Is volatility good? Can you trust promoters pledging their shares? Do cash-rich companies need investors?
By Mohan Sule
Stocks have been volatile of late, rising and falling with the flow of news. A sudden development interrupts consecutive days of unilateral direction of the market. On some other occasions, equities plunge or surge with equal ferocity on alternate trading sessions or even intra day. Events influencing investing are not necessarily confined to India. Stalling of key bills in the Rajya Sabha pulls down the market and so also improvement in US jobs data, sparking fears of US Federal Reserve sticking to its course of hiking interest rates from June. Similarly, cut in lending rates by China’s central bank casts a gloom on worries that the move will increase consumption of commodities by the largest manufacturer in the world and thereby boost prices as well as on concerns that the issue of retrospective collection of minimum alternative tax will drag on in courts. Besides the softening of the position of Greece on payment of debt instalments, putting on block a couple more PSUs for stake-sale and reworking the urea subsidy mechanism to kick start fertilizer production induce optimism. In short, the market is jumping from one issue to another without letting the resolution of earlier problems to percolate. This is because valuations have raced so much ahead, taking for granted that the NDA government will be bombarding the economy by one reform after another. Earlier, the delay by parliament in approving increase in FDI in the insurance sector to 49% was painted as the ultimate reform on which the well being of the economy hinged. Now it appears that the passage of the amended Land Acquisition Bill is the final frontier for India to conquer.
It should be evident by now that the Narendra Modi government wants to take one step at a time, covering its tracks even if it means delays, so it cannot be accused of carrying out reforms at the behest of certain sections of industry or to appease some other segment. In the process, however, it is the retail investor who is left wondering if the market flux is here to stay or temporary. Yet, realization in emerging that volatility may not be bad after all. For every foreign institutional investor fed up with the dodgy interpretation of tax rules in India, there might be a mutual fund familiar with the grinding speed with which the bureaucracy functions but still believes in the India growth story. The wild fluctuations are more likely to be a clash of opposing views rather than a reflection of a shallow market. The correction and recovery ensure valuations do not enter bubble territory or a downturn. A secular trend is more dangerous as it exemplifies unwarranted pessimism or irrational exuberance. The severe market gyrations should lead to rethinking of the vanilla concept of bull and bear phases. The other is of pledging of shares by promoters, which triggers a reflex ` sell’ action by investors, conjecturing all sorts of dark scenarios ranging from extravagant lifestyle of the owners to mismanagement.
Not all companies operate in ever-green sectors such as FMCG, pharmaceuticals and tech. A developing country needs capital-intensive industries. These companies have lots of debt, low promoter holding and ongoing capital expenditure. Shares are mortgaged to fulfil promoters’ contribution or to buy more shares to retain controlling interest after equity dilution. Better a promoter who publicly pledges his shares and invites focus on his company than who liquidates his holding in trickles and dribbles while the going is good. An extreme view is that it is only a matter of time before such inefficient promoters are dislodged in favour of an agile management. Another traditional position is being threatened in the face-off between companies preferring to keep investors happy with liberal dividends and those that are undertaking expansion and diversification for capital appreciation. Investor activists demand cash-rich companies to go for buybacks or increase the dividend rate and, in the process, further boost their valuations. The problem is that the perceived tax-free status of dividends despite the dividend distribution tax attracts risk-averse investors to dividend-yielding scrips over taxable fixed deposits or growth stocks. The fear is that acquisitions will result in leveraging of the balance sheet and sometimes turn out to be bad fits. Capacity expansion can go horribly wrong if anticipated demand does not materialise or there is disruption in the market. Yet, dividend yield too varies depending on the mood of the market. Just as interest rates recede, premium on companies with generous payouts also shoots up in a bull run. So if equity investing is providing risk capital, why chase overvalued companies not in need of cash?
Wednesday, June 3, 2015
Wednesday, May 20, 2015
Well done!
After a decade of pessimism, Prime Minister Narendra Modi has instilled optimism that India will have a better future
By Mohan Sule
When is the right time to assess a government's performance? Immediately after swearing in? After 100 days? Six months? Most new governments around the world enjoy a 100-day honeymoon. Unfortunately, the Narendra Modi government has been not shown any such courtesy. Precipitating the problem was the mess he inherited: policy paralysis, mounting bad loans of banks and a huge subsidy bill. Initially, surging consumer prices were the focus of the attack. Later, parliament proceedings were disrupted on the issue of return of black money. Now it is the alleged anti-agrarian bias of the government that has become the rallying point. The flirting from issue to issue is due to the lack of stickiness of any. With wholesale inflation below zero and consumer inflation below the 6% comfort level targeted for the current fiscal by the Reserve Bank of India, price rise is no longer an emotive topic. Unaccounted money resonates during times of economic hardships and not when the stock markets are buoyant. Scaling down of the rural employment guarantee scheme and the minimum support price are being blamed for farmers' woes caused by unseasonal rains. This is a 180-degree reversal from attributing the deployment of funds to dole out wages for digging holes for widening the fiscal deficit and causing rural inflation. A moderate increase in MSP against the background of plentiful of crop was praised for capping food inflation, which is allowing the RBI to begin its rate cut cycle. Currency volatility affecting imports as well exports and preoccupation with shedding debt and high-cost inventory contracted when oil prices were high are responsible for the corporate sector yet to see achche din.
