The soap opera

Gold, onion, rupee, stocks, PSU OFS and tea take centerstage in a riveting 2013

By Mohan Sule

Departures evoke a sense of loss. Yet the closing days of 2013 have triggered no such feeling. On the contrary, the overarching theme is that the worst may be over for India and the world. It could be an illusion but the sense of optimism coincided with the announcement of new faces at the Federal Reserve and the Reserve Bank of India. There is relief that incoming Jane Yellen is of the same old mould as her predecessor and Raghuram Rajan comes without the baggage of obsession with inflation. The composed visage of Yellen and the cheerful countenance of Rajan are in contrast to the tearful scenes being played elsewhere. Some were genuine expressions of sorrow at the death and destruction due to natural calamities: cyclone in Andhra Pradesh and floods in Uttarakhand. Most, however, gave vent to frustration, anger and betrayal. No thanks to these expressions of pent-up emotions, India made to the ranks of the gloomiest nations on earth. That a country viewed as a potential super power and hailed for its vibrant, although chaotic, democracy should descend into despair so soon and so fast could provide enough gist for a fascinating day-time TV drama. If snooping cameras catching bank executives promising to turn black money into legitimate currency afforded a peak into the desperation to boost fee income, it also indicated that traditional banking is no longer viable due to mounting bad loans and that a parallel economy is flourishing despite official protestations.

If confirmation was needed that India is becoming a magnet for hot money, it came from the flight of foreign institutional investors on hints of the Fed reversing its easy money policy on green shoots of recovery in the US, leading to rating agencies to wonder, as usual, retrospectively: was this just a fatal attraction? If the letdown stung the finance minister, already smarting from the hammering of PSU stocks being readied for OFS to fill the revenue kitty, the plunging rupee proved to be the last straw. Sebi’s minimum public shareholding norms for efficient price discovery had the opposite effect of stocks spinning downwards. The balm of Mission to Mars proved a temporary solace. The tears of joy, however, were washed away by the din over whether the country should underwrite the food security bill, especially so when the poor were advised by the heir-in-perpetual-waiting to the country’s oldest ruling dynasty to escape their fate with the velocity of Jupiter. The dry-eyed search for onions that wrecked household budgets had consumers in the same predicament as the government: spending outstripping revenue in a slowing economy. Food items were not the only commodities that left Indians teary-eyed. Gold became the new diva: sought-after by starry-eyed fans for the luminosity but putting off the handlers due to boorish behavior. Investors decamped from gold exchange traded funds, making a beeline to the nearest retailer instead, even as the finance minister and a prime-minister-designate exchanged barbs over the role of the yellow metal in the country’s economic woes.

Unwittingly, this storm in the tea cup has become a metaphor for the raging debate that has captured the imagination of the nation: entitlement v meritocracy. The economic slump has interrupted the middle-class dream of becoming wealthy through education and hard work. The comforting tea has become the unsuspecting beacon of aspiration, and not only for its ability to keep the chill out of an economy gone cold. What permitting controlling stake in multi-brand retail could not achieve, the possibility of a maker of the brew gate-crashing into an exclusive rulers’ club whose predominant members are by dint of their birth did: dissipating the pessimism about India among foreign investors. For a nation weaned on Bollywood potboilers, it is a throwback to the pre-reforms angry-young-man days, when a heroic figure embodying family values and representing the misery of a socialistic society single-handedly took on the entrenched cronyism. This time the difference is that the fight is not to dismantle the system. Rather it is to open the gated community to all. The riveting thriller has had the nation transfixed for the audacity of the plot. The cast of characters includes a sulking patriarch, shadowy aides, gaffe-prone protagonists, friends-turned-into-foes, and historical figures of varying importance in the political discourse. Add a caged parrot singing in his master’s voice to complete the bizarre picture. If ‘nonsense’ describes the irrational exuberance of the Sensex, it also has come to mean rejection of the status quo. No wonder, the passing year resembles a soap opera with plenty of laughs and sighs.

Commitment phobia

Appointing committees to chalk out roadmap for reforms
is meaningless unless the proposals are implemented

By Mohan Sule

The withdrawal of the Tatas from the race to start a bank has triggered a debate on the state of banking in India and the norms for new entrants. Earlier, the manufacturing sector was not entertained based on the historical baggage of the pre-nationalization days. Even as a three-member team headed by Bimal Jalan is sifting through the applications, there is a realization that the attractiveness of founding a bank as a vehicle to raise cheap money comes at a heavy cost of restrictive compliances. The Reserve Bank of India governor’s indication that issuance of bank licenses could be a periodic exercise rather than a one-off affair (10 new banks were set up in 1993 and just two in 2001) not surprisingly failed to generate the euphoria in the stock market triggered by the 2010-11 budget announcement. A perusal of the guidelines reveals that the government basically wants the private sector to replicate PSU banks, which are no great role models. This is typical of India’s liberalization process: erring on the side of the caution. Most often a panel is assembled as a short-term answer to douse a controversy. Resolution of water sharing between states, communal harmony, and disputes over shrines have been assigned to commissions. By the time the report comes out, the issue has lost its potency to cause trouble.

Committees are formed to spell out norms that the policy makers desire but are under pressure not to act due to the sensitivity of the issue: taxation of investment coming from Mauritius puts off a friendly country as well as foreign investors. Issues confounding policy makers, too, are parceled out: eminent members have been empanelled to decide the difference between foreign institutional investment and foreign direct investment. Hindsight wisdom of experts is an expedient answer to plug unexpected loopholes. Taxation of capital gain on transfer of Indian property owned by foreign owners cropped up only after Hutchison Whampoa of Hongkong sold its stake in Indian telecom services provider Hutchison-Essar to Vodafone of the UK. Some issues explode without warning. Differences over microfinance institutions making profit snowballed after Andhra Pradesh banned them. Some issues are ever-evolving, throwing up new challenges. A takeover regulation that is fair to the promoters as well as the minority shareholders is a simmering topic that occupied the minds of many corporate honchos invited by Sebi to participate in solution-finding sessions. With the increase in cross-border deals, the domestic framework has to keep pace with international practices. Another buzz word is corporate governance. Sometimes the aim is to find a middle path. The Nandan Nilelkani committee on cash transfer of subsidies on kerosene, LPG and fertilizer was born out of the government’s desire to continue support the weaker section and at the same time reduce the fiscal deficit. Often the textbook prescriptions spewed out are hard to implement. In such cases, the bitter medicine is put off for another day. For instance, the Kirit Parikh committee on fuel subsidies in 2010 had suggested full deregulation of diesel prices and periodic increase in LPG and PDS kerosene prices.

Another standing committee on finance, headed by former finance minister Yashwant Sinha, ahead of the 2012-13 budget had submitted sensible direct tax proposals that would enlarge the slabs for lower personal tax rates. But these were watered down by then finance minister Pranab Mukherjee. The Goods and Service Tax reform, initiated in 2000 to substitute Central excise duty and state sales tax, is still on paper as there is no consensus on revenue sharing between the states and the Center. The Tarapore committee’s criteria for capital account convertibility in 1997 are yet to be met. Similarly, the Telecom Regulatory Authority of India mooted a 60% cut in the base price of the November 2012 and March 2013 spectrum auctions, which had flopped. Instead it was hiked up to 25%, reflecting the short-term focus of the government on bringing down fiscal deficit. The Bimal Jalan committee in November 2010 did not favour listing of exchanges and wanted a cap on their profit. Sebi rejected the proposal and so also the suggestion that each promoter should hold only 5% equity right at the start instead of over three years. The report of the Vijay Kelkar committee on fiscal consolidation in September 2012 recommended bringing down fiscal deficit to less than 5% of GDP in FY 2014 by a combination of share-sale of state-owned companies, pruning petro-product subsidies and raising prices of diesel and LPG or cooking gas, and execution of GST. The outcome of the failure to do so is amply visible: one of the worst slowdowns in India’s history.

Forward looking

A bull or a bear phase influences earning estimate and Goldman Sachs’s post-election forecast only reflects this reality
By Mohan Sule
The heat and dust raised by investment bank Goldman Sacchs’s advisory to go overweight on India on indications that Narendra Modi is set to become Prime Minister post May 2014 Lok Sabha polls brings into focus the forward-looking statements made by companies and market intermediaries. The Securities and Exchange Board of India has banned primary market fund-raisers from forecasting financial numbers, restricting them to historical performance. This is to prevent issuers from painting a rosy future to justify over-the-top valuations. However, listed companies as well as analysts tracking them can offer next quarter or full-year guidance. Savvy investors take exposure to a counter on the basis of its capacity going ahead rather than relying solely on the trailing 12-month valuation, which factors in all the possible developments in the period. Only naïve investors will believe that the fluctuation in prices is purely a function of the financial performance of the stock. Companies are vulnerable to external shocks like policy changes and man-made or natural crises at locations of plants and markets. For example, civil turmoil and cyclone. Importers and exporters have to live in fear of foreign exchange volatility that not only tracks domestic fiscal and monetary policies but also global events beyond the control of the country’s policy makers. The rupee plunged on flight of foreign investors following hints by the US Federal Reserve that it might wind up the liquidity injection.
Due to these non-quantifiable variables, projections can go wrong. Even proprietary models can throw up misleading results. This is not solely because there is something amiss in the formulae as predictions cannot be based just on increase in output and orders. The possibility exists of irrational exuberance creeping in during a bull-run or overt cautiousness during a bear phase. The tone and tenor of top managers’response to analysts’ questions during conference calls, too, unwittingly weigh on the analysis. Guerrilla attacks by competitors can disrupt calculations and so also delays in commissioning projects or disruption in production due to labour unrest. Therefore, Goldman Sacchs can be excused if it has based its assessment by combining the euphoria generated by opinion polls capturing Modi’s popularity with historical data that suggest his tenure could result in reduction in corruption and implementation of growth-oriented policies. Some companies maintain a studied silence on ‘sell’ recommendation. The UPA II coalition, particularly the Congress party, instead seems to be behaving like those companies that want a positive spin on their performance despite the current numbers and outlook not justifying such a view. Instead of scolding the investment bank, the focus should be on the warning by rating agency Standard & Poor’s of assigning India to junk status after elections in view of the deteriorating financials, particularly the fiscal deficit.

