No free lunch

By Mohan Sule

Controls on the flow of capital to protect the domestic financial market are effective in the short term but result in prolonged volatility

Investors take into account many factors while entering a market. These include quality of stocks, market share, future potential, taxation regime and political stability. The most important is liquidity. Stock exchanges use two methods to meet the criterion. The obvious is to make the listing procedure stable and transparent. By laying down norms, exchanges segregate companies based on what sort of audience they want to attract. Some of the world’s biggest companies are traded on the NYSE. Tech companies opt to list on Nasdaq. The BSE has a separate platform for small and medium enterprises. The specialized set of companies attracts investors aware of the risk-reward equation. Stocks included in indices and the derivatives segment ensures a large number of participants. At each stage, picking stocks for special treatment implies wielding of control to retain the characteristic of a market. The process also means there is nothing like unfettered access to a stock or market. Circuit breakers are safety nets to prevent a blowout. In India, for instance, shareholders’ nod is required to determine the extent to which foreign investors can buy into a stock. The Securities and Exchange Board of India insists that market intermediaries know their clients. Premature withdrawal of fixed deposits invites penalties. Some equity and debt funds slap exit loads for redemption within a certain timeframe. A differential tax rate regime for long- and short- term capital gains is another hurdle.

Investors, too, understand the limitations. The problem arises when the regulators and the state machinery intervene to prop up or suppress the market. The two most recent examples of imposition of obstacles to change the course of the market are China and Greece. Worried about a bubble, China tightened the margin requirement to borrow to trade. The kneejerk reaction to the backlash that ensued was to reduce interest rates, ban IPOs, and order state institutions to buy shares from the secondary market. The meltdown has been contained, for now. The question is: for how long? The economy has to revert to double-digit growth for the Shanghai stock exchange to sustain once the artificial support is withdrawn. The curtain has still not fallen on the comic-farcical Greek drama. The shutdown of banks, then caps on deposits withdrawals and the five-week halt to trading did contain capital flight. The steepest fall of the stock market in a decade on opening indicates that the inevitable merely got postponed. Past experience suggests that economies hampering free flow of funds enter a period of ups and downs. After the debt crisis of early 1980s, the thriving Latin American economies had to struggle for more than two decades before the commodity boom of the early 2000s lifted them out of the rut. The growth of the Tigers of South-East Asia slowed down after the currency crisis of the late 1990s. The common thread is the intervention by their central banks to regulate the passage of capital. As the US Federal Reserve started buying bonds and kept interest rates near zero, cheap money found its way into the emerging markets of Asia and Latin America in the second half of 2009.

In response, Brazil levied tax on the purchase of financial assets by foreigners and Taiwan restricted overseas investors from buying time deposits. Indonesia implemented a one-month minimum holding period for certain securities. South Korea placed limits on currency forward positions. Mexico, Peru, Colombia, South Africa, Russia and Poland, too, tightened capital controls. India’s central bank was praised for keeping domestic institutions on a tight leash. Despite the obstacles, investors chase markets offering higher yields. Yet here is an undercurrent of concern. Most of the flow is from unstable sources such as hedge funds and arbitrageurs, who aim for absolute returns and not beating the benchmarks. Their participation, necessary for liquidity, increases volatility. The special investigative team probing the problem of black money created panic in the market recently when it noted the use of loosely-monitored participatory notes as one of the conduits. China’s stock market collapsed after easing entry to foreign investors recently. India’s shallow market has ensured that foreign investors have to take exposure to index and large stocks traded in the F&O segment. Amid the turbulence, one country stands out for not clamping down on the market even at the height of global credit squeeze. Inflows into the US, particularly from China with ambitions of the renminbi becoming the global currency despite rigorously calibrating the flow of overseas funds, continued due to the confidence that there would be no hindrance in taking out capital. So is it any surprise that the dollar remained firm against all other currencies even post September 2008?

The helpline

By Mohan Sule

Use forex reserves to buy bad loans of PSU banks so as to profit from low commodity prices and US recovery

Global financial markets took one step forward and two backwards last fortnight. Even as the Greece blowout was being contained, China’s stocks melted and there were indications that the US interest rates were set to rise. The dollar strengthened and commodities collapsed. So there is a strange spectacle of the US economy regaining health even as rest of the world is struggling. As a major consumer of commodities, India’s current account deficit will narrow further. Cheap metals will boost a host of industries including refineries, power distributors, capital goods, automobiles, consumer durables, paper and packaging, paints and FMCG. The margins of tech, pharmaceuticals, garments, jewellery and other services exporters might expand A weak rupee should be an incentive for global manufacturers to set up base in India to export. What could be a better booster dose for the prime minister’s Make in India project? The problem is that the Indian rupee’s depreciation against the dollar is on the lower side compared with those of other emerging economies including Russia and Brazil. Due to the scare about China slowdown, foreign investors have not completely abandoned India. The market is huge and so also the scope for reforms. Their presence is keeping the rupee range-bound. The other not-so-obvious explanation is the covert role of the Reserve Bank of India. A steep depreciation will leave little room for reduction in lending rates. The fall in oil prices will be somewhat blunted, frustrating the government’s efforts to reduce fuel subsidy. Besides good southwest monsoon, low prices of petroleum products are necessary to keep inflation in check.