As it completes a year in office, the Modi government should have reasons to feel satisfied. The increase in FDI in the insurance sector to 49% has become a reality. The initiation of e-auction to sell mines will mean that henceforth natural resources will never ever be assigned arbitrarily. There were concerns that the high price to secure mines and spectrum will result in pass-through of costs. In the present circumstances, however, transparent allocation of resources is the best possible way. The cost-benefit equation will get sorted over in the coming years, with players keeping their bids reasonable. Besides these visible reforms, behind-the-scenes triggers have been pulled. Many projects got stalled after the 2G spectrum allocation scandal followed by the cancellation by the Supreme Court of the coal blocks allocated since 1993.Promoters, too, did not display any urgency because of the global economic slump. Some projects were starved off coal and other critical inputs such as natural gas. Environmental clearances are coming without any `tax'. The high price of natural gas approved by the previous government was revised to offer a modest increase. Pooling of domestic and imported LNG will even out prices. Taking advantage of falling crude prices, diesel was deregulated. The appeal by the prime minister to the well-off to give up their subsidized LPG cylinders is Kennedysque: Ask what you can do for the country.
Bankers now can sanction loans based on commercial viability. There is consensus among multilateral and credit rating agencies that India is the growth story to watch out for. The upward revision in the outlook for the country from junk status on improving macro indicators will lower the cost of overseas borrowings. Make-in-India and Digital India have the capacity to stimulate the economy. Foreign investors are being treated on par with ordinary tax payers, whose previous seven years' tax returns can be opened for scrutiny. The Jan DhanYojna is set to be a game-changer in the goal of financial inclusion. The amendment to the land acquisition bill is a result of the prime minister's experience as Gujarat chief minister when activists stalled the Narmada dam. The mark of a leader is being firm in his convictions unlike the Gandhi scion who pandered to every section and sub-segment of the society on the eve of Lok Sabha elections. By labeling the NDA government as suit-boot ki sarkar, the Congress leader who aspires to be the next prime minister humiliated the aspiring India and the migrants who come to cities to better their and the next generation's standard of living. Mikhail Gorbachev’s perestroika triggered the fall of the Berlin Wall, freeing former Communist bloc countries from the tyranny of the Soviet Union. The heir to the dynasty of former prime ministers, who kept the animal spirits of two generations of its citizens shackled, perhaps anticipates that Modi will occupy a place in history for freeing India from cronyism, corruption and feudalism after P V Narasimha Rao in 1991 freed India from the licence raj regime.
By Mohan Sule
When is the right time to assess a government's performance? Immediately after swearing in? After 100 days? Six months? Most new governments around the world enjoy a 100-day honeymoon. Unfortunately, the Narendra Modi government has been not shown any such courtesy. Precipitating the problem was the mess he inherited: policy paralysis, mounting bad loans of banks and a huge subsidy bill. Initially, surging consumer prices were the focus of the attack. Later, parliament proceedings were disrupted on the issue of return of black money. Now it is the alleged anti-agrarian bias of the government that has become the rallying point. The flirting from issue to issue is due to the lack of stickiness of any. With wholesale inflation below zero and consumer inflation below the 6% comfort level targeted for the current fiscal by the Reserve Bank of India, price rise is no longer an emotive topic. Unaccounted money resonates during times of economic hardships and not when the stock markets are buoyant. Scaling down of the rural employment guarantee scheme and the minimum support price are being blamed for farmers' woes caused by unseasonal rains. This is a 180-degree reversal from attributing the deployment of funds to dole out wages for digging holes for widening the fiscal deficit and causing rural inflation. A moderate increase in MSP against the background of plentiful of crop was praised for capping food inflation, which is allowing the RBI to begin its rate cut cycle. Currency volatility affecting imports as well exports and preoccupation with shedding debt and high-cost inventory contracted when oil prices were high are responsible for the corporate sector yet to see achche din.
As it completes a year in office, the Modi government should have reasons to feel satisfied. The increase in FDI in the insurance sector to 49% has become a reality. The initiation of e-auction to sell mines will mean that henceforth natural resources will never ever be assigned arbitrarily. There were concerns that the high price to secure mines and spectrum will result in pass-through of costs. In the present circumstances, however, transparent allocation of resources is the best possible way. The cost-benefit equation will get sorted over in the coming years, with players keeping their bids reasonable. Besides these visible reforms, behind-the-scenes triggers have been pulled. Many projects got stalled after the 2G spectrum allocation scandal followed by the cancellation by the Supreme Court of the coal blocks allocated since 1993.Promoters, too, did not display any urgency because of the global economic slump. Some projects were starved off coal and other critical inputs such as natural gas. Environmental clearances are coming without any `tax'. The high price of natural gas approved by the previous government was revised to offer a modest increase. Pooling of domestic and imported LNG will even out prices. Taking advantage of falling crude prices, diesel was deregulated. The appeal by the prime minister to the well-off to give up their subsidized LPG cylinders is Kennedysque: Ask what you can do for the country.
Bankers now can sanction loans based on commercial viability. There is consensus among multilateral and credit rating agencies that India is the growth story to watch out for. The upward revision in the outlook for the country from junk status on improving macro indicators will lower the cost of overseas borrowings. Make-in-India and Digital India have the capacity to stimulate the economy. Foreign investors are being treated on par with ordinary tax payers, whose previous seven years' tax returns can be opened for scrutiny. The Jan DhanYojna is set to be a game-changer in the goal of financial inclusion. The amendment to the land acquisition bill is a result of the prime minister's experience as Gujarat chief minister when activists stalled the Narmada dam. The mark of a leader is being firm in his convictions unlike the Gandhi scion who pandered to every section and sub-segment of the society on the eve of Lok Sabha elections. By labeling the NDA government as suit-boot ki sarkar, the Congress leader who aspires to be the next prime minister humiliated the aspiring India and the migrants who come to cities to better their and the next generation's standard of living. Mikhail Gorbachev’s perestroika triggered the fall of the Berlin Wall, freeing former Communist bloc countries from the tyranny of the Soviet Union. The heir to the dynasty of former prime ministers, who kept the animal spirits of two generations of its citizens shackled, perhaps anticipates that Modi will occupy a place in history for freeing India from cronyism, corruption and feudalism after P V Narasimha Rao in 1991 freed India from the licence raj regime.