Just like companies, governments, too, do not take kindly to downgrades. S&P’s US head “resigned” two weeks post the agency revising the sovereign rating of the US to AA plus from AAA in August 2011 after the US Congress voted to raise the debt ceiling. Yet, the dollar held steady due to flight of capital to the US from the euro zone region enveloped in the sovereign debt crisis. No one fears a US default like some Latin American countries earlier. Very few are even willing to consider how the US is going to pay the debt. In fact, during the government shutdown in October this year, S&P did not change the county’s rating. Thus, gut feeling and sentiment can overwhelm scientific data. India is not in the same position as the US. It is still vulnerable to flight of capital, though the external debt, up 21.2% of GDP last fiscal from 19.7% in FY 2012, is considered modest compared with more than 100% of the Asian Tigers during the 1997 currency crisis. However, there is the bottoming-out effect. Trade deficit narrowed to a 30-month low in September 2013. The Reserve Bank of India has attributed the phenomenon to decline in imports of gold and robust exports. However, critics interpret it as fall in demand from industry due to slowdown and boost in realisation due to the depreciation of the rupee. Thus, data can be read both ways. It is likely that economic activity will revive in the next six months on continuation of the Fed’s bond-buying as there is worldwide consensus that an abrupt withdrawal can damage the global economy and recovery in the US and euro zone. The resultant surge in stock prices could be viewed as the percolation of the burst of recent reforms by the government or optimism on the prospects of a Modi-led government.

Animal spirits caged

Small investors denied opportunity to access investment that could outperform the market
By Mohan Sule

The recent decision of the Securities and Exchange Board of India to allow small and medium enterprises to trade on a specialized platform without an IPO is another attempt to open up the capital market to these firms. Initial backers such as financial institutions, banks, private equity investors and venture capitalists will be able to exit with gain for the risk taken. Many SMEs could be with a scalable model in urgent need of funds but unable to fulfill the listing requirement. Listing may be the path to grow big for some of them, which otherwise would languish for want of capital. In a public offering, the market assigns a value based on track record and outlook of the company. Investment bankers fix a price range after taking into account the views of big-ticket investors. The issue either gets an overwhelming response or flops, depending on the subscribers' perception of the valuation. The listing could be at a premium if there is unmet demand or at a discount if the high valuation has drawn lukewarm response. Of late, this process has been corrupted, with some investors using the mechanism to make quick gains by getting out after the shares debut on the bourses. Thereafter, the stock is left languishing, waiting for some trigger from the company. Overpriced offerings to capitalize on the bullish sentiments, too, have spoilt the market with their subsequent dismal performance. Nonetheless, the baptism is essential to test the staying power of companies. By skipping this vetting process of the market and restricting access only to informed investors with minimum investment of Rs 10 lakh, Sebi has made public its lack of confidence in SMEs’ corporate governance practices and in the process denied small investors a chance to partake in the India growth story. For retail investors, these stocks could have been good alternatives to expensive large caps, a chance to diversify their portfolio, and an opportunity to outperform the broad market. In turn, access to the small investors would have unleashed the animal spirits of these firms. Thus, the listing of SMEs in the present format in essence is a private placement.

The other important issue is the quantum of shares available for trading. Without an IPO, the inference is there will be no dilution of equity. Either the promoters will be offering part of their holdings or the lenders and the backers their stake. The small number of shares available might make the stock illiquid, putting off the high networth investors that Sebi hopes will be attracted to these firms. The last time the market regulator tweaked the rules for listing was to allow tech companies to offer only 10% of their equity capital to public. The aim was to ride the popularity of these companies, which had caught the fancy of the developed markets for outsourcing their back-office work to cut on costs, to boost the languishing primary market following the dot-com-bust-induced global recession at the turn of the century. Many startups from the IT sector did list. The unintended fallout was the stampade among several small caps from the old economy to switch to offering software solutions to latch on to the boom. Some others changed their names to appear as tech companies though they had nothing to do with the sector. Besides, the small number of outstanding shares made price discovery difficult. Instead of providing a lifeline to the primary market, the half-baked measure caused immense harm to investors. The sharp spurt in IPOs eventually sputtered out under the weight of dubious offerings. This market revived only after the secondary market kicked back into life mid 2003.

SMEs are an important component of any economy. Due to their low level of automation, they are employment generators, especially in the rural and semi-urban areas. Many of today's success stories, particularly in the tech, pharma and auto ancillary sectors, started small. Investors have seen their wealth multiply manifold as these companies made the transition to large caps. On the other side, SMEs play in a constricted field. Most of them are in sectors where entry barriers are low, with unorganized players snapping at the heel. Very few operate in the infra sector, an emerging area. Those that do are able to do so because of political ties. Some others are contend to be captive suppliers to original equipment manufacturers and are often funded by the latter. Thus, their fortunes rise and fall with those of the user-industries. Promoter-driven, they may lose their sense of purpose as more decision makers nominated by large investors or institutions join the board with the infusion of capital. The resultant power tussles could be upsetting, the most recent example being that of SKS Microfinance. But by allowing big investors the first right of refusal, Sebi may have unwittingly laid the stage for pricey offerings from these firms later on.

Ring out the old

Investors want to turn their back on half-hearted reforms that retain the power of veto and protect vested interests

By Mohan Sule


More than the covert liquidity injection spree by the new governor of the Reserve Bank of India, the belief that bond-buying by the US Federal Reserve will continue till its new boss settles early next year has triggered a relief rally in the market. The soft credit line extended to banks to enable them to lower interest rates on home and consumer loans is the RBI’s idea of a Diwali fix for an economy low on growth and high on inflation. Whether the fireworks crackle or turn out to be damp squibs will depend if the consumers squeezed by rising foodgrain prices and shrinking disposable income bite the bait. Nonetheless, foreign institutional investors have returned with a gusto, propping up equities and the rupee. Hopefully, this allows domestic investors — floating in an economy adrift in space due to the policy paralysis resulting from the many corruption scandals, battered by stocks and bonds waxing and waning to the sightings of the minutes of the Fed’s policy meets, baffled over gold’s status as a dinosaur or a new-age currency, and bruised by the Indian rupee sinking faster than the force of gravity — to look ahead with optimism, particularly with the opportunity round the corner to ring out the old and ring in the new. Adding to the chaos is the cross-connection between the government’s desire of a high-growth, plentiful-liquidity economy and the central bank’s goal of tight-money, low-inflation financial landscape. No wonder, investors want policy makers to shrug off their fears to approve legislations that allow industry to escape the Hindu growth rate faster than the velocity of Jupiter.

Clarity on the goal of reforms will sweep away much of the cobwebs of historical baggage. Foreign direct investment, for instance, is assumed to be one face of liberalisation, the other being foreign investment in the capital market. Right now both are viewed as means to accumulate foreign exchange reserves to finance imports, primarily energy. The objective was justifiable during the first phase of the opening up of the economy, when the country had to mortgage its gold as our dollar stockpile had dwindled to finance 15 days of imports. Understandably, a cap was imposed on FDI in some sectors, while a few were kept totally out of bounds. The second phase saw the ceiling abolished completely in many industries and lifted some more in certain others, while a few remained untouchable. In the third phase undertaken in the second half of this year following the free fall of the rupee on the flight of FIIs after the Fed dropped hints of winding up of its pump-priming program, 100% foreign owned companies were allowed to operate telecom services and make defence equipment and the level of FDI increased in insurance and aviation and to controlling stake in multi-brand retail. Yet, these steps did not generate the desired response due to the fine print imposing many restrictions. Reforms that go the entire last mile, particularly in sectors such as power and transport, without the ifs and buts that render the excercise pointless is what investors would like to see.

The experience so far is that the conditions attached are to serve two purposes. One is the desire of the policy makers and bureaucrats to continue to hold the veto. The stringent rules governing paybacks that foreign companies, particularly from the US, have to adhere while investing abroad blunt the diabolic charm of quid pro quo. The telecom and aviation sectors are apt reminders of how an uncertain policy environment can put off rather than attract investors. Second is to protect vested interests. Hence, the resistance to free completely fuel and power from pricing control. PSU insurers are used to bail out sick units and nationalised banks to waive off loans on election-eve. Safeguards and permissions at various stages have translated the land acquistion law as unworkable or at best a time-consuming process. Yet, where entry has been freed, consumers and investors have benefited from increase in transparency and quality of delivery. An effective regulator can ensure a level-playing field. In some markets, foreign brands have ceded to Indian makers, enjoying the edge of cost-efficiency. Of late, Indian entrepreneurs are acquiring assets abroad to diversify as well as to import these brands to take on foreign competition on home turf. Allowing businesses to decide investment based on demand outlook rather than on obstructionist regulations is what is needed in the coming year. Otherwise, India would be a barren land, with neither Indian nor global investors. If not for the reverse book-building escape plug, most of the listed MNCs would have exited by now. This regulation, formulated apparently to protect minority investors, has had the opposite effect of scaring potential foreign investors and is symptomatic of India’s obsession of safeguarding one constituency at the expense of the other.

