The NDA government is caught between the need for market- oriented reforms and desire to fulfill social obligations
By Mohan Sule
There is growing impatience among foreign investors at the slow pace of reforms in India. Many assumed that Prime Minister Narendra Modi would undertake some radical steps to attract investments after assuming charge end May 2014. Perhaps they had not listened carefully. In his address to the new MPs of his party, he had wondered: If the government does not take care of the poor, who will? In the euphoria of the defeat of the corrupt UPA II government, the market chose to be selective in its understanding about the flexibility of the government in carrying out reforms. The issue is if reforms should be in one sweep or in installments. Diesel pricing has been deregulated but not LPG. The Big Bang reforms of Margaret Thatcher in 1986 transformed London into a global financial hub but also triggered criticism in the aftermath of the collapse of Lehman Brothers in September 2008 that banks embarked on risks not proportionate to their capital adequacy. The P V Narasimha Rao regime in India launched the most comprehensive restructuring exercise India had ever seen. The impact on the economy was equivalent to nationalization of banks and abolition of privy purses. In the era of coalition politics that followed, there was lack of consensus on how much to open up but not on the reforms process. Instability at the Centre, with successive governments lasting for a few months and even days, the foreign exchange crisis that tamed the SouthEast AsiaTigers, and the dotcom bust at the turn of the century ensured that policy makers did not have to do much to discourage foreign inflows. The 2012 verdict of the Supreme Court calling the January 2008 distribution of 122 licences for 2G spectrum on the basis of the first to comply with the conditions as “arbitrary” and “unconstitutional” and the recent cancellation of all coal blocks save four allocated since 1993 was a wakeup call.
The adverse fallout of the telecom scam was the policy paralysis for the remaining two years of the UPA II government. The positive outcome is that the activism of the apex court has given rise to the debate on the best possible way to dispose of natural resources. So far, the rulers had used their discretionary powers to reward cronies. There is a welcome realization that this method discourages entrepreneurship, thereby blocking the creation of jobs as well as innovation, so necessary for growth. At the same time, there is acknowledgement that auctioning, though transparent and fair, does not benefit the end users as the government tries to keep the base price high so as not be criticized later for selling the family silver cheaply. Winners try to recoup their investment through high pricing. Also, it fosters status quo. Only those with established deep pockets are in a position to tap the emerging opportunities. The 3G spectrum auction in 2010 saw participation of only seven private bidders. There were a mere five players bidding for just 102 of the 140 blocks in the GSM band in 2013. In fact, the presence of a large number of players in the 2G space earlier had resulted in fierce competition, leading to low voice usage rates. The outcome was deeper penetration of mobile services. After the shakeout, tariffs are once again on the rise. Service providers are happy but not consumers, who are facing less choice.
The decision to keep prices of coal controlled and Coal India intact, while auctioning the cancelled blocks for captive consumption, too, signals a cautious appoach. This could perhaps be to avoid trouble from trade unions on the eve of elections in Jharkand, which has the highest coals reserves in the country. The message is the government views PSUs as a vehicle to ensure cheap goods and services to poor. This is contradiction to Modi’s declaration in the US that the government has no business to be in business. The power generation sector is an example of half-baked reforms. Generators can produce power but pricing is subject to the regulator’s approval. Yet, they have to import coal at market-oriented rates as CIL is unable to meet demand. The government intends to lower its stake in PSU banks to 51% but wants them to be at the forefront of social programmes such as Jan Dhan Yojana, which is a high-cost operation due to the zero-balance requirement. This social outreach will make borrowers happy but not their shareholders just like those of CIL. Should investors stay with PSUs? With the example of the benign neglect of Air India following the entry of private operators and rising NPAs of PSUs even as private banks are proving to be nimble, investors would not be wrong to fear erosion in the value of their holding as the sectors in which state-owned enterprises are monopolies are thrown open to competition.
Wednesday, November 19, 2014
Thursday, November 6, 2014
Big deals
Strategies adopted by issuers of capital and e-commerce sites
to attract buyers have many similarities
By Mohan Sule
Very few companies can claim to earn US$100 million (Rs 600 crore) in 10 hours. The success becomes even more noteworthy if the entity has been in existence for slightly more than a half-a-dozen years. There have been instances of trailblazing companies burning out later, particular in the telecom, aviation and consumer durables space. The reasons include inability to manage the sudden growth, going off the course with wrong calls or the consumers losing attention and latching on to the next promising idea. Therefore, the latest phenomenon of user-visits bringing an e-commerce site to a standstill due to the inability to cope up with the rush, not surprisingly, has triggered opposing views. On one side are those who feel vindicated that India is taking to e-ecommerce rapidly, with falling prices of smart phones and charges for data downloading fueling the habit. The other argument is that the novelty factor of online shopping could wear out soon. Technical glitches and complaints about pricing are signs of buyers’ disappointment and disillusionment. Both opinions, nonetheless, signal that there is much in common in the way companies woo consumers and investors. The first is that it is not necessary to think out of the box to set the cash register ringing. The practice of offering hefty discounts is not new. Several business-to-consumer companies do it all the time. Law enforcing agencies have had to be called to control crowds at huge sales organised on national holidays. In the US, buyers queue up in freezing winter to rush in at midnight to grab goods of throwaway prices on Black Friday, which flags off the Christmas shopping season. What is required is packaging and marketing. The surest way for issuers of capital to create a buzz is by placement of shares with qualified institutional investors on the eve of primary-market debut. Presence of big-ticket investors is taken as a confirmation that the company is on the right track.