Wednesday, May 6, 2015
Bogus outrage
Attempts to create a level playing field can have limited success going by the experience in the stock market
By Mohan Sule
The trigger for the outrage was innocuous. An Internet service provider offered zero rates to users clicking on the app of an e-tailer. Instead, the merchant paid the ISP for not counting the usage of data by the visitors. Competitors contended the agreement gave an unfair advantage to the trader. A grim scenario was painted of ISPs blocking sites on behalf of government or slowing access to those of smaller players who are unable to afford this extra cost. The argument is that as gatekeepers to the Internet, ISPs have to be neutral in providing access to the net and not help divert traffic to certain sites by providing exclusive lanes to speed up download. The proposition is compelling. Imagine, for instance, a hospital charging differential rates for the same treatment, depending on the economic status of the patients. Civic services like supply of water are billed as per usage and not the purchasing power of the user. Power bills and telecom tariffs are generated as per consumption. Yet, leveling the field is easier said than done. Applicants to private educational institutions can jump the queue by paying donations, disregarding scholastic achievements. Corporate hospitals hike fees to ensure that their resources are not comprised by heavy demand or to enlist specialists. Multiplexes price tickets depending on the popularity of films and screening slots. Credit card issuers routinely offer discounts for visiting certain retail outlets or fine dining restaurants. Brands woo super markets and even mom-and-pop outlets with higher margins for better display and push. This means unless some sort of discrimination is practiced, it will be impossible for many organizations set up to make profit to justify their existence.
The Securities and Exchange Board of India’s experiments to flatten the playing ground for issuers and subscribers have produced more misses than hits. The stock market regulator has strengthened norms against insider trading by enlarging the definition of who fits the bill. Deliberations of board meeting have to be conveyed to stock exchanges within minutes. Transcripts of analysts’ meets have to be posted on the company’s web site for symmetrical dissemination of information. The efforts to protect minority shareholders have been matched by easing of resource-raising. As long as they make full disclosures, companies do not need permission of any authority to list on stock exchanges. This has opened the floodgates for even dubious promoters, many of whom have subsequently vanished from the scene. On complaints about the cost of floating shares to the public and for staying listed, Sebi carved out quotas for institutional investors, throwing in a carrot of retail discount. Shares can be placed with qualified institutional investors, bypassing the small investors. Book building gives big-ticket investors influence to determine pricing as they are informally polled to find the appetite for the offer. Grading of public issues indirectly helped established companies and so will the move to cap the commission of mutual fund distributors, an avenue for small players to gain visibility.
In the debate on net neutrality, a crucial issue has been lost sight of: except for sites put up by governments and multilateral institutions, everyone is out to make money or peddle influence. B2B presence is to gain access to a wider market and B2C properties eliminate the cost of building a brick-and-mortar set-up. Blogs eventually hope to self-sustain through ads. Free content is giving way to paid subscription to meet costs if not to etch out a profit. If there is still an echo of the disastrous eyeball parameter to assign valuations to dot-coms without any cash flows reverberating across the net, it is due to startups, many put up by con artistes out to snag venture capital or private equity. The shrill follow-the-herd cries for net neutrality should recognize that telecom companies have to pay for spectrum. They are answerable to their shareholders. The choice for them is between increasing voice and data tariffs and exploring other options to lighten the pricing burden to stay competitive. Internet retailers, on the other hand, are hobbled by server breakdowns in their quest to expand market share. The result is an arrangement beneficial to all the stakeholders. It is a pity that Flipkart buckled under pressure and backed out of the zero rate plan of Bharti Airtel, which though has stayed firm in going ahead with the program. No doubt, a company has to operate in an ethical environment. But surrendering to populism at the cost of the bottom line reveals to the shareholders where its priorities are. Hopefully, investors will not forget this when the e-commerce pioneer in India comes out with an IPO.
By Mohan Sule
The trigger for the outrage was innocuous. An Internet service provider offered zero rates to users clicking on the app of an e-tailer. Instead, the merchant paid the ISP for not counting the usage of data by the visitors. Competitors contended the agreement gave an unfair advantage to the trader. A grim scenario was painted of ISPs blocking sites on behalf of government or slowing access to those of smaller players who are unable to afford this extra cost. The argument is that as gatekeepers to the Internet, ISPs have to be neutral in providing access to the net and not help divert traffic to certain sites by providing exclusive lanes to speed up download. The proposition is compelling. Imagine, for instance, a hospital charging differential rates for the same treatment, depending on the economic status of the patients. Civic services like supply of water are billed as per usage and not the purchasing power of the user. Power bills and telecom tariffs are generated as per consumption. Yet, leveling the field is easier said than done. Applicants to private educational institutions can jump the queue by paying donations, disregarding scholastic achievements. Corporate hospitals hike fees to ensure that their resources are not comprised by heavy demand or to enlist specialists. Multiplexes price tickets depending on the popularity of films and screening slots. Credit card issuers routinely offer discounts for visiting certain retail outlets or fine dining restaurants. Brands woo super markets and even mom-and-pop outlets with higher margins for better display and push. This means unless some sort of discrimination is practiced, it will be impossible for many organizations set up to make profit to justify their existence.