The Satyam model

To stem erosion in shareholders’ wealth, the government should sell the FTIL group through the auction route

By Mohan Sule
The explosion of the Rs 5600-crore NSEL scam is a vindication of Sebi’s former chief C B Bhave’s tough stance against promoter Jignesh Shah’s proposal to start an equity exchange after launching a commodity futures bourse. Besides insisting on separating distributors’ commission from investors’ subscription, his crackdown on mutual funds’ unit-linked insurance products had antagonised powerful asset management companies as well as irked the Insurance Regulatory and Development Authority and was the trigger for the setting up of a super regulator by finance minister Pranab Mukherjee, apparently to coordinate between different regulating agencies and avoid a turf war. Denial of extension to him was the collateral damage of the ambition of an aide of the finance minister to see her close relative as the boss of UTI. A vacancy was created at the country’s oldest AMC by shifting the incumbent to the capital market regulator’s office, riding on the campaign launched against Bhave for his inaction in weeding out fake subscribers at subsidiary NSDL, when he was heading the NSE, instead of focusing on the faulty proportionate allotment mechanism applicable for distribution of IPO shares. The plan skidded, when the single largest shareholder of the government-sponsored mutual fund, T Rowe Price of the US, raised objection. The fourth largest mutual funds by assets remained headless for over two years till July this year. The moral of the story is that some of the outrages in the Indian financial world can be traced to political ties. Though MCX-SX got the green light after the promoter agreed to bring down his shareholding to 5% in a predetermined timeframe following a hard-fought legal battle, the truce was facilitated only after there was a change of guard at the finance ministry and Sebi.

The promoter of Saradha chit fund could profit from the pyramid scheme either because of complicity or indifference of local policy makers. The Sahara group promoter has built a diverse empire by offering small savings schemes to the informal sector clueless about the risk and returns correlation and benefiting from a nascent regulatory environment with limited reach and power, confusion between regulators over supervision of overlapping products, and the complex landscape in the politically important home state of Uttar Pradesh. Similary, Ramalinga Raju, the promoter of Satyam Computer Services, had become the face of Andhra Pradesh’s transformation from a agri- and marine-based economy to a hi-tech destination for domestic and foreign investors. His political reach cut across the aisle, enabling him to share a dais with former US president Bill Clinton during the latter’s visit to the state in 2000. While Raju was promptly arrested after his confessional statement to Sebi of having doctored his accounts for many years, Shah has blamed the professional management of the spot commodity exchange. Considering that flagship Financial Technologies India owned nearly the entire NSEL, the inference is that either he was sleeping at the wheel or did not know the difference between a spot and futures market. In fact, Shah’s was a classic derivatives strategy of hedging against both a bull and bear run by running a regulated exchange as an entrepreneurial showpiece and at the same time generating a spurious enterprise for high return.

This brings to the second realisation. The conflict between public interest and making profit is sharper in certain businesses. Stock exchanges, often cited in this context, cannot be run as non-profit organisations if they have to invest in offering seamless services and create a secure environment for trading. Yet, the for-profit objective is leading to consolidation among global exchanges, eliminating price competition. If they cannot be completely eradicated, it is essential to ensure that the damage due to scams is limited. Fast-tracking trial is one of the ways and so also freezing and liquidation of the assets of the manipulator. This may not be fair to the other stakeholders. Therefore, focus on consolidated results is an important lesson for investors. This will prompt closer scrunting of the symbiotic relations between group companies. For instance, flagship FTIL’s profit was being boosted by the illegal gains made by NSEL. To solve the problem of the troubled group, the Satyam rescue could be an ideal template. The government disbanded the board of directors and appointed a 10-member committee of eminent professionals to run the software services producer, hit by a Rs 7000-crore hole in the balance sheet. Later, the IT company was auctioned to the highest bidder. This is what should be done to the FTIL group to prevent further erosion in the wealth of the shareholders and also to discourage the formation of bubbles.



Pain postponed

Whether the continuance of liquidity pumping by the US Fed will boost India’s growth is debatable. But it will intensify inflation

By Mohan Sule

There are four inferences to be drawn from the US Federal Reserve’s decision to extend its bond-buying program by another month or till early next year. One is that the US recovery is fragile as inflation is still below target. Second, the buoyancy on Wall Street cannot be mistaken for bounce-back of the home economy. Third, neither the finance minister nor the Reserve Bank of India can take credit for the return of foreign investors as there has been a worldwide rally. Fourth, the recent low of the rupee (below 68 a US dollar) and stocks (below 18,000) could be taken as the threshold for the market’s plunge when the liquidity tapering is announced as the benchmark indices may have crossed new milestones and the rupee appreciated significantly in the meantime. The central bank might also be in a hurry to wind up its costly subsidization of dollar deposits. The easing of FDI caps in some sensitive sectors, which has the power to lend support to the rupee when the Fed actually starts pulling out from the market, will take more time to percolate. What would see an immediate impact would be withdrawal of power, fertilizer and diesel subsidies. This is unlikely till the general election scheduled early next year. So while Ben Bernanke is hoping for inflation to rise, which would indicate the US economy is sprouting green shoots, Raghuram Rajan wants inflation to be tamed even at the cost of growth. The Fed is continuing with loose money policy, while the Reserve Bank of India is making money costly.

On the positive side, the rupee depreciation has helped narrow trade deficit. On the flip side, wholesale inflation remains high. The joker in the pack is food inflation, which rose near about 19% per annum in the month. Rural welfare schemes and the food security legislation will mean that surplus money will chase food items up the value chain. The paradox is slowing manufacturing but higher prices of foodgrains. The central bank now faces the challenges of moderating food credit and at the same time pushing up non-food credit. Food credit surged from a negative growth in FY 2008 to 18.6% annual increase last fiscal, while non-food credit slumped from 23% year on increase to 14% annual expansion in this period. Any which way, inflation is sure to get a fillip. Besides, compulsive focus on non-food credit could worsen the bad loan situation of banks. Gross non-performing assets have risen by 1.12% points to 3.42 % in the five years to FY 2013. Most of it was contributed by the infrastructure sector. The RBI’s new boss wants to free bank branch expansion from controls. How many banks will bite when treasury income supports profitability and the current trend is to shrink balance sheets after being burnt by aggressive expansion in consumer financing? Spread-out in rural areas has great potential, particularly since the launch of the rural employment guarantee scheme. However, there could be political pressure to waive off loans on eve of elections. The central bank instead should have spelled out a roadmap for mergers and acquisitions in the banking sector, which would have led to consolidation and strengthen the ability to withstand global and local shocks.

esides a surge in inflation due to the continuance of Fed’s loose money policy and other welfare programs of the UPA-2 government, real estate also could see the formation of bubbles. The weak rupee has increased the cost of construction. At the same time property prices have become attractive to overseas buyers. This means increased inflows into luxury projects, which could be in the danger of a bust when the Fed goes back to conventional monetary policy making. Developers were luring domestic buyers hit by inflation with 20% upfront payment and deferring the balance till possession. The clampdown on bank financing to such schemes will squeeze cash-flow. A slump in real estate could be dangerous as seen from the widespread fallout of the crash in the sub-prime category in the US in 2008. A host of ancillary industries will face decline in demand. Banks with exposure to these sectors will see a spurt in delinquencies. This would have a ripple effect on the economy. The tightening of credit against gold jewellery too is mis-timed. Rural and poor urban folks used the scheme for liquidity, particularly during times of distress. The RBI, thus, has limited the flow of these funds into sectors such as housing, education and healthcare. The relaxation in dollar borrowings by corporates and banks is meaningless unless policy paralysis is shaken off. Capital-intensive infra, power and telecom sectors are not seeing capital expenditure due to policy and regulatory issues and not because of lack of demand. The bottom line is three months is a short time for India to get its act together.

Global audience

Increasingly reforms have to be addressed to please foreign investors rather than to appease domestic interests

By Mohan Sule

Each crisis teaches a lesson. If the 1991 depletion of foreign exchange reserves demonstrated the perils of being inward looking, the 1997 Asian currency turbulence showed the dangers of addiction to foreign money. The 2013 current account deficit storm illustrates that reforms have to be ongoing and not selective. The vast domestic market is no doubt attractive to foreign investors, but making them stick around is challenging just as ensuring that the flows are shepherded to the right sectors and do not cause bubbles. There is consensus now that foreign direct investment is more stable and productive, triggering employment, supporting ancillary industries and boosting infrastructure, rather than foreign portfolio inflows. Yet India is witnessing a strange paradox of foreign money gravitating to the equity and debt markets even as huge FDI projects get stuck due to lack of clarity on regulations. Foreign money is reluctant to come to the infrastructure sector due to inadequate last-mile reforms, while overseas investment in the commodity sector is not percolating to the ground level due to delays in getting environmental and land acquisition approvals. Two large foreign investors Posco of Korea (US$5.3-billion steel project in Karnataka) and Arcelor-Mittal of Europe (US$12-billion steel project in Orissa) have pulled out. Approval for the Etihad-Jet deal is still pending, reflecting the cautious stand following criticism of crony capitalism. One of the largest foreign investors, Vodafone of the UK, was slapped with retrospective capital gain tax. MNC retail giants are not displaying enthusiasm despite opening up the multi-brand segment as the green-lighting vests with states, many ruled by those opposing the reform. Despite hiking the FDI cap in insurance ventures to 49% recently from the earlier 24%, no foreign partner is known to have expressed interest in taking up the offer.