The currency is not the only worry that is complicating India’s efforts to profit from the current scenario. A low interest rate regime at a time US bond yields are stiffening is similar to opening the stable doors for foreign investors to bolt. Pre-2008, it was the carry-trades (borrowing in cheap yen to invest in economies with high returns) that kept the stock market buoyant. Those expecting the RBI to embark on an aggressive cycle of rate cuts will have to contend with disappointment. More than the domestic economy, future action on access to money is likely to be calibrated with that of the Fed. As the cooling of food inflation will not be the only motivator for the central bank to cut rates, there will be no immediate easing of the troubles of infra companies and banks. The short-term solution will be capital infusion into banks and fund-raising by leveraged companies depending on investors’ sagacity to overlook the present problems for a long-term vision. Overseas acquisitions to expand might slow down as borrowing costs rise in the US. The impact of the miscalculation of those who had issued foreign currency convertible bonds to finance overseas acquisitions is still being absorbed by the shareholders. The bearish phase post 2008 meant that investors preferred redemption over conversion into equity.

The RBI has limited flexibility to ignite growth by keeping the cost of money low, balance the currency so as to not hurt importers and exporters and sustain foreign inflows. Besides, banks’ balance sheets are hindering the pass-through of interest rate cuts to customers. Unless the problem of bad loans is solved, softer interest rates will remain on paper. The tapering of supply of capital from overseas and domestic sources can stall the economy. Liquidity is essential to drive investment, direct or portfolio. The challenge will be to sustain and accelerate inflows from both to meet the capital expenditure requirement of the public and private sector during this difficult juncture till global markets adjust to the decoupling of the US and rest of world. The central bank had foreign exchange reserves of US $ 353.33 billion mid July. It can set up a special purpose vehicle to buy out at least 50% of the US$435-billion bad loans of PSU banks, leaving sufficient cushion to step into the market during volatility. The depletion of dollars will be at best temporary as these will get bulked up by export revenue from a healthy US market. Banks will get a breather to pass on base rate cuts and should write off at least a quarter of the remaining sour assets. In the process, they will become attractive to investors to contribute to their capital. The move will provide the much-needed propellant to lift the economy, without straining government finances, and hold the attention of foreign investors set to flee to the US. The SPV can sell the bad loans in small tranches at a discount to the face value to vulture funds and institutional investors. These investors can redeem them after an appropriate gap from the issuing bank or convert into equity of the borrower, thus gaining a voice in the future of the company.

Striking similarities

Sebi and investment banks have to ensure that the imminent IPO boom does not degenerate into doom as in China

By Mohan Sule
The primary market is a parasite. It survives by feeding on the secondary market. A euphoric Shanghai stock market spun off a share-sale deluge. No sooner did the Chinese controllers stepped in to cap the runaway prices by hiking margins than listed equities began displaying withdrawal symptoms, plunging 30% from the peaks. So much so that financial institutions and brokers had to pledge to step up buying. Issuers were banned from raising capital to shore up the secondary market. China’s secondary market may well hold due to all the public display of affection but will IPOs? India is on the cusp of a primary market recovery. It will be the beneficiary of any disappointment of foreign investors with Shanghai. Yet, China’s experience of boom and projected doom has raised concerns. There are striking parallels. Chinese stocks have run ahead based on the belief that double-digit growth will be the norm. A slowing economy, therefore, can pull down high-flying stocks. Hence, the desperate attempts by the authorities to cool the heated equity market. Indian shares started spurting even before the May 2014 Lok Sabha elections on projections of the rise of Narendra Modi. His stint as the chief minister of Gujarat had established his reformist credentials. Also, the low base of the last two years meant heady growth going ahead. The turn in sentiments propelled the market to cross the 30,000 level. Just like China, India has plenty of room to grow. The potential of both remains untapped due to different reasons.