The Securities and Exchange Board of India’s experiments to flatten the playing ground for issuers and subscribers have produced more misses than hits. The stock market regulator has strengthened norms against insider trading by enlarging the definition of who fits the bill. Deliberations of board meeting have to be conveyed to stock exchanges within minutes. Transcripts of analysts’ meets have to be posted on the company’s web site for symmetrical dissemination of information. The efforts to protect minority shareholders have been matched by easing of resource-raising. As long as they make full disclosures, companies do not need permission of any authority to list on stock exchanges. This has opened the floodgates for even dubious promoters, many of whom have subsequently vanished from the scene. On complaints about the cost of floating shares to the public and for staying listed, Sebi carved out quotas for institutional investors, throwing in a carrot of retail discount. Shares can be placed with qualified institutional investors, bypassing the small investors. Book building gives big-ticket investors influence to determine pricing as they are informally polled to find the appetite for the offer. Grading of public issues indirectly helped established companies and so will the move to cap the commission of mutual fund distributors, an avenue for small players to gain visibility.
In the debate on net neutrality, a crucial issue has been lost sight of: except for sites put up by governments and multilateral institutions, everyone is out to make money or peddle influence. B2B presence is to gain access to a wider market and B2C properties eliminate the cost of building a brick-and-mortar set-up. Blogs eventually hope to self-sustain through ads. Free content is giving way to paid subscription to meet costs if not to etch out a profit. If there is still an echo of the disastrous eyeball parameter to assign valuations to dot-coms without any cash flows reverberating across the net, it is due to startups, many put up by con artistes out to snag venture capital or private equity. The shrill follow-the-herd cries for net neutrality should recognize that telecom companies have to pay for spectrum. They are answerable to their shareholders. The choice for them is between increasing voice and data tariffs and exploring other options to lighten the pricing burden to stay competitive. Internet retailers, on the other hand, are hobbled by server breakdowns in their quest to expand market share. The result is an arrangement beneficial to all the stakeholders. It is a pity that Flipkart buckled under pressure and backed out of the zero rate plan of Bharti Airtel, which though has stayed firm in going ahead with the program. No doubt, a company has to operate in an ethical environment. But surrendering to populism at the cost of the bottom line reveals to the shareholders where its priorities are. Hopefully, investors will not forget this when the e-commerce pioneer in India comes out with an IPO.
Wednesday, April 22, 2015
In the crossfire
Currency crosswinds due to liquidity injection and withdrawal and differing interest rate policies are complicating stock selection
By Mohan Sule
Those who were disappointed that the Union Budget 2015-16 did not produce a Big Bang will find plenty of fodder in the new fiscal to stock up the cannon. The moot question is whether the explosions will light up the landscape or trigger a bush fire. The era of a market throwing up only gainers, with all the stocks across the spectrum turning gold, during a bull phase is perhaps past us. This is because of crosscurrents of monetary policies as each region struggles to tailor the environment to suit local requirement. Even as the US Federal Reserve phased out its bond-buying and is poised to increase interest rates on signs of a recovering economy, the European Central Bank has embarked on a euro1-trillion liquidity infusion to revive confidence in the euro region. China, too, is expected to follow Japan’s example of loose money policy to stem the slowing of its GDP growth. India is on the path of low interest rates and massive infrastructure spending. Unfortunately, the fallout is not confined to the borders. The ripples are felt across the globe in differing magnitude. A prominent casualty of the declining consumption of energy by the euro zone and China is crude oil, which slide below US$50 a barrel at one point. Instead of cheering, most developed countries are worried how to stop the spiral of disinflation. The fallout is a slippery gold, a comfort investment to fend off inflation.
Withdrawal of foreign funds from the emerging markets when yields on US bonds become more attractive than dollar returns from equities could be a blessing as stocks cool down and the rupee weakens. For the Reserve Bank of India, however, this is a recipe for disaster: how to shore up the currency and at the same time keep interest rates low to keep the liquidity tap open. A strong dollar is a prominent manifestation of the complex global scenario. Nothing seems to soften the Teflon currency, even fears of recession in its home market. On the contrary, signs of uncertainty boost the greenback for its safe haven status. The mighty dollar is neutralizing the slide in oil prices for emerging markets. The net result is that neither fuel prices have fallen to the level they should have nor are the wobbly export markets bringing relief. Not surprisingly, the RBI is under increasing pressure to reduce interest rates and thereby let the rupee depreciate further to provide the winning edge to Indian exporters. The prevailing uncertainty has not dampened global markets, which are hitting highs in the belief that the problems in different corners of the world are not insurmountable. After the success of the US Fed, pump-priming is viewed as a solution to all economic ills. This is in contrast to the view last century, when distressed borrowers were bluntly told by multilateral institutions to tighten their belts. The rebellion by Greece and the cold caught by markets around the world subsequently has reconfirmed the premise that the penalty for splurging is injecting more money rather than imposition of fiscal discipline though it was living beyond means that was responsible for the mess in the euro zone.
If the inflows from the US slow down, the floodgates of the euro zone have been thrown open. If China is no longer attractive, there is India, despite no noticeable ground level change in the ease of doing business. The drumbeats heralding the country as the next financial hotspot has already begun, with the ADB and the IMF joining the chorus of various foreign brokers and rating agencies in revising up the growth forecast. Yet no one has been able to assert with any degree of finality that not only foreign money will stay but the inflows will continue in spite of the ramping up of interest rates by the US. As a result, tech stocks roar every time a Fed official reiterates sticking to its roadmap of hiking interest rates from June and falter on weak US job data. In the same way, banks and auto shares’ fortunes fluctuate with the unpredictable consumer price index as the RBI takes one slow step at a time to slash domestic rates. Evergreen FMCG scrips are no longer oases, wilting and blooming with the monsoon’s mood. Pharmaceutical stocks’ health depends on US regulatory approvals and crackdowns. Power and capital goods counters with plenty of potential are yet to share the enthusiasm for Make-in-India due to the overbearing public sector’s influence on their orders and bottom lines but cement companies, projected to be the beneficiaries of government-sponsored low-cost housing and infrastructure projects, race ahead of earnings. No wonder the market is looking like a game of Russian roulette more and more.
