General Partners V Limited Partners

The Retail Rats...

2010-03-18T05:03:00.000-07:00

Yesterday it was Subhiksha. Today it’s Vishal Retail. Auditors are smelling a rat all over the place, not just inside the retail stores. The charge – Books are cooked, inventory depletion happening at an alarming pace. All in the midst of a CDR process in tow.
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Retail is a fantastic sector to book cooks. The characteristic of the business also helps. There is a huge inventory base and is all meant for trading. They don’t manufacture anything and so it’s just sourcing, shelfing and selling. Now that leaves enough scope for spillage, wastage, damage and an issue of age itself in case if the goods are slow moving or just…non-moving.
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The Agarwals of Vishal Retail have played it to the hilt. They raised about Rs.110 crores by IPO in June, 2007 then went on to raise over Rs.800 crores of debt that is now seeking reprieve from lenders. The news was that the lenders have also agreed to finalize a CDR package of Rs.730 crores. Now there is the demand for forensic audit. A la Subiksha scam where ICICI Ventures was an early investor, played along the Board, then Renuka Ramnath, CEO of I-Ventures quit pretending ignorance when she was about to be hauled up for investigation but not before palming off a substantial stake to Azim Premji’s PE fund.
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I say everyone is an accomplice. A fraud of this magnitude, at a very base level (i.e.rapid build-up of inventory and writing it all down in double quick pace cannot happen unless everyone including Auditors, Bankers, Board members all collude. Ordinary investor is the only one that is left off circle. This is bullshit and it should clearly stop.
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Or just do away with Auditing as it exists now. Make the Auditors directly responsible to shareholders – not just making certificates and disclaimers.
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Dick anyway !

2010-02-21T19:56:00.000-08:00

I’ve always been a great fan of the `inside CEO’.

That’s no great find, agreed. Insiders, I mean those who have significant stakes in the lasting success of enterprises such as its various stakeholders including Shareholders, long serving employees or its largest suppliers or even beneficiary community members will certainly make a better CEO than wet-behind-the-ear B-School graduates that have just one goal – "personal prosperity. Let the enterprise go to hell."

Here’s a report on HBR survey that just confirms it.

Imagine a Reliance minus Dhirubhai in the mid 80’s –mid 90’s ? Or worse, try putting a jargon wagging B-School cartoon in his place? One reason why Lehman Bros collapsed could be that it’s CEO was not someone with Lehmann as his second name. It had a dickhead at the top, sorry his name was Dick Fuld. Dick anyway !

Back and in deep freeze mode

2010-02-11T03:15:00.000-08:00

Yeah, I am back to blogging after a 100+ day hiatus. No reason. Just found nothing exciting to blog.

A few minutes back, I read a nice piece by Greg Pytel titled “A US way out” and I almost froze. Here’s the excerpt from that chiller of a post –

“Washington Times compares the US model to Franklin D Roosvelt’s New Deal. However the current financial crisis does not resemble the 1930’s depression in its root cause. The current crisis is a result of a giant global financial pyramid collapse that left a quadrillions of dollars liquidity hole. Therefore President Obama’s actions may not be modelled on the New Deal, but on some other premise…

Considering the current US debt and its rate of increase, the US borrow and spend solution reminds an insolvent person who keeps on borrowing money, as long as there is anybody “silly” enough prepared to lend him. He knows that at the end of this process he will not pay anything back but simply declare bankruptcy, write off the entire debt and start its financial life anew.

The US, as the country, is economically and militarily powerful enough to declare that it no longer honours its debt and its currency. Effectively the dollar could be written off as a currency. As around two thirds of world reserves are held in dollar they will be written off. The US will have no debt.”

And then I read “History of Collapsed Dollar” in Commodityonline.com and Pytel’s hypothesis didn’t seem like a fictional conjecture at all. It could get catastrophically real.

“As with any fiat currency, the Continental dollar [USD version 1] later collapsed due to inflation. With politicians unwilling to fix the deficit and instead choosing to inflate the currency, the currency was left in ruins. The Continental dollar was eventually recalled by Congress and redeemed at 1/40th its face value. In a very few localities, it remained in existence for many more years, where it eventually plummeted to 1/1000th of its issuing value.

The factors that led to the demise of the first currency of the United States are the same that are leading the assault on the current US dollar. History shows us that when fiat currencies fail, precious metals remain as a standard of wealth and an accepted medium of exchange.”

And I now turn to a new asset class that I had shunned so far. Paper Gold. Gold ETF, I mean. Googled up and landed here. I will watch the price of Gold for next 4-5 months and might end up investing in this by August, 2010.