The deceleration in the grinding of its manufacturing facilities, triggered by the fall in property prices, is slowing China’s growth. The glacial pace of India’s reforms is lagging behind the galloping valuations. A common area of worry is the banking industry. China’s is dogged by dodgy account keeping, hiding the true state of its bad loans. Loose lending has contributed to bubbly stocks. India’s banks, too, are weighed down by non-performing assets, immobilizing their capability to lend to new clients. If the Chinese IPO boom is the beginning of the end of the China’s growth story, is India too destined to burn out before taking off? The composition of investors is a rough indicator to determine the state of a market. Ordinary investors fuelled the Chinese primary market. Indian retail investors are returning to the ring, primarily through mutual funds. On many occasions domestic institutions have bought equities even when foreign investors were selling. The downside is that the small investors responsible for holding up the market through mutual funds might book profit in the secondary market and turn their attention to new offerings. The Securities and Exchange Board of India has shortened the listing period from the close of issue by nearly half to six days. The prospect of bumper profit in a short time span can prompt diversion of funds from listed stocks. No wonder, a frothy primary market is viewed as the last phase of a bull-run. The equity market went bust shortly after the mega offer by Reliance Power in January 2008.

The other danger is the absence of capital appreciation due to high-value offerings. There is at least a probability of gains being recycled into newer offerings. Under-subscription due to richly-priced issues or listing at a discount to the offer price has the malevolent power to destroy the primary market and, in turn, the secondary market. Many issues will be offering exit route to early-stage investors, who would want good returns on their investments. More will be from companies aiming to deleverage. With banks going slow on lending due to money locked up in bad loans or entertaining only those with good credit score, there will be no surprise if those requiring capital will be from risky but promising segments. Small and mid caps will be the most vulnerable to mood swings as money flows in and out of the secondary market, depending on the size and attractiveness of the issue in the primary market. The market regulator has gone out of its way to ensure a smooth ride for small investors by introducing concepts such as retail discounts, anchor investors, market-making and buyback as safety net. With the memory of the roller-coaster ride of Chinese stocks still fresh, Sebi has to nip in the bud any signs of irrational exuberance and become vigilant in vetting the issues. There should be zero tolerance for non-disclosures by becoming visible in cracking down on those who flout rules. Investment banks have to cap the greed of issuers by nudging them to price their shares modestly so that they can be long-term players rather than flashes in the dark.

What to do with banks

Time to junk the concept of universal banking and turn to niche banking to ring-fence risks

By Mohan Sule
One of the stumbling blocks to the revival of the Indian economy is the poor health of public sector banks, which own more than 72% of the assets and 77% of the deposits of the industry. Not surprisingly, the finance minister has to keep reiterating the government's intention to infuse fresh capital into PSU banks. This is to restore confidence in the system, which is apparently to serve the small saver but has been twisted and bent to cater to crony capitalists. The banking industry has been the problem child not only of India but of the global economy, going back to the Great Depression. The Glass-Steagall Act was passed in the US in 1933 to limit commercial banks' securities activities, clearing the way to demarcate savings and lending institutions and investment banks. The idea was to protect the risk-averse depositors from the leveraging associated with dealing in securities. The scope to make big profit from accepting funds at lower rates and lending at higher rates is limited. Expanding physical presence to garner a big share of the market requires huge capital. In contrast, there are bumper gains to be made from advisory services and dabbling in the debt and equity markets on a relatively lower base. The M&A wave in the US in the 1990s saw commercial banks acquiring stake or tying up with securities firm for that much-needed bump to the bottom line. The Gramm-Leach-Bliley Act of 1999 repealed the provisions restricting affiliations between banks and securities firms, sowing the seeds for the blowout of the too-big-to-fail banks in 2007-2008 as exotic derivatives were deployed to top the league tables, ignoring capital adequacy.

The subsequent forced merger by the government of weak and strong financial organizations has resulted in a handful of institutions dominating the US's banking space. Though capital requirement has been enhanced and proprietary trading scrapped, prospects of a systemic failure have increased due to the small numbers. In India, PSU banks replicate efforts, manpower and capital to expand into each other's territory to chase customers. Their bottom lines are influenced by income derived from non-banking activities. Their assets are prone to turn sour because credit sanctions are not always commercial transactions. Mergers can create a few capable banks with scale. The issue is if the alliance should be based on balance sheet strengths and weaknesses or geographical presence to achiever wider reach. Core banking is making brick-and-mortar existence redundant. Interestingly, this leads to two crucial questions. Should banks be viewed as FMCG companies, vying for attention on the basis of brand loyalty acquired through superior service? Or are banks going to become e-commerce entities delivering the basic needs efficiently? FMCG stocks are favored for consistent payouts, while Internet startups are enjoying huge valuations despite making losses because of the potential. Banks combine the best and the worst of both.