By Mohan Sule
Those who were disappointed that the Union Budget 2015-16 did not produce a Big Bang will find plenty of fodder in the new fiscal to stock up the cannon. The moot question is whether the explosions will light up the landscape or trigger a bush fire. The era of a market throwing up only gainers, with all the stocks across the spectrum turning gold, during a bull phase is perhaps past us. This is because of crosscurrents of monetary policies as each region struggles to tailor the environment to suit local requirement. Even as the US Federal Reserve phased out its bond-buying and is poised to increase interest rates on signs of a recovering economy, the European Central Bank has embarked on a euro1-trillion liquidity infusion to revive confidence in the euro region. China, too, is expected to follow Japan’s example of loose money policy to stem the slowing of its GDP growth. India is on the path of low interest rates and massive infrastructure spending. Unfortunately, the fallout is not confined to the borders. The ripples are felt across the globe in differing magnitude. A prominent casualty of the declining consumption of energy by the euro zone and China is crude oil, which slide below US$50 a barrel at one point. Instead of cheering, most developed countries are worried how to stop the spiral of disinflation. The fallout is a slippery gold, a comfort investment to fend off inflation.
Withdrawal of foreign funds from the emerging markets when yields on US bonds become more attractive than dollar returns from equities could be a blessing as stocks cool down and the rupee weakens. For the Reserve Bank of India, however, this is a recipe for disaster: how to shore up the currency and at the same time keep interest rates low to keep the liquidity tap open. A strong dollar is a prominent manifestation of the complex global scenario. Nothing seems to soften the Teflon currency, even fears of recession in its home market. On the contrary, signs of uncertainty boost the greenback for its safe haven status. The mighty dollar is neutralizing the slide in oil prices for emerging markets. The net result is that neither fuel prices have fallen to the level they should have nor are the wobbly export markets bringing relief. Not surprisingly, the RBI is under increasing pressure to reduce interest rates and thereby let the rupee depreciate further to provide the winning edge to Indian exporters. The prevailing uncertainty has not dampened global markets, which are hitting highs in the belief that the problems in different corners of the world are not insurmountable. After the success of the US Fed, pump-priming is viewed as a solution to all economic ills. This is in contrast to the view last century, when distressed borrowers were bluntly told by multilateral institutions to tighten their belts. The rebellion by Greece and the cold caught by markets around the world subsequently has reconfirmed the premise that the penalty for splurging is injecting more money rather than imposition of fiscal discipline though it was living beyond means that was responsible for the mess in the euro zone.
If the inflows from the US slow down, the floodgates of the euro zone have been thrown open. If China is no longer attractive, there is India, despite no noticeable ground level change in the ease of doing business. The drumbeats heralding the country as the next financial hotspot has already begun, with the ADB and the IMF joining the chorus of various foreign brokers and rating agencies in revising up the growth forecast. Yet no one has been able to assert with any degree of finality that not only foreign money will stay but the inflows will continue in spite of the ramping up of interest rates by the US. As a result, tech stocks roar every time a Fed official reiterates sticking to its roadmap of hiking interest rates from June and falter on weak US job data. In the same way, banks and auto shares’ fortunes fluctuate with the unpredictable consumer price index as the RBI takes one slow step at a time to slash domestic rates. Evergreen FMCG scrips are no longer oases, wilting and blooming with the monsoon’s mood. Pharmaceutical stocks’ health depends on US regulatory approvals and crackdowns. Power and capital goods counters with plenty of potential are yet to share the enthusiasm for Make-in-India due to the overbearing public sector’s influence on their orders and bottom lines but cement companies, projected to be the beneficiaries of government-sponsored low-cost housing and infrastructure projects, race ahead of earnings. No wonder the market is looking like a game of Russian roulette more and more.
Wednesday, April 8, 2015
Breaking away
Lessons from the ex-PM's summons, the land bill, the Sebi-Sat spat on DLF and the resistance to the FTIL-NSEL merger
By Mohan Sule
Out-of-season rains is one of the banes a farmer faces in his long journey from tilling his field to reaping the crops and selling them to the government or private distributors. Yet the disruption in pattern underscores the importance of rules, be they made by nature or man. The heat generated over the summons to Manmohan Singh by a Central Bureau of Investigation court in the coal allotment scam demonstrates India's reluctance to break from the past of differential treatment to the rulers and the ruled. Congress president Sonia Gandhi marched to his residence to announce that the entire world knows of the former prime minister's honesty and integrity. The argument offered in his support is that he did not make any money from the process. In the earlier age of innocence, railway ministers were known to resign, owning up moral responsibility for any major train accidents on their watch. Home ministers have been shunted out for terrorist attacks or due to law-and-order situation spinning out of control during their tenure. If bureaucrats can be questioned and a minister and a beneficiary who happened to be a member of parliament could be sent to jail for their roles in the second-generation spectrum allotment case, then surely a former head of the government can appear before a judge. The opportunity should be used by Singh to clear the air if he assigned coal blocks because of his belief in the end use or he was helpless because someone even more powerful than him had a say in the arbitrary allotment.