In contrast, the capital market is seeing an influx of foreign investment. In fact, the government has been treating overseas portfolio investors with a feather touch. The phasing out of P notes, through which anonymous foreign investors can invest in Indian stocks, was rescinded after the market displayed withdrawal symptoms. Differentiating investment from tax havens between good and bad is in a limbo to pacify sulking investors. Thus, a preferential and differential treatment is being meted out to overseas investors in stocks and bonds as against those investing in green- and brown-field projects despite the flighty nature of the former. Expediency is scoring over permanency. Since the global financial meltdown of September 2008, foreign investment in equity and debt has been abreast of FDI, except in the fiscal ended March 2012. In FY 2013, portfolio investment raced past FDI. Not surprisingly, the sudden exodus of these investors from the debt market after the US Federal Reserve indicated that it might gradually withdraw its liquidity-pumping program was the prime reason for the recent plunge of the rupee. The Reserve Bank of India had to raise interest rates to stop the mass exit. The bottom line is that the nation is paying a heavy price due to the setback to the timetable to bring the economy back on to the growth path by small but consistent doses of interest-rate reduction.

A vibrant capital market is important for companies to raise funds for their growth plan. But the glow should be derived from the robustness of the listed securities. The current status of some sectors getting a torrent of foreign inflows while some others languish capture the unhealthy state of Corporate India due to uneven reforms. The resistance to increase FDI cap in insurance, banking and aviation to 51% is to ring-fence public sector players, while keeping prices of coal, and till recently petroleum products and power, below production cost is to insulate end users. Thus, an important lesson is policies cannot be tailored only for the domestic audience. When the finance minister stands up to read the budget speech in parliament, investors from New York to Singapore are listening. Apart from company-specific approach, the big picture of government spending and revenue, capital inflows and outflows, and inflation and interest rates concerns them. Just like they accord importance to the growth potential of a stock to base their buy and sell decisions, hassle-free entry and exit is a crucial factor. In fact, the new boss of the RBI had to capitulate and ease restrictions on outflow of forex, subsidise dollar deposits and promise to treat MNC banks on par with domestic ones for foreign investors to take a second look at India.

Loss of confidence

Foreign investors do not have to wait for five years to express their views on the governance of a country’s economy

The insider

After being part of the problem, RBI’s new boss is now expected to be the solution


By Mohan Sule

The appointment of Raghuram Rajan as the new governor of the Reserve Bank of India was greeted with a giddy reception generally reserved for the coronation of a new captain for India’s cricketing squad, who is expected to lift sagging team morale. Impressive qualities were discovered, not the least his three-year stint as the youngest chief economist at the IMF in Washington and his prescient warning three years ahead of the global financial crisis. As is so typical of such rituals heralding the close of an era and beginning of a new phase, the hard knocks of the past year were attributed to the outgoing chief’s slopping fielding including failure to catch the hurtling rupee, inability to duck the bouncers thrown by speculators, and arranging the field to contain inflation rather than shaking up the opening batting lineup to speed up the run rate. The central bank has blamed speculation in the overseas markets, while the government has attributed ballooning imports of oil and gold for the woes of the Indian rupee. Currency manipulators are like short sellers in the equity market, spotting a stock whose future is likely to be worse than its present. They can also be compared with acquirers in the corporate world, hunting for undervalued preys. Unutilized cash and valuations below assets in hand reveal a driver sleeping at the wheel.

The similarities end here. Bears can drive down a currency or a stock, creating panic and pain. On the contrary, mergers and acquisitions can help a stock to regain some of its shine in anticipation of a better tomorrow. Whatever the aim, the process of beating down value or purchasing an asset cheaply hinges on the underlying weakness. To fend itself, the target can utilise its reserves to make an offer that cannot be matched by the attacker or enlist a white knight. The end result could be a hollow victory as the company may have staved off a takeover but is left depleted of its cash and could have ceded even some control. Though the RBI has not dipped into the reserves, tightening of liquidity and imposition of import barriers by the government will raise the level of stress for its citizens. Hike in FDI caps in various degrees in some sensitive sectors without paying attention to ground-level problems like dodgy infrastructure and convoluted regulations seems a desperate rather than a logical measure. Rajan can continue the process of making money costly and scarce and thereby set back the timetable for India’s recovery. He can hope that the higher interest rates could make some foreign money on its way out to the recovering US economy pause and rethink. At best, the quality of this money would be questionable. Perhaps the realization that the scope for the incoming governor to undertake radical steps to stem the fall of the rupee is so limited that the market hardly blinked. The BSE Sensex lost 0.36% and the rupee sunk 42 paise to 61.21 a US dollar the day after the announcement.

Also, despite his foreign stint, Rajan was the ultimate insider as the head of a committee on financial reforms, honorary economic advisor to the Prime Minister and lately the chief economic advisor to the finance minister. When he returned to India in November 2008, the economy was already slowing down after a spectacular 9.32% annual growth in the year ended March 2008 (FY 2008). Economic output was up just 4.99% last fiscal. Though wholesale prices are down, consumer inflation has risen 1.68% points in this period after peaking at 13.37% in FY 2010. Current account deficit has nearly doubled. The rupee was 45.91 to a US dollar end FY 2009. FDI is down by US$ 3500 million from a four-year-ago level. On the positive side, fiscal deficit has narrowed by nearly 1% point and forex reserves surged by US$ 40,000 million end last fiscal. Due to his low profile, it is difficult to know the policies that had Rajan’s stamp unlike the Sonia Gandhi-headed National Advisory Council, which is the source of the rural guarantee employment scheme and the food security legislation. What was the economist’s contribution in freeing the pricing of petroleum products? How much of his inputs were responsible for retrospective taxation on transfer of Indian assets owned by foreign companies or giving tax men the discretion to determine if foreign investors registered in offshore havens had done so to avoid tax? Has he agreed with the decision to ramp up natural gas prices? Did he concur with former Finance Minister Pranab Mukherjee’s creation of a super financial oversight body ostensibly for better coordination among various regulators but in practice an encroachment on their autonomies? With his cover of anonymity gone, the central bank’s new chief will have to take credit or discredit for his actions. Besides shoring up of the rupee, how he tackles the new round of licensing of private banks will also test his mettle.

The third chapter

The 1991 and 1997 foreign exchange crises were turning points for India’s reforms. Is history repeating?

/By Mohan Sule

The plunging rupee finally forced the Union government to shake off its policy paralysis. However, the prescription has the potential to do more harm than cure the disease. It took one (Singapore) to four (Thailand) years for the East Asian economies to recover from the depreciation of their currencies, triggered by Thailand’s move to float the bath in July 1997. The Asian Tigers were running large current-account deficits. Some of them had foreign debt in excess of 100% of GDP. Compounding the problem was the recovery in the US. The resultant increase in interest rates by the US Federal Reserve proved to be a magnet for foreign funds. As a counter-attack, most ramped up interest rates to stem the flight of capital. The IMF had to step in with US$ 40-billion infusion to stabilise the region, particularly Indonesia, South Korea and Thailand, in exchange for austerity measures. The collateral damage was the end of the 21-year-old reign of President Suharto of Indonesia as the depreciation of the currency resulted in sharp increase in prices. In India, which was undergoing political uncertainty as minority coalition governments had twice lost the vote of confidence between 1996-08, the rupee dropped 12%. The nuclear test carried out by the two-month-old BJP-led government in May 1998 resulted in international sanctions, end of assistance from the World Bank and Asian Development Bank, and downgrading by credit rating agencies, leading to withdrawal of foreign funds. The Reserve Bank of India had to increase its lending rate by 2% points to 11% and the cash reserve ratio by 50 basis points to 10.5% .The State Bank of India had to issue US$ 4.2-billion sovereign Resurgent India Bonds to stabilize the rupee.

Even then the Indian currency depreciated 16.7% in the 10 months to June 1998. Yet, the impact was not severe. External debt as a proportion of GDP (25%) in 1996–1997 was meager compared with that of Indonesia (61.3%) or Thailand (62%). GDP growth dipped to 4.8% in 1997–1998 but rose again to a healthy 6.5% next year. By the end of 1999, foreign exchange reserves were adequate to cover six months of imports. Even the current account deficit fell to just 1% of GDP. Is history repeating? And will India bounce back again? Take the ingredients. India is grappling with foreign debt as high as 20% of GDP. Foreign funds are exiting on the Fed’s hints of an end to the easy-money policy. There are two options to support the currency. The first is to bring down the fiscal barriers to foreign fund inflows and raise import tariffs to conserve foreign exchange. Telecom has been opened to 100% FDI and insurance to 49%, though the cap in the aviation and defence sectors has been left untouched. The downside is that there is a lag effect before big-ticket investments start coming in. There could be a gap between intention and execution. Despite opening multi-brand retail to 51% FDI, global supermarkets are still waiting and watching as this is a state subject. Also, opening up the economy is meaningless if investors face constant insecurity about pricing, sourcing of raw materials, and tax issues. Foreign investors will have to weigh the cost effectiveness of buying into an Indian company or going it alone. Worryingly the government is toying with more import penalties apart from making overseas gold costly. This could push demand underground and fuel inflation.

The second route is using monetary tools including ramping up interest rates to attract capital. The RBI has indirectly hiked interest rates by 200 basis points and tightened credit outflow. This action had an immediate impact. The rupee appreciated above the 60 level but bond prices plunged, adversely impacting the income of banks and retail investors. Companies will have to borrow at higher rates, too. Besides pressure on the margin, non-performing loans could rise as recovery gets postponed. The equity market might not get the inflows looking for higher yields. Yet there could be a silver lining. The crisis has been a warning that populism is not a substitute for pragmatism. The huge domestic market is no doubt an attraction, but foreign capital cannot be taken for granted. Investors would stay invested as long as returns are appealing. For that to happen the economy has to grow at a steady clip. To facilitate expansion, regulations have to be so tailored that there is transparency, quick and just grievance redressed mechanism, and absence of shocks such as stalling or reversing of policies to meet short-term objectives. Just like the 1991 forex crisis, which sowed the first wave of reforms, and the 1997 currency crisis, 2013 could well be a turning point in the process of unshackling India.