Just as the FMCG sector is no longer viewed as evergreen due to dependence on monsoon to drive rural growth as the urban market has flattened out, PSU banks are burdened with the cost of reaching out to the lowest denominator. Like e-retailers who are prone to categorize themselves as tech companies rather than slot themselves with retailers in the real world enjoying poor discounting, banks are embracing technology for the ease of doing business and increased penetration. Unlike cyber malls, however, their valuations factor in the non-performing assets rather than the huge unbanked population as India urbanizes. The second dilemma is if India should go back to the era of institutional lenders confined to corporate clients rather than encourage universal banks. The regulatory framework for banks operating in various niches will differ. Investors will be able to pick stocks in the sector suiting their profile. The discounting due to the thin margins earned by attracting and lending money will be mediocre compared with those for bottom lines supported by trading income. Yet as the business of savings banks will pivot on the credit track record of retail borrowers, they will be viewed stable and safe. Investment banks will focus on maximizing treasury opportunities and big-ticket players will be specialists in devising innovative ways of raising capital, thereby rewarding risk-takers. VC and PE funds are meeting the needs of startups. Microfinance and SME lending institutions can take care of the small borrowers. The proposed Mudra Bank is aimed at the unorganized sector. Thus, clubbing banks as per the markets they cater to, with different capital requirement, will lead to better monitoring and containment of risks.

The 2-minute lessons

What the Maggi fiasco of bans and stock withdrawal reveals about Nestle’s strengths and weaknesses

By Mohan Sule

Every crisis teaches a lesson to the stakeholders, and the Maggi storm is no different. The first is makers of consumer products have to be prepared for a far severe backlash than business-to-business enterprises. Larger the size of the market, more does the echo reverberates. Many top-notch pharmaceutical companies have had their shipments from sub-standard production facilities suspended by the US regulator. Apart from a short-term reaction in the stock market, their domestic image hardly took a knock. Nestle had to face consumers’ as well as shareholders’ ire. This leads to the second lesson. Companies spend a lot on building brands, particularly in markets where entry barriers are low and competition is on the basis of price. Therefore, a breach of trust is hard to bridge: You, too? Investors who had propelled a north-based developer into the largest market cap player in the segment, leading to its inclusion in benchmark indices, felt let down on learning of material non-disclosures in its red herring prospectus. The third lesson is positioning. As long as Maggi remained a convenience food to be cooked quickly, it was looked at indulgently despite the widespread knowledge, at least among adults, that its basic contents contributed nearly nil nutrition. No sooner did it shift the focus to being a healthy alternative for children, it attracted scrutiny, leading to its downfall. Real estate players who forayed into the 2G telecom space have still to recover from the debacle.

Can Maggi win back users’ confidence? Going by the experience of Cadbury, which too faced quality issues, the exercise should not be difficult. A company with an established brand finds it easier to get up after a fall is the fourth lesson. At the same time, there is a danger for a brand operating in a buyer’s market sliding as consumers have other choices. The FMCG sector is a classic example of fierce loyalty to brands and fleeting from one brand to another in many segments of the personal-care category. The fifth lesson is that a track record determines how fast a company can emerge out of a blowout. Nestle has been in India for many years. It has had no run-ins with regulators till the recent episode. The result is that though the Maggi brand has taken a knock, the company has not suffered irreparable damage. The sixth lesson is that even low beta stocks can turn volatile. Nestle lost more than 9% in a single trading session and shed 11% in the fortnight since the snowballing of the content controversy early June. Yet, the stock is more than 25% away from its 52-week low and is still expensive. The market is optimistic of a bounce-back in earnings after a few quarters as the other brands in the basket are holding on. Despite sticking to the basics, the company did not allow any single food item to dominate, which has proved to be a bulwark against the Maggi backlash. Too much reliance on blockbusters can be counterproductive when they face a downturn is the seventh lesson. Core competency can boost as well as drag down bottom lines. Following the 2008 global financial crisis, the tech sector is expanding into Europe. L&T has forayed into the residential segment of the construction market after the slump in the infrastructure space due to the pre-2014 policy paralysis. To de-risk from its bread-and-butter business of cigarettes, ITC is now into food products and hospitality.