The outrage instead should be reserved for the action of those who have tried to influence the due course of law by applying covert populist pressure. Thankfully, our judiciary is made of sterner stuff as seen from the woes of Subrata Roy, who was in the habit of issuing full-page ads in the newspapers in response to the Supreme Court's summons in the case filed by the Securities and Exchange Board of India for misappropriating more than Rs 30000 crore of investors' funds. His attempts to try his case in the court of public opinion flopped. The Sahara kingdom provides employment to thousands of people and sponsors sporting events. That, as the firmness of the SC has shown, should not be the criteria for leniently dealing with a law-breaker. Even after a year in jail and employing the best legal eagles, the boss has not been able to raise Rs 10000 crore for bail. The rallying of opposition to the land acquisition bill is similarly an attempt to mislead: it is not so much to ensure fair compensation to farmers as to try to protect Rahul Gandhi's ownership of the Act. As per the consensus of chief ministers, including those ruled by Congress, the law in its present form is not practical. The prime minister noted the fact during the bill's introduction in the budget session of the parliament. Instead of modifying a harebrained legislation, propaganda that the bill is anti-farmer has been whipped out despite spelling out the kind of projects including defense and infrastructure projects in the public sector and education institutions and hospitals in the private sector for which the consent of the land owner will not be acquired, while maintaining the level of compensation.
Along with a country’s development, the level of urbanization increases. Those in agricultural jobs shift to manufacturing because the number of hands required to farm fall due to genetic modification, mechanization and improvement in yield on deployment of pesticides. Many farmers are keen to switch to another profession as their land's productivity decreases over the years. Breakup of families means fragmentation of the land parcel. Not all members might want to continue with farming. The most convincing argument against allowing status quo is that no investment has come in due to this shabby legislation. In the same wayy, there is an urgent need to change the mechanics to resolve regulatory tussles in the capital markets. Sebi banned DLF from issuance of capital for three years for inadequate disclosures in the IPO document seven years ago. The Securities Appellate Tribunal found the punishment harsh. This is not the first time that Sat has overturned the market regulator. This back and forth should be increasingly replaced by consent decrees. The promoters save face but pay monetary fines. Banning fund raising can scotch genuine attempts to turn around the company just as delisting blocks investors' exit route. The disclosure of payment of penalty in the offer document should alert investors as should the fact that a major portion of the revenue of the flagship is derived from a subsidiary with opaque business practices. If the shareholders of the parent can partake in the good times, surely they should be willing to make good the Rs 5600-crore hole in the balance sheet of a wholly-owned subsidiary. The division over the FTIL-NSEL merger should prompt investors to pay attention to consolidated accounts, which provide a window to corporate governance and how revenues are earned or siphoned off.
By Mohan Sule
Out-of-season rains is one of the banes a farmer faces in his long journey from tilling his field to reaping the crops and selling them to the government or private distributors. Yet the disruption in pattern underscores the importance of rules, be they made by nature or man. The heat generated over the summons to Manmohan Singh by a Central Bureau of Investigation court in the coal allotment scam demonstrates India's reluctance to break from the past of differential treatment to the rulers and the ruled. Congress president Sonia Gandhi marched to his residence to announce that the entire world knows of the former prime minister's honesty and integrity. The argument offered in his support is that he did not make any money from the process. In the earlier age of innocence, railway ministers were known to resign, owning up moral responsibility for any major train accidents on their watch. Home ministers have been shunted out for terrorist attacks or due to law-and-order situation spinning out of control during their tenure. If bureaucrats can be questioned and a minister and a beneficiary who happened to be a member of parliament could be sent to jail for their roles in the second-generation spectrum allotment case, then surely a former head of the government can appear before a judge. The opportunity should be used by Singh to clear the air if he assigned coal blocks because of his belief in the end use or he was helpless because someone even more powerful than him had a say in the arbitrary allotment.
The outrage instead should be reserved for the action of those who have tried to influence the due course of law by applying covert populist pressure. Thankfully, our judiciary is made of sterner stuff as seen from the woes of Subrata Roy, who was in the habit of issuing full-page ads in the newspapers in response to the Supreme Court's summons in the case filed by the Securities and Exchange Board of India for misappropriating more than Rs 30000 crore of investors' funds. His attempts to try his case in the court of public opinion flopped. The Sahara kingdom provides employment to thousands of people and sponsors sporting events. That, as the firmness of the SC has shown, should not be the criteria for leniently dealing with a law-breaker. Even after a year in jail and employing the best legal eagles, the boss has not been able to raise Rs 10000 crore for bail. The rallying of opposition to the land acquisition bill is similarly an attempt to mislead: it is not so much to ensure fair compensation to farmers as to try to protect Rahul Gandhi's ownership of the Act. As per the consensus of chief ministers, including those ruled by Congress, the law in its present form is not practical. The prime minister noted the fact during the bill's introduction in the budget session of the parliament. Instead of modifying a harebrained legislation, propaganda that the bill is anti-farmer has been whipped out despite spelling out the kind of projects including defense and infrastructure projects in the public sector and education institutions and hospitals in the private sector for which the consent of the land owner will not be acquired, while maintaining the level of compensation.
Along with a country’s development, the level of urbanization increases. Those in agricultural jobs shift to manufacturing because the number of hands required to farm fall due to genetic modification, mechanization and improvement in yield on deployment of pesticides. Many farmers are keen to switch to another profession as their land's productivity decreases over the years. Breakup of families means fragmentation of the land parcel. Not all members might want to continue with farming. The most convincing argument against allowing status quo is that no investment has come in due to this shabby legislation. In the same wayy, there is an urgent need to change the mechanics to resolve regulatory tussles in the capital markets. Sebi banned DLF from issuance of capital for three years for inadequate disclosures in the IPO document seven years ago. The Securities Appellate Tribunal found the punishment harsh. This is not the first time that Sat has overturned the market regulator. This back and forth should be increasingly replaced by consent decrees. The promoters save face but pay monetary fines. Banning fund raising can scotch genuine attempts to turn around the company just as delisting blocks investors' exit route. The disclosure of payment of penalty in the offer document should alert investors as should the fact that a major portion of the revenue of the flagship is derived from a subsidiary with opaque business practices. If the shareholders of the parent can partake in the good times, surely they should be willing to make good the Rs 5600-crore hole in the balance sheet of a wholly-owned subsidiary. The division over the FTIL-NSEL merger should prompt investors to pay attention to consolidated accounts, which provide a window to corporate governance and how revenues are earned or siphoned off.