Back to future

Controversies such as pricing of gas and sovereign guarantee for a private
deal become irrelevant in a capital-starved economy

By Mohan Sule
Reform has become a fashionable prescription for economic woes. The one-size-fits all solution is offered for all sorts of headwinds facing a country including growth slowdown and surging inflation. There seems to be surprising unanimity that undertaking structural changes would enable a country to come out of its misery. Yet there is no consensus on what constitute reforms. Take the slump in the US economy following the failure of big banks. Liberals backed the US Federal Reserve’s decision to loosen money supply to ensure that lack of liquidity did not hamper risk taking, considered vital to boost expansion. The downside of this strategy is formation of asset bubbles. Conservatives protested, finding virtue in cutting public expenditure to balance the budget, which would support lower interest rates and thereby encourage capital expenditure. The flip side of this approach is invitation to recession. No wonder reform has become a loaded word. For proponents of free market, withdrawal of government from running businesses is an essential ingredient even though this may lead to strong players overwhelming the market. At the other end are those who hold government responsible for creating jobs, keeping prices low, and ensuring affordable housing despite the danger of snuffing out the animal spirits of entrepreneurs. It is when neither system is able to achieve the desired result that there is a clash, with either side wishing for just that much supervision or back-off by the government but not able to agree to the extent of this meddling or non-meddling. The issue has once again come center stage in India following two decisions of the government.

The Supreme Court in its wisdom has classified natural resources as the country’s assets, thereby consigning its monitoring to the government. This could be viewed as an assertion that government has a role to play even in the reforms process or a setback to the concept of letting markets take care of demand and supply. Subsequently, the government okayed hiking the price of natural gas to bring it on par with international level and airline seat capacity on the Gulf route to attract foreign investment. On the face of it, the government is exercising its discretion to effect these changes, which it feels are crucial to carry forward the reform process. Embedded is the contradiction: government presence is sought to check price rise and protect indigenous interests. Higher gas pricing is bound to have a cascading impact on end products. Investors in domestic airports and airlines will see a large chunk of lucrative traffic shift to foreign shores. The end result, as per the government’s justification, would be more gas as well fertilizer and power output to fuel the growth engine and restoration of the health of the airline sector as Jet is the market leader. Thus, the pricing of gas and backing for an aviation deal between two private parties symbolise the unintended consequences of the reforms process that came to the fore during the launch of PSU divestment. To ease pressure on interest rates, investment spending has to shift to the private sector. Divestment of PSUs is an important component of this process. Investors, however, will participate enthusiastically if they have the freedom to a market their products and services. It is at this point that the tug-off between striking a balance between public good and private initiative becomes pronounced.

The example of the US government in bailing out bankrupt banks with tighter operating rules shows the advantages as well as the disadvantages of an economy where the private sector is asked to thrive under increasingly restrictive regulations. To prevent monopolies in the telecom market, policies frown on consolidation and pricing is reviewed by the regulator periodically. Yet the liberal grant of 2G licences in 2008, which can be viewed as an effort to encourage competition so integral to reforms, invited the SC’s ire. The net effect is an industry stunted by uncertainty. Unsure of the regulatory landscape a few years down there is no surprise that foreign investors like UAE national carrier Etihad are insisting on sovereign guarantee to avoid future uncertainty. Now 100% foreign direct investment has been allowed in telecoms, a policy that was resisted for so long because of the sensitive nature of the sector. So the initiation of reforms by allowing private investment in hitherto prohibited sectors but checkmating investors from undue profiteering by keeping them on a tight leash is racing to a conclusion that was sought to be avoided: the slow but sure crumbling of entry barriers is diminishing the power of intervention. In a throwback to the post 1991 opening up to stave off an economies crisis triggered by the drying up of foreign capital, any doubts about the side effects have been rendered irrelevant.

The Godfather Part II

Despite IT services turning into commodity, the scope for family interference is limited as licences do not drive
By Mohan Sule

Some movies cry out for sequels. Typically, the script vests the protagonist with near-mythical powers to overcome adversities. Eventually, the mayhem and wreckage dissolve into triumph till the next obstacle course. The most famous of all franchises is the one starring James Bond. The most appealing feature of his pervasive popularity is that despite the fancy gadgets at his disposal he does not require to don a disguise while embarking on his rescue act. He is smart yet can get distracted from his task. Because he is so life-like, there is always a crisis waiting for his intervention just like in the real world. He can never ever think of retiring, always poised to serve Her Majesty’s Government. Unfortunately, very few corporations want to replicate the lessons from the spying legend. This is surprising considering that the objective of the board of directors running a company and a government of a country is similar. Both want their empires to run for perpetuity and in good health. Yet, even performing governments are voted out of power in democracies and some countries have imposed term limits on their executives. Company bosses, too, are assigned a shelf life. If a leaf it to be taken on how to survive and prosper, is not 007 a better number than 65, when most top managers retire? Shareholders seem to prefer a dashing driver at the helm, just like Mr Bond, but do not appear to accord as much importance to his hands-on experience and the intuitive ability acquired to spot the next opportunity or a downward curve during his enduring inning.

Recent events, however, suggest that there might be rethinking towards CEOs and their usefulness. If Steve Jobs represents the best-known case of a discredited boss making a spectacular comeback to the company he set up, in India the focus is now on N R Naryan Murthy, who has been plucked out of retirement to once again lead the venture he co-founded in 1981. If Apple was the disruptive force in the personal computing market, Infosys was the showpiece of how outsourcing could cut operating costs. If the half-bitten fruit logo symbolized design excellence, the Indian tech company was talked about for being among the rare domestic establishments to focus on corporate governance to enhance market value. The i-products of Apple empowered consumers in the same way as stock options powered employees of Infosys into the millionaire’s club. The most visible difference between the two is that while Jobs fully justified the confidence of his shareholders by stunning the marketplace with one bright idea after another, it remains to be seen if NRN will be able to revive the glory days when the tech company outperformed the industry average and its growth was used as a benchmark to assess peers. Crucially, Apple’s founder had been sacked after running his enterprise to ground, while the Infosys builder had completed his full innings, leaving behind a thriving outfit. Just as there was skepticism in the board’s wisdom to recall Jobs after 11 years, there have been murmurs about NRN’s induction, a mere two years after stepping down, with some even questioning the pioneering firm’s business model.

Indeed, the performance of companies run by professionals is once again under scrutiny. There is anxiety if Infosys is transforming into one of those family-run businesses in the commodity sector, which are in place because of their proximity to wrung out licenses from policy makers and not because of any skill sets. In fact, the turmoil at Infosys can be traced to the increasing commodification of outsourcing services. In this market, branding has no place. Rather pricing is the vital factor. However, a big difference is that commodity makers have a captive audience, while services providers have to convince the buyers of their choice. The inherent aim of outsourcing is to economise production expenses. Getting the best price is a benefit derived when the number of players offering the same kind of service increases. In this circumstances, tying up orders calls for networking and sales skills. The focus shifts from operations to the marketing team. With his image as a leading light of India’s outsourcing business, NRN is uniquely placed to bag orders based on his profile. The comeback of one of the original inceptors could once again help Infosys to clinch deals at better margin in the short term. In the long run, however, the company has to once again work on reinforcing the perception that it is the generic byword for offshoring just as Apple has become the torchbearer in the smartphone and tablet markets since reinstating Jobs. Also, NRN occupying the corner office does not spell an end to the nascent experiment of manager-driven companies, which are ideally omnipresent in the services industry. Happily, the share of the services sector in the country’s GDP is now nearly 60%.

Side effects

The problems of some pharma companies with the US regulator might stem from efforts to keep prices low

By Mohan Sule

Quality issues have ceased to shock Indian consumers over the years. The aftereffects of adulteration and usage of substandard ingredients resulting in temporary or permanent health setbacks and injuries and even casualties are common, grabbing attention for a few days. Yet no one stops buying consumer goods, shifting to new houses, partaking wedding meals, or visiting restaurants. This is in the belief that the latest horror is an aberration and there are competent authorities to keep vigil on the essential items of consumption. Auditors, for instance, are anointed as the conscience keepers of investors and are expected to go through the numbers of companies with a fine tooth. Their signatures on balance sheets imply that they have indeed performed the task expected of them. Regulators are supposed to keep the interest of investors and users above those of issuers, producers and other market intermediaries. The board of directors acts as a check to ensure that in its focus on the shareholders, the management team does not circumvent corporate governance. Even so many of them fail in their fiduciary duty on quite a few occasions. Poor quality of medicines is in the spotlight after the US Food and Drug Administration pulled up Ranbaxy Laboratories and Wockhardt. Despite the furor, the local regulator’s silence is surprising.