The eighth lesson is that tangible assets help a company to fall back during a storm. From small savings, Sahara has diversified into hotels and real estate, which will help its boss to post bail to get out of jail. Nestle has visible presence. There is no danger of the company vanishing like many others after the bust of the IPO boom late 1990s. The reaction of the capital market watchdog was to delist erring companies. Banning a product from the market or a company from the stock exchange should not be a kneejerk reaction is the ninth lesson. Here, the Securities and Exchange Board of India’s insistence on full disclosures by companies raising capital should be the template. Cigarettes are sold with a warning about health hazards. Similarly, consumables should display the ingredients and their nutritional values. Deviation from the stated composition should be the trigger for crackdown. Automobile companies are known to recall models after discovery of faulty mechanism. The return is the reinforcement of consumer bonding. Nestle, too, has recalled Maggi from the shelves. Where it slipped was in its sluggish response. Though the company kept the communication channels with the stock exchanges open, filing regular updates, it was slow in addressing the concerns of the consumers. The tenth lesson is that MNCs, as a rule, are transparent but are not necessarily sensitive to the sensibilities of the local markets in which they operate.

Changing complexion

Three transformations that investors will have to prepare for as the market undergoes another evolution

By Mohan Sule
The way of doing business has gone a dramatic change since last May. Transparency and rule-based governance are the buzz words. Natural resources are being auctioned. There are no phone calls or chits from the PMO or extra-constitutional authorities to bank CEOs to grant loans to cronies. Company bosses and lobbyists no longer have to make frequent trips to New Delhi with suitcases to tweak policies to suit them. The transformation is welcome and is another pointer that India is slowly graduating to a demand-based market from a supply-controlled economy. Investors have to prepare for the next phase in the evolution, where a company’s value will be determined by cost-efficiency and competitive policies rather than due to the monopoly status acquired by bagging licences based on proximity to the policy makers. The rise and fall of Naveen Jindal’s JSP should be an apt illustration and so also the wealth creation by the Adanis through acquisitions. Instead of SBI, the group is scouting finance from Russian and Chinese banks for its Australian mining project. The earlier stages saw the scrapping of the Controller of Capital Issues, which was vested with powers to decide not only the entry but also the size and price of the offering. The opening up resulted in a flood of fixed-price issues from the established to the shady. To solve the problem of hefty premium, the power of deciding pricing has been transferred to the market through book building. Another difference is the motive of the IPOs. Initially, they were to raise funds for expansion. Now shares are listed to allow early stage incubators to exit. The issue of expensive offerings, thus, continues.

The next stage is crucial. It can either propel the stock market’s wealth or discharge the third shock. The first was the period when fishery and aqua culture growers and timeshare promoters ripped investors, followed by the bursting of the dot-com bubble blown by eyeballs. Two types of issues will dominate. The first, of course, will be from the infrastructure sectors as stalled projects spurt to life. The not-so-pleasant past experience with these companies in the frontline of benefiting or losing due to government’s wise or whimsical policies might prompt caution. The second lot will be emerging companies, predominantly from the services sector. This is natural. The share of the services sector in a developed economy overwhelms manufacturing and agriculture. Pinning down valuations will be difficult due to their unique business models. Investors grappled with a similar dilemma when fast-food chains and telephony- and web-based aggregators of information ranging from general to wannabe brides and grooms and jobs entered the market. Is the valuation expensive based on trailing 12 months or cheap discounting the enormous forward earning potential? Lately, theme parks have sought funds and going forward there could be those setting up digital platforms to exchange used goods, sell furniture or find suitable houses not to exclude e-supermarkets. Should the market compare them with tech companies? Many of them may not even have comparable brick-and-mortar peers. More than these wonders, perhaps below-the-radar back-office and last-mile services providers are likely to be the winners, just as our tech companies remained immune from the crash of Internet companies.

The second challenge for investors will be to spot when a generational change takes place. Usually, the recast of indices is a good guide to notice the shift. Despite the first-mover advantage, Nokia and Blackberry have lost market share to the disruptive Apple. Traditional business houses have been shaken to the core by the net revolution, which has flattened the globe. Not surprisingly, they are in the forefront of the campaign to discourage zero rate arrangements between Internet service providers and e-commerce companies. The worry is that an agile upstart can neutralize the high-entry barrier in the real world by diverting traffic to its site by tying up with an ISP. Investors are already in the midst of the third wave of change. As the government pulls out from the business of running businesses, monetary rather than fiscal policies are having a far greater impact on the market. The US Federal Reserve’s moves are closely monitored. China’s softening of interest rates created ripples and so also liquidity injection by the European Central Bank to pull the euro zone out of recession. The policies to control the flow and the cost of money will affect the health of the market more than the budget as tax rates become stable and the government runs a system without many shocks to attract investors. Just as the Fed chairman is the most powerful person in the world, the Reserve Bank of India governor will be the man to watch out for.

Clash of conventions

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?