Just wish Barack Obama allows me time till then. Amen.
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CBDT, learn from IRCTC

2009-10-25T23:24:00.000-07:00

While some of us may wail over poor internet penetration extending the longevity of high cost off-line systems, IRCTC is proving otherwise. To the uninitiated, IRCTC is India’s online railway reservation facilitator. One look at this report over its results is an eye opener. With the increasing penetration and use of the internet, IRCTC’s ticketing revenue has seen a remarkable increase over the past 3 years ( From Rs 7.04 billion (2006-07) to Rs 17.44 billion (2007-08) and to Rs 39.66 billion last year.

Just wondering. What if CBDT allows Income Tax assesses (and not-yet assesses) to pay a presumptive tax (say a base rate of 10% of total income) online and ask no further questions unless they have incontrovertible proof of evasion? I am sure people will have lesser incentive to evade taxes and that will widen the tax base and reduce the total cost of tax collection which currently is steep and getting steeper.

Hardening interest rates...? The US will go belly up.

2009-10-01T01:24:00.000-07:00

I am a bit flummoxed by C.Rengarajan’s theory that interest rates may harden.

I think we have to distinguish between short-term interest rates and long-term interest rates. In the US, the Federal Reserve does not really control long term interest rates. They can tweak it occasionally through quantitative easing and through the purchases of 7 / 10 / 30 year bonds but what they control is the short-term interest rates (the Fed fund rates). Hear out Ben Bernanke, and you feel the short-term interest rates will stay low for a very long time. In America the fiscal deficit this year will be around USD 2 trillion and I do not think they can cut the fiscal deficit next year because if they cut it, it will have a negative impact on the economy. So I rather think that the fiscal deficit will stay at this level or in my opinion actually even increase. That will lead the Fed to keep interest rates artificially low because should they increase short-term rates meaningfully then the cost of servicing the government debt in the US will escalate substantially. So I think as far as the eye can see, monetary policies in the US will stay expansionary.

That means US dollar shall remain weak for a very long time and that means most $ funds will find its way to other currencies / asset classes. Liquidity is therefore assured and no bank will have the guts to jack up lending rates because money flow is not going to be tight for quite some time. Then where is the question of rates hardening...?

The bond dealers are in for some rough times. But then they can't do much else except to squeal and crow for hard rates !!!!

Predictions of a recovery – V, U, W and now " L " !

2009-08-21T05:48:00.000-07:00

Fuck.... They're soon going to run out of letters in the alphabet.

All this talk of shape of the (economic) recovery befuddles me. Can we assume the first step in any recovery is for output is to stop shrinking? But the more interesting question is what shape it will take. The debate centers around three scenarios: “V”, “U” and “W”. A V-shaped recovery would be vigorous, as pent-up demand is unleashed. A U-shaped one would be feebler and flatter. And in a W-shape, growth would return for a few quarters, only to peter out once more.
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America is apparently doomed no matter what. Years of debt driven consumption by consumers is now replaced by debt driven consumption by the government. If it inflates away the debt, the government will be able to pay off its debt but its citizen will all be poorer due to value erosion, leading to a crash in consumption and even higher unemployment. If US doesn't inflate away its debt, then its children and grandchildren will work to pay off interests on that debt for generations, leading to extended depressed consumption and high unemployment. Different path to the same result. So, some predict an `L' shape recovery for America.
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Why is inflation bad? Inflation is a tax on savings while a subsidy to borrowers. If you saved $100,000 today, it won't feel so great when high inflation eats all of it away tomorrow. If you're a borrower, $100,000 is a huge burden on you today, but something you can probably write a check for tomorrow and forget about.

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America's balance sheet recession is different. In this case, the saver is not fellow Americans. They're foreigners (China and other Asian nations). So for Americans, inflation is a remedy that won't make its rulers lose that many votes (so long as inflation does not get out of control). After the Asian financial crisis, East Asia was using export-oriented growth, through undervalued exchange rates, to power growth. The other side of their trade figure is a huge deficit in America which can only exist with an overvalued dollar...which itself can only exist with foreign money from Asia coming in to prop up the dollar. So, high export earnings from Asia were replowed into America, which cannot produce anything of its own because of an overvalued currency but was awash with cheap money...well, banks had to do something with that money, like lend. If they didn't lend, their competitors will. Asia giving so much money to a rich country where they money won't go as far is really unusual.