The controversy has come at a delicate junction. During the downturn of the last four years, big-ticket investors had gravitated towards companies in this sector for two reasons. Like FMCG, demand for drugs is inelastic. In recent years, many producers have emerged as important global players on par with some from the tech industry. Cheap generic drugs, like low-wage IT workers, are increasingly finding acceptance in the developed markets. A growing number of MNCs is outsourcing manufacturing to India similar to the back-office work being offshored by the global financial services sector. Some mid-size manufacturers have leapfrogged into the big league on the back of such production contracts and exports of their generics. Ironically, Daiichi of Japan bought controlling stake in Ranbaxy to ride the generics boom. If recession in the US and euro zone exposed how vulnerable our tech sector is to the well being of their customers, the revelation of flouting of good manufacturing practices by two mainline players has the potency to slow down or even scotch the growth of a sector that is yet to reach its full potential. To ring-fence the industry, it is necessary for the domestic quality control body to launch a nationwide inspection of facilities to weed out players who have stepped out of the line to demonstrate that shoddy manufacturing is not all pervasive. Going by the experience of the tech industry, this is not difficult to achieve. Many clients of Satyam Computer Services stood by the company, distinguishing between the talent pool and the promoters. Also, there was hardly any impact on the business of other players such as Infosys, TCS and Wipro.

Even as action is being taken on the ground level, there is need to introspect. How much of the blame can be apportioned to the greed of promoters and how much to faulty policies that have spawned an industry known for reverse engineering rather than innovation? In its bid to keep prices of drugs affordable, the government may have indirectly encouraged manufacturers to take shortcuts. Price control of essential drugs meant that companies had to remain small in scale. In the meantime, there was also a transformation in the composition of diseases as India embarked on the growth path and accepted the product patent regime in 2005 after joining the World Trade Organisation. Though MNCs hold patents for many lifestyle diseases, the expiry of some earlier varieties opened a window of opportunity for Indian producers. So much so that the share of exports of frontline player is equal or more than domestic revenue. However, penetrating the market by being the first to file molecules and compounds is just one step. To establish a lasting presence requires a change in attitude to what constitute acceptable practices to keep the cost of operations low. It is in this crossfire that the Indian pharmaceutical industry is caught. Some like Sun Pharmaceutical and Glenmark have made spectacular progress in the crossover. Many more will do so in the medium term. What is crucial is that in their race to capture market share by producing cheaper versions they do not lose sight of the fact that they operate in a space that is more fragile than that of other industries. Consumption of medicines is not a ‘want’ but a ‘need’. Many prescriptions for complicated diseases are patents, leaving no choice for consumers. As for policy makers, the episode is another reminder that controlled pricing can lead to a blowout.

Liquidity injection

The Rs 29000-crore infusion by Unilever could see capital going to assets in need of funding instead of gold and property

By Mohan Sule

Cash can be a blessing as well as a problem. For companies, reserves are primarily a buffer against downturn, when inventories rise, products are slow in moving, customers demand discounts and stretching of the payment cycle, and credit is required to service working capital. RIL used some of its reserves for additional depreciation charges arising from revaluation of its plants and machinery. The market loves companies financing their expansion through internal accruals. For investors, its presence on the balance sheet indicates a healthy operating margin. At the same time, the increasing size of cash pile adversely impacts the return on equity. Consequently, there is clamor from investors to use it to grow the business by undertaking expansion, which would be a cause for capital gain. There is also pressure to share some of it with the shareholders through dividends or as bonus shares. Of late, companies are offering to purchase shares to reduce capital, which boosts earning and invites better discounting. The tendency to dip into reserves is more noticeable during a bearish phase. Besides using this method to support the stock, lack of effective channels to expend is a vital factor in distributing cash. This is not so during a bull run. Besides, the attraction of dividend yield diminishes as stock prices surge. Buybacks and delisting become expensive.

The way a company prefers to consume its cash influences the market’s attitude towards the stock. Those offering dividend, tax-free in the hands of investors, are favored though they may belong to mature industries because of the predictability of their payout. On the other hand, fund-guzzlers are viewed with caution despite the opportunity to buy cheap and scope for appreciation as they mostly operate in the emerging sectors of the economy. For a time it did seem Indian investors were buying into this growth story from the huge response to the Rs 11600-crore Reliance Power IPO, the last of the big-ticket issue before the collapse of the primary market in 2008. Policy paralysis, regulatory overhang and shortage of raw materials have snuffed out the potential of the infrastructure sectors, including telecom, that had lured investors for a while. Buybacks are taken as a sign that growth has peaked and the company does not see many opportunities to expand market share. RIL had to resort to share mop-up to prop up the stock beaten down due to fall in natural gas production. Dell of the US is taking the company private as smartphones and tablets have disrupted the desktop and laptop market. Hindustan Unilever is an interesting case. Parent Unilever is increasing stake in the Indian company to the maximum permissible of 75% to stay listed but triggering speculation that the MNC might go private sometime in future as the margin and revenue come under pressure due to competition. The flawed reverse bookbuilding process mandated by Sebi will ensure investor interest in the stock in the hope of extracting a sumptuous exit price. The shares might even enjoy still steeper valuations, going against the conventional logic that stocks slip after buyback is completed.

What happens to the cash that is returned to investors through the various mechanisms? It will not be surprising if it is deployed in risk-averse fixed income instruments or locked up in gold or real estate. The Rs 29000 crore that Unilever is going to inject into the Indian stock market comes at a different time. There are reasons to believe that some of this largesse might finds its way back into the equity market, which is at a critical juncture. The US Federal Reserve has indicated it might gradually wind up its pump-priming program against the backdrop of return of risk-taking. The Indian market is benefiting from the spillover emerging from the surging Dow Jones Index Average and Nikkei indices. Indians are still buying gold in record numbers despite its declining value. The current account deficit expanded in April 2013 mainly due to higher gold imports. Yet, the difference over the four-and-a-half years since the global market meltdown is that purchases seem to be for consumption rather than for investment. Decent return from real estate looks slim at the current level. On the other hand, cheap sunrise sectors that need capital rather than FMCG counters with stretched valuations could lure investors. Pressure from foreign investors could even prod companies in the infrastructure space to improve their corporate governance and the government to initiate reforms that would allow players easy entry and exit and flexibility in sourcing supplies and pricing. In that sense the cash infusion by Unilever and other MNCs that might be tempted to follow the FMCG giant would be a welcome liquidity injection in the Indian equity market.

Paying the bill

It is the tax payers, including the small investors whose savings have been wiped out, who end up bailing out failed institutions

By Mohan Sule

From a humble beginning as money collectors, the Sahara and the Saradha groups have transformed into conglomerates dabbling into media and property development among other diverse activities. Their large-scale across-the-board flouting of the basic stipulation of getting details of the depositors and promising returns above industry standards lead to two conclusions. One, for deposit-taking outfits or chit funds, maintaining digital records is a liability for it leads to paper trail of the subscribers to whom they have to deliver the promised returns. The second is by following the commission- or the target-based business model, the promoters cleverly spread the responsibility of survival of the organisation on agents, whose campaign focuses on quantity rather than the quality of deposits and results in misselling of products. Most have long maturity and are embedded with high marketing expenses. Suck out the incentive, and the industry faces seizure as was evident when Sebi banned mutual fund entry load,which was parceled out to distributors. The other side of the sordid drama is the hunger of both urban and rural investors for instruments that secure the principal as well as guarantee high returns. The fuss about proof of presence puts migrants at a disadvantage and so also the minimum balance requirement of banks for those working in the unorganised sector. It is this space that unregulated chit funds and deposit-taking firms occupy.

During the evolutionary phase of mutual funds in India, small investors had to be wooed with promise of fixed returns till some public sector bank-floated mutual funds sunk into red. The bankruptcy of UTI predating that of Lehman Brothers and following that of hedge fund Long Term Capital Management in the US stemmed from this very problem, with its flagship scheme, US-64, coming to symbolise government-backed cash-flow spigot. Another conclusion is that small investors are an important component of the financial system. The Sahara and the Saradha groups’ scale of expansion and diversification on the foundation of small savings should clear any doubt on this score. These firms saw the opportunity and deployed an army of collectors, something the organised financial services sector neglected. Insisting on adherence to KYC norms and auditing of records, to start with, and asking the deposit takers to explain how they plan to invest their corpus to keep their guaranteed-return promise are obvious steps to rein in the unruly sector. However, these measures could prove counterproductive unless public sector banks are ready to fill the gap that may be created by the crackdown. One of the justifications bandied for the emergence of shady money-collection schemes is the clogging of the capital pipeline to those who may be short of collateral but long on ambitions. Running chit funds is never their ultimate objective. Rather it is the means to an end — to build an industrial empire spanning airlines, hotels, townships, TV channels. These capital-guzzling ventures need a steady source of funds.

From another angle, keeping out elements with plenty of daring but shortage of ethics could be viewed as the soundness of the banking story in post nationalization India. Yet the mounting bad loans of public sector banks is a reminder of the bane of crony capitalism that keeps away those whose only asset is their dreams. Lack of access to liquidity prompts many of them to seek avenues that are lightly regulated to raise resources. No wonder the first thing that these promoters do on achieving critical mass is to venture into media to buy respectability and influence policy makers so as to ease the path to future projects. The other crucial issue that has to be confronted even as regulators grapple with the disciplinary aspects to prevent such occurrences in future is what to do with the thousands of depositors who have lost their savings. West Bengal chief minister Mamta Banerjee has been criticized for levying a tax on cigarettes to compensate the victims of Saradha. This is surprising considering tax payers aided in the rescue of UTI. Eventually, though, the surge in equity markets helped the mutual fund to repay the government just as large investment banks in the US returned the capital infused by the government during the 2008 credit crisis. Closer in time, large depositors in Cyprus will find their corpus reduced as the government dips into their holdings to finance the bailouts of large banks. So whenever an important link in the value chain of the financial ecosystem collapses, it is the universe of taxpayers, including the small depositors whose savings have been wiped out due to the collapse of the institution, who pays the penalty. This is an important lesson that should not be forgotten.

