Rollbacks and push-backs

Despite holding firm on many sound issues, the Modi government and the market regulator back down on some others

By Mohan Sule

Investors are advised to cut losses when they make bad bets in the hope of salvaging some of the capital instead of witnessing destruction of their investment. Companies carry out restructuring to pare debt, conserve cash, or raise funds to deploy into more productive assets. Tactical retreat is not a surrender but a survival step to fight for another day. For instance, the Modi government decided to abandon the ordinance route to ease the stringent land acquisition law after universal criticism. Instead, the revision has been referred to a parliamentary committee.  The provisions of the real estate bill were tightened as per an all-party consensus after opposition to easing of regulations to encourage developers to build homes. The trick is in knowing when to back down and when to stand firm. The government has not budged from the goods and service tax provision of a flexible tax rate that would take into account the exigencies of the situation despite non-cooperation by Congress. Anticipating the delaying tactics likely to be marshaled by Congress, the implementation of Aadhar, ensuring subsidies reach the beneficiaries’ bank accounts, was paved by tagging it as a money bill. Only a simple majority in the Lok Sabha, where the ruling alliance controls the numbers, is sufficient for the passage. Unmindful of the intense pressure, FTIL was ordered to merge wholly owned subsidiary NSEL with itself, thereby holding the parent liable to make good the default in payment by the commodity exchange to investors. Similarly, the finance ministry remained firm in the face of a near one-and-a-half month shutdown by jewelers to strike down the 1% excise duty, knowing well that gold ornaments are conduit to funnel black money.   

Yet, there have been notable back-downs that hardly made sense. The only charitable explanation seemed to be to deflect mob frenzy despite merit in the proposals. The government succumbed meekly without much of a fight in the battle for net neutrality. No market allows players unfettered freedom. Mergers and acquisitions need approval of the Competition Commission of India to ensure that a supplier of products and services does not become a monopoly.  Swayed by the ayatullohs of the internet, comprising start-ups fearing being edged out in the digital space by cash-rich brick-and-mortar enterprises if traffic were to be shepherded to sites that tied up with internet services providers, the Telecom Regulatory Authority of India banned such arrangements. Meanwhile, these types of exclusive agreements continue to flourish in the real world: cash-back offer at select retail outlets on use of a particular brand of debit card and reward points on totting up purchases beyond a threshold. Even in the cyber universe, many manufacturers tie up with e-commerce aggregators to offer deep discounts.

The rollback of the budget provision to tax 60% of Employees’ Provident Fund withdrawal at maturity unless invested in an annuity was another instance of buckling under pressure of the Twitter Talibans. The intention was to put EPF on par with the National Pension Scheme. The latter’s objective is to provide private sector workers life-long security by disbursing the corpus accumulated through contribution over the working life as monthly pension. The NPS was constituted to avoid the dangers of lump sum withdrawal of EPF: directing the amount into unproductive or wrong assets, thereby leaving the beneficiary without a security cover for the remainder of his life. Those in favor of status quo noted that annuity short-changed anyone who did not live long enough to fully enjoy the monthly payout that in any case was miserly. This risk is present even for public sector staff.  Also, there are now many options including mutual funds available to employees to build a corpus for big-ticket events after retirement.  The debate over algorithm or high frequency trading is yet another illustration of how a non-event becomes a contentious issue. The regulator and other stakeholders have to decide if the presence of institutional investors is desired in the trading ring. It is not only the advantage of servers at the location of their brokers that give them split-second advantage over ordinary investors. They get access to management that a small investor can never dream of.  They can bargain for finer pricing. Yet, in the absence of major retail presence, largely due to Sebi’s misguided zeal to direct small investors to mutual funds and investor activists’ fear mongering, big-ticket investors are important to create liquidity. If a level playing field has to be created, why not scrap private placement and preferential allotment, instituted for companies to raise capital cost-effectively, and order organised investors to undertake negotiated deals or auctions?