Wednesday, March 25, 2015
Lighting a fuse
By Mohan Sule
Ever since the deregulation of the London financial markets by Margaret Thatcher in October 1987, every reform is expected to produce a Big Bang. Following the opening up India’s economy by the P V Narasimha Rao-Manmohan Singh duo in 1991, every budget since then is viewed as a make-or-break occurrence. The urge for lofty deliverables stems from the fact that the country is always in a crisis mode. The causes may vary, ranging from lack of rainfall, runaway public expenditure, galloping inflation to the after-effects of global catastrophes. Consequently, the collective will of the nation imposes on those at the helm mythical powers to bring order to the chaos, not one day at a time but at the stroke of a pen, unmindful that magnificent edifices that can withstand time are built brick by brick. There has to be a reason to undertake destruction to raise a new architecture. Britain was losing its preeminence as a global hub for doing business due to the outcry system for executing trades and fixed brokerage. India was on the verge of default and had to pawn its gold for foreign exchange to meet its import requirement. In present times, the corruption and the populist policies of the UPA government had turned off investors, plunging the currency to a new low. Hence, the hopes of a quick turnaround by those who had lost more than two years of their lives fighting price rise and stagnation had reached unrealistic proportions by the time Narendra Modi ascended to power. The report card so far: the Wholesale Price Index near zero, bidding for natural resources, infra projects on the fast-track, and initiatives such as Make in India, Digital India and Swatch Bharat launched to make India an attractive destination.
If the first budget of the new government in July 2014 was crammed with good intentions like cleaning the Ganga, setting up smart cities, running bullet trains and making India a magnet for religious tourism, this budget’s four cornerstones are financial inclusion, creation of jobs, building up of infrastructure to improve the quality of life, and tax transparency. The approach is to treat the root cause of inequality rather than the symptoms by offering curatives such as subsidies and guaranteed wages for digging holes leading to nowhere. The rural employment scheme has not been abandoned. In fact, the allocation to it has been increased, probably necessitated not only due to wider coverage of road and irrigation projects but also to make up for the deficient rainfall last year, which had led to slump in sales of consumer durables. As such, the pumping of more liquidity in rural areas could act as quantitative easing for FMCG, automobile, cement and steel makers and telecom services providers. An indirect fiscal stimulus will be cash transfers in lieu of subsidies and providing health, medical and pension benefits for a nominal premium. The idea of universal insurance coverage is path breaking like the Jan Dhan Yojna, the universal banking system. Similarly, the intention to bring in a bankruptcy code is a historic development. It will aid in creative destruction and evolution of new opportunities, so vital for a dynamic economy.
Clearly influenced by the role of venture capitalists in nurturing and sustaining Silicon Valley ideas, the Mudra Bank is a concept whose time had come. Despite the inroads by microfinance agencies, unorganized businesses have very few bankable avenues to rely on. The pampering of the poor and the marginalized is not at the expense of big companies. Another game changer is the offer of five 4,000-MW ultra mega power plants, with all clearances in place, to bidders. Other infra projects, usually victims of the crossfire between the industry and environmental ministries, too, can benefit from this novel concept. The scrapping of wealth tax and replacing it with surcharge on the income tax of the super rich will result in better compliance. An important step towards stability of the tax regime is the cut in corporate tax by 5% over four years in return of elimination of tax exemptions and doing away with retrospective taxation. The 2% increase in service tax along with higher freight for coal, cement and steel, will be inflationary in the short term but is a transition to the era of goods and service tax, which is 14%, from April 2016. Besides, GST will replace all other existing Central and state levies. If a realistic roadmap is drawn to nip benami transactions, it will indeed be one more visionary feature of the budget. The stock market, comfortable with cold numbers, appeared confused at a vision statement instead. It need not. The fallout from the budget will gradually gather momentum to create a transformational change in the way we are governed.
Monday, March 16, 2015
Opportunity in setbacks
The AAP win and the spy scandal in the capital should be used as springboards to illustrate the power of competition
By Mohan Sule
The sweep of the radical Aam Aadmi Party cloaked as an anticorruption crusader in the national capital has spooked the market. The impact was particularly severe on the two power distribution companies servicing the region. During its short stint a year ago, AAP had demanded an audit of the discoms by the Comptroller and Auditor General of India. The idea was to spot instances of inflating profit to prod them to cut their consumer bills. The inference the market drew was that the statutory auditors could not be relied upon. Stocks of energy explorers suffered a setback on revelations that their officials were caught ferreting out policy papers from government offices. The episode revealed the pervasive role of the government in influencing the fluctuations in the bottom lines of oil and gas producers. The fear is that, in the aftermath of these two developments, caution could subsume courage. The fallout could be a slowdown in the pace of rollback of subsidies. Already the moderate increase in the minimum support price to farmers’ crop this year is being blamed for BJP’s poll debacle in an urban region like Delhi instead of acknowledging its contribution along with soft crude prices and deregulation of diesel to bring down the wholesale price index to below zero and the consumer prices index to the 5% level. Populist pressure is forcing the government to rethink the amendments to the land acquisition bill to ease buying of farmland to put up transport and industrial corridors through public-private partnership.