Turning point

If rising prices of onions can effect a change in government, so may fall in value of gold

By Mohan Sule
For every country, company and investor there comes an inflection point that presses for a change in course. For the global economy, growth triumphed over fiscal discipline after the September 2008 credit crunch. No country wanted to experience the Great Depression in the US of the 1930s that resulted from spending cuts to balance the budget or Japan’s lost two decades due to the timidity of the government in stimulating the economy after the property bust of the early 1990s. Despite allowing prominent companies such as Enron, WorldCom and Long Term Capital Management to go bankrupt, a fiscally conservative government in the US enforced mergers and bailed out large banks by using tax money so as not to clog money supply. A socialist government in India realised the importance of private sector investment after it had to ship 67 tonnes of gold to banks in Europe in exchange for US$600 million as reserves had dwindled to finance only three weeks of imports. Prospect of downgrade of credit rating to junk prompted the UPA II government, which had turned the country into a welfare state, to turn attention to controlling fiscal deficit by paring subsidies on fuel and take up pending reforms. The role of auditors, independent directors and pledged shares came into focus in the Indian market after the accounting scandal at Satyam Computer Services. The 2-G spectrum scam showed that a closed and highly regulated industry was not essential to spawn crony capitalism and corruption. IT companies are realising that quality of earning is more important than market share.

It took a while for infrastructure investors to confront the reality that opening up only part of the value chain is meaningless unless supply of raw materials and last-mile connectivity too is freed from pricing controls. After the crash in real estate prices at the beginning of this century and in stocks in the third quarter of the last decade, the lesson for retail investors is there is no escaping from the cycles of boom and burst. The latest correction in commodities supports the belief that there is no permanency in any investment theme. If equities can nosedive or surge, reacting to external or internal factors, so can the value of debt instruments in relation to interest rates, which are not static. Higher is the coupon, more are the chance of default of principal. Till the recent sharp fall in prices, gold had achieved a special all-weather status. A bull run or a bearish phase did not dim its luster: However, the change in its characteristic to an investment option from a hedge against inflation, particularly in the last four years of economic uncertainty, has contributed to gold’s volatility. The launch of dedicated mutual funds and exchange-traded funds has proved to be a double-edged sword. If more inflows have translated into higher returns, they have also exposed the commodity to abrupt outflows.

World over investors take exposure to stocks and bonds to build a safety nest or to make money from trading. In contrast, Indians primarily buy gold for use or as liquidity of last resort. This is because of the agrarian tilt of the economy and inadequate penetration of financial products. Restricted inflows till 1992 and stunted economic growth due to absence of reforms resulted in weak linkages between local and international prices. Even if prices did not spurt sharply, the demand-supply imbalance insulated buyers from steep dips, burnishing the metal’s property as a safe haven. Easy imports have resulted in better availability, meeting one of the criteria for the change in policy, but have not diminished the attraction, the other important objective. Instead domestic prices have aligned to the futures markets in Chicago, with the influence of dollar movements on prices increasing. The turn of events is best illustrated by the fact that a weak rupee now gets a lift from fall in gold prices as the current account deficit narrows. During his term as finance minister, Manmohan Singh had famously declared that he does not lose sleep over stock market fluctuations. Wiser  about the importance of a healthy capital market to boost economic growth during his tenure as prime minister, he is not likely to repeat the mistake. Our policymakers’ agitation over inflation can be traced back to the time Indira Gandhi ousted the ruling Janata Party government in 1980 by harping on the spiraling prices of onions. Now, it will be interesting to see how the erosion in gold holdings of millions of Indians affects the national mood. The war with China in 1962 and the mortgage of the country’s precious asset in 1991 have been two low points for every Indian. Though end March 2013 forex reserves could meet about seven months of imports, we still have to attain closure for the defeat in Aksai Chin. The fall in value of gold might be good for the economy but will it be for those for whom it was the last investment standing?

Crime and punishment

Why is the market rewarding loose monetary policies of Japan but is unimpressed with India’s promise of fiscal discipline?

By Mohan Sule
A stock’s price is supposed to fully value its historical earning at any given point of time. Risk-averse pickers wait for correction to possess a long-desired scrip. The reversal in price could be due to company-specific hiccups. The counter could also slide on profit booking after a sharp run-up, deterioration in the health of the industry due to factors beyond the company’s control, or because of the broad market slide on muddied outlook for the economy. The small gains that the cautious investor makes through this incremental approach are blunted by limited opportunities. The other class of risk takers prefers to look ahead to load the portfolio. The appeal of a stock is based on growth potential, estimated through order backlog or completion of ongoing projects. Last year, Maruti Suzuki was beaten on worker unrest at its Manesar, Haryana, unit as the valuation assigned due to its bulging order book looked expensive in view of the imminent delays in delivery and cash flow. IT stocks swing to economic data from the US and the rupee movement, which dictate the flow, pricing and realisation of contracts. The market crashed even as the UPA I government was being formed in May 2004 as a partner indicated burial of the PSU divestment program, so vital for narrowing the fiscal deficit and easing pressure on interest rates. Most firms tend to be conservative in their guidance. However, many are unnecessarily optimistic. The reason could be to convince the market to assign premium pricing to aid in fund-raising.

The exuberance is more pronounced in a bull market. In a downtrend, the concern is the worst is still to come despite valuations that have already factored in the sluggish growth and liabilities on the balance sheet. Of late, the market seems to be going against logic. Take two recent instances. Equity investors hardly flinched when rating agencies downgraded the UK and Japan due to their unhealthy balance sheets: Britain’s debt-to-GDP ratio is nearly 90% and Japan’s fiscal deficit is expected to balloon to more than 10% of GDP in the current year. As against a conventional response, the Nikkei index surged to a new high. In contrast, the Indian stock market seemed unimpressed with the finance minister’s confidence of lowering fiscal deficit to 4.8% from 5.2% last fiscal and boosting growth to an impressive 6.5% from an anemic 5% estimated for the March 2013 year end. It remained flat in the month since the budget. If equities are supposed to be forward looking, Japan should have shed value and India experienced a renewed surge. There could be two explanations for this behavior. One, the market had already absorbed the two contrasting scenarios: growth pangs for Japan and a turnaround for India. Two, it was excited at the Bank of Japan’s aim to inject liquidity till inflation rose to 2%. On the other hand, the Indian finance minister had failed to spell out the roadmap to achieve his projections. PSU divestment had fallen short of the Rs 30000-crore target. There was expectation of renewed policy paralysis due to the election season.

Yet stocks had responded heartily to the increase in FDI cap to 51% in the retail sector and to 49% in aviation in spite of the formidable obstacles at the ground level and to the partial rollback of fuel subsidies despite the walkout of a key ally from the coalition government. On the surface, it would appear that the market is discriminating by ignoring Britain’s debt pileup and the danger to Japan’s health due to easy money policy. India’s promise of prudent fiscal policies, in contrast, is not getting a warm reception. The inescapable conclusion is that foreign investors are assigning higher discounting to growth and differentiating between good inflation (US and Japan) induced to expand the economy and bad inflation (India) due to supply bottlenecks that is stalling output. The message is that India has to undertake deep reforms. The glimmer of structural shakeup late 2012 did more to propel the market than balancesheet jugglery to bridge revenue shortfall. Selling shares of PSUs to a state-owned insurer can at best be described as cash transfer. Instead of drastically slashing market borrowings for welfare spending and subsidies that keep interest rates high, the budget has passed the buck to the conservative investors, who will face lower payout from debt mutual funds that had become attractive due to higher return because of the hike in dividend distribution tax (DDT) and from efficient companies making more than Rs 10-crore profit due to the increase in surcharge on DDT.

Changing equation

The seizure of the US mortgage-security market and India’s FCCB defaults show that debt is becoming as risky as equity

By Mohan Sule

The decision of the US government to sue Standard & Poor’s for assigning investment-grade rating to mortgage-backed securities has once again brought into focus the difficulties in making investing secure. As against the inbuilt uncertainty associated with exposure to equity including volatility in earning, debt is considered dependable for the stability in cash flow and protection of principal. Chances of projections about future earning going wrong are high for stocks but so is the potential for return. A credit rating for a fixed-income product, in contrast, is supposed to accurately predict the likeliness of default by the borrower. The advantage is neutralized by barely-above inflation return and higher tax compared with equity. This traditional equation of risk being directly proportionate to reward that divided investors into the adventurous and the conservative now looks close to collapse. This is because of the strengthening of the link between capital and leverage. Servicing of loan is dependent on the timely execution of projects, which, in turn, hinges on the financial performance of the borrower. Rating of debt, on the other hand, is influenced by the track record and the current health of the issuer unlike buy or sell calls on stocks, which pivot on the outlook for the company and industry. In fact, neither discounts sudden changes in the macro environment. This is because interest in issuance of paper increases during a bull period. This means the issuer has two choices: dilute equity by offering shares at premium or increase leverage through attractive coupon rates. Both are fraught with downsides.

With the world becoming flat, the power of the commodity cycles to pull up or push down markets is weakening. Rather fiscal policies such as taxes and spending cuts to balance the budget and monetary policies such as easing liquidity or increasing the cost of money sway the markets more dramatically. An unexpected decline in demand for products and services affects return ratios as well as the ability to service debt. Complicating matters is the popularity of derivatives. Cloudier the future, more is the hunger for these exotic instruments to hedge against future reversals. Mortgage-backed debt paper comprised securities of different profiles. Rating agencies erred in not alerting subscribers to the inherent volatility due to the composition. Instead, they clubbed it in the highest-safety category. The reasoning probably was that the mix of the dodgy with the credit-worthy would eventually spread out the risk. Instead, these papers turned out to be combustible. The fact is rating agencies that keep a hawk’s eye on countries’ fiscal health turned sloppy when it came to monitoring their clients. The legal battle will offer a glimpse of the method behind the madness. Protracted court proceedings, however, could also chip away confidence in these firms, supposed to be investors’ gatekeepers, and in the financial markets. If this happens it would lead to another seizure of the credit market in the absence of benchmarks at a delicate stage, with the US economy showing signs of recovery and the euro zone expected to bottom out. Instead, the opportunity should be used to clean up the system.