The second similarity is the value-for-money offers. Many offline outlets have protested that often items are sold online at less than the landed cost of imports. Pricing becomes a deciding factor during a slowdown. Reasonably priced IPOs have succeeded even in a dull market. Getting the pricing correct means issuers do not have to depend schemes such as safety nets and market making to pull in subscribers. It is important for digital malls to stay away from tricks such as bumping up prices and undertake a token gesture of slashing them later. A distinguishing feature between two companies in an industry is the degree of confidence that they can instill in the stakeholders. Consumers come to equate quality and after-sales service with the brand. Those with transparent corporate governance practices will find it easy to raise funds at attractive valuations in the market. At the same time, adventurism can prove fatal. E-supermarkets in the US are accused of deploying algorithms to alter prices depending on the visitor’s shopping history, which reflects their purchasing power. Indian companies diversifying into unrelated areas such as aviation and telecom have had to suffer massive erosion in value. Window-dressing of accounts, changing accounting policy and reluctance to share setbacks with investors have also cost companies dearly.
Earmarking special days is also an exercise in brand building. This is observed in the capital market, too. Stocks tend to go up on the eve of board meetings called to mull corporate actions. Listed companies have to utilise cash prudently, either capitalising it through a bonus issue or funneling it for capex, to communicate to the market that the company is in good health. Discounting also reveals if a company is relying on volumes to gain share. Many of them have to turn to debt or dilute capital to crank up production without any buffer for a slowdown. The market rewards those with a good operating profit margin. Companies have to streamline processes to make and sell products with a minimal mark-up or convince investors that the premium justifies the outlook. The success of big-deal days also implies that sellers have to create opportunities. Commodity producers, in particular, have to protect from cyclical downturns by widening the customer base. Asset-light stocks are preferred during slowdowns. Another important inference is that there can be different classes of consumers for the same product. Small investors are in for the long haul and are concerned about dividend payout, while institutional investors would look for capital appreciation. Balancing the different pulls of the market is indeed a tough call for companies looking for buyers of goods and equity.
to attract buyers have many similarities
By Mohan Sule
Very few companies can claim to earn US$100 million (Rs 600 crore) in 10 hours. The success becomes even more noteworthy if the entity has been in existence for slightly more than a half-a-dozen years. There have been instances of trailblazing companies burning out later, particular in the telecom, aviation and consumer durables space. The reasons include inability to manage the sudden growth, going off the course with wrong calls or the consumers losing attention and latching on to the next promising idea. Therefore, the latest phenomenon of user-visits bringing an e-commerce site to a standstill due to the inability to cope up with the rush, not surprisingly, has triggered opposing views. On one side are those who feel vindicated that India is taking to e-ecommerce rapidly, with falling prices of smart phones and charges for data downloading fueling the habit. The other argument is that the novelty factor of online shopping could wear out soon. Technical glitches and complaints about pricing are signs of buyers’ disappointment and disillusionment. Both opinions, nonetheless, signal that there is much in common in the way companies woo consumers and investors. The first is that it is not necessary to think out of the box to set the cash register ringing. The practice of offering hefty discounts is not new. Several business-to-consumer companies do it all the time. Law enforcing agencies have had to be called to control crowds at huge sales organised on national holidays. In the US, buyers queue up in freezing winter to rush in at midnight to grab goods of throwaway prices on Black Friday, which flags off the Christmas shopping season. What is required is packaging and marketing. The surest way for issuers of capital to create a buzz is by placement of shares with qualified institutional investors on the eve of primary-market debut. Presence of big-ticket investors is taken as a confirmation that the company is on the right track.
The second similarity is the value-for-money offers. Many offline outlets have protested that often items are sold online at less than the landed cost of imports. Pricing becomes a deciding factor during a slowdown. Reasonably priced IPOs have succeeded even in a dull market. Getting the pricing correct means issuers do not have to depend schemes such as safety nets and market making to pull in subscribers. It is important for digital malls to stay away from tricks such as bumping up prices and undertake a token gesture of slashing them later. A distinguishing feature between two companies in an industry is the degree of confidence that they can instill in the stakeholders. Consumers come to equate quality and after-sales service with the brand. Those with transparent corporate governance practices will find it easy to raise funds at attractive valuations in the market. At the same time, adventurism can prove fatal. E-supermarkets in the US are accused of deploying algorithms to alter prices depending on the visitor’s shopping history, which reflects their purchasing power. Indian companies diversifying into unrelated areas such as aviation and telecom have had to suffer massive erosion in value. Window-dressing of accounts, changing accounting policy and reluctance to share setbacks with investors have also cost companies dearly.
Earmarking special days is also an exercise in brand building. This is observed in the capital market, too. Stocks tend to go up on the eve of board meetings called to mull corporate actions. Listed companies have to utilise cash prudently, either capitalising it through a bonus issue or funneling it for capex, to communicate to the market that the company is in good health. Discounting also reveals if a company is relying on volumes to gain share. Many of them have to turn to debt or dilute capital to crank up production without any buffer for a slowdown. The market rewards those with a good operating profit margin. Companies have to streamline processes to make and sell products with a minimal mark-up or convince investors that the premium justifies the outlook. The success of big-deal days also implies that sellers have to create opportunities. Commodity producers, in particular, have to protect from cyclical downturns by widening the customer base. Asset-light stocks are preferred during slowdowns. Another important inference is that there can be different classes of consumers for the same product. Small investors are in for the long haul and are concerned about dividend payout, while institutional investors would look for capital appreciation. Balancing the different pulls of the market is indeed a tough call for companies looking for buyers of goods and equity.
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