Puzzles and riddles

Different views on crude prices, buying equities v mutual fund units and changing goal posts for rate cuts

By Mohan Sule

The market is a riddle. The triggers for a rally or a crash should be contradictory. Often, they are the same. Take the price of crude oil. Is the plunge good or bad for global economy? This is a puzzle for investors. A slump indicates faltering demand or excess supply. Ups and downs in consumption and prices are inherent in the economic cycle. Investors rush into a sector with a vibrant outlook. Excess capacities get built, result in a glut and a bust. The purge ensures survival of the fittest. Eventually, activity picks up and new players enter with better technology to carve out niches in the segment. Their bubbling businesses lure more investors, sowing the seeds for the repeat of history. Of late, the rules of the game seem to be changing. There is uncertainty if crude will revisit the US$100 a barrel mark. Boiling prices, hitherto, indicated a humming global economy. First, credible replacements are coming. The huge demand for the latest edition of Telsa’s electric car is a signal. Second, American businesses are investing in an alternative. Any uptick in crude price is bound to revive activity in exploration and production of shale gas. Third, Iran, an important supplier, is in the market after more than a nine-year sanction imposed by the UN for its nuclear program. All these have contributed to feeling good that oil prices are bound to remain low and stable even if consumption spurts going ahead. Yet, this scenario is a cause of pessimism. Oil producers are big consumers of goods and services. The prospects of global revival diminish if these crucial links in the consumption chain come loose.

Actions of regulators, too, fox investors. Does a light touch or cracking the whip mercilessly contribute to a dynamic market? Book building was seen as a solution to issuers’ complaints that fixed-price offerings did not factor volatility and outlook. Rich valuations, determined largely by the appetite of institutional investors, have unleashed grumblings about meager gains or negative returns post listing. Market making and buybacks introduced as safety nets to put a bottom to share meltdown have found only sporadic support. Instead of installing convoluted systems to insulate investors from the vagaries of the market, why not simply go back to the controlled pricing regime? Similarly, the capital market regulator is shepherding investors towards mutual funds as a secure mode over buying equity. Those who have opted for this method point to poor returns and high expenses incorporated by asset management companies. After tinkering with how commission should be paid, investors are now being told to deal directly with fund houses. Agents at least narrowed down funds suited to the investor’s requirement and risk profile. Bypassing distributors will mean examining the composition and track record of the scheme among other things despite warning of past returns no guarantee of future performance. If even investing in mutual fund is fraught with uncertainty and involves research, why not encourage investors to scan companies to take exposure to them? Equity trading necessarily involves signing up with a broker and so should mutual fund investing.

The third enigma is the central bank. The Reserve Bank of India has been credited with keeping Indian banks insulated from the global financial crisis of 2008, when many US and European institutions had to be bailed out and forced to merge with stronger peers. Nonetheless, many domestic entities collected huge bad assets on their balance sheets. How can a monitor be efficient as well as sleeping at the wheel at the same time? Many clients, now declared defaulters, had no problem getting additional loans despite a patchy history of servicing previous credit. Under the present governor, foreign exchange reserves have hit record highs but the local currency touched a record low.The bar for revising interest rates down keep on changing. Initially, it was the fear of food inflation due to the lethal combo of increasing prosperity and two consecutive deficient southwest monsoons. Till recently it was the inability of banks to transmute the rate reductions due to their reluctance to take risk following pressure to make higher provisions for non-performing loans. Now the cost of money will be pegged after assessment of rainfall. In the meantime, fiscal deficit is under control, current account deficit narrowing due to inflows of foreign direct investment and slowing of gold imports as jewelers downed shutters to protest the slapping of 1% excise duty, wholesale price index is in the negative for many months now and the consumer price index has come down to the comfort level of 5% and coupon on small savings schemes cut marginally. To be careful is commendable but to err on the side of caution is a misplaced zeal.