In view of the vital role they play, how can rating agencies avoid the conflict of interest of rating their clients? Are country downgrades quicker and harsher than those for companies? Is it because institutional investors pay for the intelligence, while ordinary investors do not? If market regulators are prickly about investment banks maintaining a Chinese wall between their underwriting and brokerage functions, rating agencies, too, should have two teams, one for client servicing and the other for third-party investors. Perhaps this is an appropriate time to examine if there is need to fall back on the volatility indicator used to determine the movement of stocks during different phases of the market for debt offerings, too. If a counter with higher beta can outperform during an upturn, its ability to service loans is also bright. Most times, rating alerts come after the equity market has passed its judgment. For investors the lesson is that fixed-income products could turn out to be as unpredictable as stocks. The increasing incidence of defaults by companies in redeeming foreign currency convertible bonds should be a clinching evidence of the tenacious relation between shares and debentures. Issued during a period when interest rates were soft and the markets surging, these instruments allowed companies the safety of conversion in case of stress in repayment. The calculation went horribly wrong as the subsequent bearish undertone hammered stock prices and also squeezed cash flows. Many issuers have had to bloat their balance sheets further to meet current obligations. If equity investing is like braving a hurricane, debt can be an iceberg, which hides more than it reveals.

Small strokes

The small investor, the small homebuyer, the small saver, and the small enterprise 
are the focus of the budget for 2013-14

By Mohan Sule

There were three challenges facing the finance minister as he rose to present the budget for 2013-14. The first was to revive growth. The second was to stick to the fiscal deficit target. The third was to keep inflation low. Confronting even one of them head-on would have resulted in the resolution of the other two. Balancing demand and supply could have dampened prices without sacrificing growth. Ironically, the roots of these problems could be traced back to the heydays of 8% plus expansion of the economy, which increased the level of income of a large number of people, requiring the import of more energy and thereby fuelling prices. The textbook solution would be to tighten money supply so as to slow down demand and cool inflation. The global credit crunch, however, ensured that traditional solutions that had stood the test of time were no longer relevant. Funds in search of better yields flowed into India despite the fragile health of the economy as the central bank had to keep interest rates high to due to increase in consumption. As a result, the stock market’s surge was not accompanied by the strength of the underlying economy. Complicating the efforts to bring back growth on track was the policy paralysis stemming from a series of scandals. Prickly coalition partners that opposed the rollback of subsidies to blunt the falling revenue and policies that relied on government handouts to erase poverty rather than creating more jobs were the other obstacles.

The year also flags off the election season. Not the best of time even for the most fiscally conservative finance minister. In such a situation, the temptation is to nurture the traditional constituency. Hence, 30% increase in Plan allocation besides 22% more for agriculture, Rs 10000 crore for food security, and Rs 6000 crore for rural housing. Yet there is no major ramp-up in direct or indirect taxes to balance the spending spree. There could be four reasons. First, as the Economic Survey 2012-13 points out, the worst for the domestic and global economy could be over and any tinkering could have delayed, instead of aiding, the recovery. Second, revision in taxes could have been short-lived as the rates would have to undergo another makeover if the Direct Taxes Code bill is passed in the current session of parliament and consensus emerges among states on the Goods and Services Tax rates. Third, of course, is the prospect that such a move would contribute to inflation, which is at a delicate stage as the economy absorbs the partial rollback of fuel subsidies. Fourth, the increasingly vocal urban middle class could be the reason for the feeble attempt to increase the income or service tax rates and base such as levying a token surcharge of 10% on those whose taxable income is more than Rs 1 crore per annum, 6% more excise duty on mobile phones above Rs 2000, 1% TDS on transfer of property above Rs 50 lakh, 100% customs duty on luxury cars, 30% excise duty on SUVs, and service tax on AC restaurants.

Despite the ballooning expenditure without matching revenue-raising steps, the finance minister is confident of bringing down fiscal deficit to 4.8% in the coming year and maintaining it at 5.2% this year. Besides austerity measures and decline in the fuel subsidy burden that allowed him to keep expenditure at 96% of this year’s budget estimate, the bet seems to be on the record 250 million tonnes of food grain production in 2012-13 to bring down food inflation, the main component of concern in the headline inflation. This could pave the way for softer interest rates and allow industry to borrow cheaply. Going by the budget’s efforts to attract them including cutting STT on sale of equity futures, foreign portfolio investors have been recognized as the growth drivers and so also debt as a better option to meet resources: There will be 10% surcharge on distribution tax on dividends, one of the  attractions of equity investing. Road infrastructure is to get a regulator, tax-free infrastructure bonds will make a comeback, and stock exchanges will have a debt segment, satisfying foreign investors and the small saver. Pension funds can now participate in debt and exchange traded funds. Another crucial source of revenue for the infrastructure sector is insurers. Public sector banks will see Rs 14000-crore capital infusion and along with those in the private sector can act as insurance brokers. LIC will have a presence in towns below population of 10,000 in a belated move to reclaim the space occupied by shady chit funds. By introducting tax sops for home loans up to Rs 25 lakh, reducing STT on redemption of mutual funds and ETFs, and imposing surcharge on DDT for debt funds to blunt their advantage over fixed deposits, the overarching theme of the status quo budget is the small saver and the small enterprise: there will be 10% surcharge on corporate tax for those with profit of more than Rs 10 crore. And if India manages by default to become the second fastest economy in the world after China next year not due to any bold efforts but because of the global sluggishness, it will indeed be a small consolation.

Cosmetic facelift

Instead of safety nets to lull investors into complacency, focus should be on the ease and the cost of entry and exit
By Mohan Sule

The market surge of 2012-13 is rekindling memories of the boom in 2007-09. Just like in the past, the recent buoyancy is due to foreign portfolio inflows. Low interest rates in the US are once again contributing to the liquidity. The similarities seem to end here. The expensive stock valuations when markets were hitting new highs in a matter of days four years ago seemed justified due to the robust health of the global economy, particularly emerging nations. China was notching up around 10% growth rate and India about 8% per annum in the second half of the last decade. The clawing back of the market to reclaim past glory is evoking concern instead of exuberance as most of the developed countries are in recession and some like the US are showing weak signs of recovery. China is tenaciously fighting to get back to the past years of high growth rate, while India is scrambling to put its balance sheet in shape just to avoid credit downgrades rather than to grow in double digits. Foreign investors have been assured of a benevolent tax regime till FY 2015. PSUs are being dusted off the shelf by the government to capitalize on the market momentum. The Reserve Bank of India has shifted its focus from fighting the still-high headline inflation to boosting growth. If retail diesel prices are being raised in slow steps, the cap on subsidized LPG cylinders has been enhanced to nine in a step backward. The scurrying about seems to be to reach the short-term goal of getting past 2014 intact. In short, a coat of paint is being given to make the house appear presentable to foreign visitors rather than carrying out structural repairs to make it livable for its inhabitants.

The weak economy, which is expected to grow just 5% in the current financial year, in a way has proved to be a blessing, shaking off the government’s policy paralysis and forcing it to act. This is in contrast to what happened for most of 2003-10. Instead of divesting PSUs to take advantage of the market boom and initiating second-generation reforms, the UPA II government launched treasury-draining welfare schemes like guaranteed rural employment. Not only did the giveaway contributed to fuelling food inflation, it boosted manufacturing prices too as the private sector had to raise wages to compete for workforce, The worry now is that in spite of the government’s belated realisation that there is no substitute for reforms, the inflows could reverse as quickly as they rushed in if the domestic economy does not respond to these stimuli. Recovery in the US, the euro zone and Japan too could help the turn the tide. Another reason is that equities in India are now fully valued based on their historical earning unlike at the start of the fiscal. Any further upturn will be justified by the economy surpassing the central bank’s estimate of 6.5% expansion next fiscal. This can come about only if the government quickly puts in place a transparent land acquisition and environmental clearance mechanism. The euro zone could be the next hotspot for inflows. Already yields on corporate bonds are rising in the region.

The high fiscal and current account deficits are slowing the central bank from aggressively cutting interest rates. Also, the government’s neglect of retail investors and tilt towards big-bracket overseas investors are not helping matters. Apart from the solace that long-term capital gain tax is unlikely to be raised from nil currently, the transaction costs including demat and brokerage charges and the securities transaction tax remain high for small investors. Book building has further marginalized the retail segment. Yet the recent attention on listing gains raises the possibility that the equity market is being given a cosmetic facelift to resemble a risk-free investment option. Toying with concepts like issue grading, market making, buybacks by promoters on dip in stock price over a fixed timeframe, however, are dangerous as they will lull stock pickers into false complacency just as US buyers, backed by cheap mortgage rates, came to believe that prices of property always go up. Instead of solely focusing on supply-side issues, the need is to encourage demand. Shrinking the period for listing and minimum 25% public float will ease entry and exit. Sebi has tried to create a level-playing field in the primary market by insisting on upfront margin and no-cancellation policy for big ticket investors and introducing ASBA facility that allows debit of subscription amount only on allotment. Another measure to reduce cost could be releasing of investors’ funds as per the progress of capital expenditure rather than on distribution of shares. This would enable retail players to earn interest on their unutilized portion and tamp down expectation of super listing gains, thereby de-risking companies from having to explain the fall in share prices due to delays in project execution.