On the positive side, the crackdown on companies’ spies will accelerate the process towards transparency by both the government and the corporate sector. Companies will have to work out the cost-effectiveness of acquiring the rights to dig out natural resources. Service and pricing will determine the margin rather than monopoly status. With a healthy inflow of tax receipts due to more players, the government can concentrate on its social obligations. HDFC boss Deepak Parekh will not have room to complain about the difficulty in doing business even after the Modi Sarkar completing nine months. In fact, the prime minister can point to the changes in the housing finance sector to emphasis the point that market forces can be the best leveler. Atrocious practices like pre-payment penalty have faded and barriers to transfer the loan to another lender offering better terms have come down. Players have realized that lobbying with the government for favors and to create artificial controls to curb competition will not attract good discounting despite a bulging bottom line. A steel and power producer, with the promoter close to the erstwhile UPA regime, saw its market cap plunge after the Supreme Court cancelled coal blocks allotted since 1993. The stock has bounced back after the company won the bids for the same blocks it had to surrender. Many companies have reworked their business models to stay on top of the game. The IT sector has focused on exports. Had it concentrated on the domestic market, PSUs would have been the main clients. Pharmaceutical companies chained to tight controls in the domestic market have used their copycat skills to become cheap producers of generic drugs for the developed markets. Facing the onslaught of foreign competition, Bajaj Auto shifted gear to cater to overseas customers.
On the other side, the failure of the 2G spectrum auction in November 2012 to attract any bids for regions with a high base price is a reminder to the government that there is a limit to milking the corporate sector to bridge the fiscal deficit. The increase in tax revenue as the market expands due to healthy competition in the marketplace is a better solution to widen the tax base. Competition in buying coal and supplying electricity will moderate tariffs and also ensure uninterrupted supply the same way competition to buy land to put up projects in the healthcare, education and infrastructure space will benefit farmers rather than a law that makes it time-consuming to even put up a bid. The symmetric opportunity for wealth creation will boost valuations, like those of e-tailers, rather than by accessing confidential information. Consumers, too, will realize that competition and not subsidies will lead to efficiency, enabling reform-minded political parties to reclaim the space from fringe parties. Elimination of waiting lists to procure two-wheelers and telecom connections post reforms is the best illustration of the power of a level-playing field. The Delhi election results show that a lot of work has to be done to transform the prevalent socialist mindset accumulated over the last six decades of government being the provider of all essential services and at the same time keeping taxes low and using PSUs to provide lifelong low-paying jobs.
By Mohan Sule
The sweep of the radical Aam Aadmi Party cloaked as an anticorruption crusader in the national capital has spooked the market. The impact was particularly severe on the two power distribution companies servicing the region. During its short stint a year ago, AAP had demanded an audit of the discoms by the Comptroller and Auditor General of India. The idea was to spot instances of inflating profit to prod them to cut their consumer bills. The inference the market drew was that the statutory auditors could not be relied upon. Stocks of energy explorers suffered a setback on revelations that their officials were caught ferreting out policy papers from government offices. The episode revealed the pervasive role of the government in influencing the fluctuations in the bottom lines of oil and gas producers. The fear is that, in the aftermath of these two developments, caution could subsume courage. The fallout could be a slowdown in the pace of rollback of subsidies. Already the moderate increase in the minimum support price to farmers’ crop this year is being blamed for BJP’s poll debacle in an urban region like Delhi instead of acknowledging its contribution along with soft crude prices and deregulation of diesel to bring down the wholesale price index to below zero and the consumer prices index to the 5% level. Populist pressure is forcing the government to rethink the amendments to the land acquisition bill to ease buying of farmland to put up transport and industrial corridors through public-private partnership.
On the positive side, the crackdown on companies’ spies will accelerate the process towards transparency by both the government and the corporate sector. Companies will have to work out the cost-effectiveness of acquiring the rights to dig out natural resources. Service and pricing will determine the margin rather than monopoly status. With a healthy inflow of tax receipts due to more players, the government can concentrate on its social obligations. HDFC boss Deepak Parekh will not have room to complain about the difficulty in doing business even after the Modi Sarkar completing nine months. In fact, the prime minister can point to the changes in the housing finance sector to emphasis the point that market forces can be the best leveler. Atrocious practices like pre-payment penalty have faded and barriers to transfer the loan to another lender offering better terms have come down. Players have realized that lobbying with the government for favors and to create artificial controls to curb competition will not attract good discounting despite a bulging bottom line. A steel and power producer, with the promoter close to the erstwhile UPA regime, saw its market cap plunge after the Supreme Court cancelled coal blocks allotted since 1993. The stock has bounced back after the company won the bids for the same blocks it had to surrender. Many companies have reworked their business models to stay on top of the game. The IT sector has focused on exports. Had it concentrated on the domestic market, PSUs would have been the main clients. Pharmaceutical companies chained to tight controls in the domestic market have used their copycat skills to become cheap producers of generic drugs for the developed markets. Facing the onslaught of foreign competition, Bajaj Auto shifted gear to cater to overseas customers.
On the other side, the failure of the 2G spectrum auction in November 2012 to attract any bids for regions with a high base price is a reminder to the government that there is a limit to milking the corporate sector to bridge the fiscal deficit. The increase in tax revenue as the market expands due to healthy competition in the marketplace is a better solution to widen the tax base. Competition in buying coal and supplying electricity will moderate tariffs and also ensure uninterrupted supply the same way competition to buy land to put up projects in the healthcare, education and infrastructure space will benefit farmers rather than a law that makes it time-consuming to even put up a bid. The symmetric opportunity for wealth creation will boost valuations, like those of e-tailers, rather than by accessing confidential information. Consumers, too, will realize that competition and not subsidies will lead to efficiency, enabling reform-minded political parties to reclaim the space from fringe parties. Elimination of waiting lists to procure two-wheelers and telecom connections post reforms is the best illustration of the power of a level-playing field. The Delhi election results show that a lot of work has to be done to transform the prevalent socialist mindset accumulated over the last six decades of government being the provider of all essential services and at the same time keeping taxes low and using PSUs to provide lifelong low-paying jobs.
Subscribe to:
Posts (Atom)