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This is unusual for two reasons: a) developing countries are in no position to lend (b) US T-bills offer a silly 4-5% return. Asia should therefore invest all of it internally for better healthcare, education and infrastructure in rural areas. Then perhaps they can beat the piffling return they get from US-T bills as they do now, which is again eroded by depreciation of the dollar as they repatriate back home on maturity. This is a great misallocation of resources!

Still people are fixated at likely shape of recovery, than how best to make it happen.

New Tag - Rally Buster

2009-08-17T04:16:00.000-07:00

Rally Buster. This is the new tag on my blog. It relates to a spooky rumor or news item that pulls the plug on a rally in the stock market. Sugar has been rallying for quite some time because of huge demand (22 million tons) – supply (15 million tons) gap in India. The rally has extended to the US and European commodity markets too because of the news that India, world's most avaricious consumer of sugar is facing this huge a deficit and is in a mood to import in bulk.

Meanwhile, the sugar companies in India were operating nowhere near their full capacities because the raw material (sugar cane) is in short supply. Then we have the socialist mandate of levy sugar (10% production of each sugar mills to be sold to government at Rs.12 per kg even as the going market price is Rs.30 plus) to be supplied by the mills before the rest can be sold in the open market.

Constraints, constraints, constraints for the sector. As if all this is not enough, today the sugar daddy and others in the cabinet have met up to discuss raising the levy sugar quota from 10% to 25% of production to bring down the spiraling sugar prices.

That busted the rally to some extent. The sugar stocks tanked between 4%-8%. The Economist can talk of Astonishing Asian rebound. Given the rally busting tendencies of our policy makers, they may not have to spill much ink on the topic !

On to the worm now

2009-08-13T05:20:00.000-07:00

This was pure music....

Real estate, after the meltdown, was my favorite. DLF to be precise. Don't think I did big bang research that made it quite a find. Just a wistful hunch when I saw the stock languishing at Rs.300 levels. Now I read about the Mutual Funds newfound love for all things realty. Ha!

The MFs exposure to realty rose from Rs 1.24 bn in March 2009 to Rs 1.71 bn around December 2008 to nearly Rs 11.13 bn by the end of Q1-FY09. By July 09, it rose to Rs.14.21 bn according to this news report in BS.

Nice to feel like an early bird... On to the worm now !!!

Never blame securitization

2009-07-24T02:51:00.000-07:00

Securitization offers many advantages to all participants in the marketplace. Derivatives decrease barriers of entry to a host of markets, increase potential diversification and customization, and enhance liquidity and hedging activities.

Securitization has represented a series of innovations that have brought about greater efficiency but the problem with innovation, almost by definition, is that they outpace the ability of the infrastructure, on both the private and public side, to sustain the innovation.

Now, the system is trying to catch up but we risk an overreaction that may limit the potential of securitization. Hopefully, an understanding that a return to securitization is crucial to economic recovery (by allowing banks to lend more through risk transference) will lead policymakers to resist any misguided populist sentiment.

The new products present challenges for risk managers and regulators alike. It also burdens operations, technology, and settlement systems in the process. In reality, every level of the financial system will need to continually adapt to changing risk and complexity.

Unfortunately, policymakers, almost by default, will always be behind the curve. Because an attractive fee is extracted at every stage of securitization, the agents, or intermediaries, will will always be prone to excesses. Innovation will always outpace the ability of the infrastructure to sustain it and securitization crises will be a recurring phenomenon in the new age global finance, you bet. But try doing away with it, you're only deepening the liquidity crisis.

The Goldman heyday

2009-07-16T01:17:00.000-07:00

What are we to make of Goldman’s Q1 results…? Making $3 b in as many months is indeed recession defying but how much of it is its own making in contrast to the near absence of competition – Citigroup, UBS, Lehmann and its ilk? The Economist says - To the survivor the spoils - and I can’t agree more.

Monday, after market close, Goldman Sachs Group, Inc. reported 1Q09 earnings of $1.66 billion or $3.39 a share, up from $1.51 billion, or $3.23 a share a year earlier. The results were way ahead of consensus estimates of a profit of $1.64 per share.

Higher-than-expected profit was mainly due to strong trading revenue. Of the first quarter net revenues of $9.4 billion, $6.6 billion (34% higher than its previous record) was the contribution from the company’s fixed-income, currency and commodities (FICC) group. High volatility (benefiting the Treasury markets and the Dollar), wide spreads in fixed income and reduced competition in the markets were the main reasons for strong earnings.

However, the areas outside fixed income and currency businesses showed weakness during the quarter. Investment banking revenues were down 30% year-over-year, due to the low activity in the capital markets. Asset management revenues also declined 28% to $949 million.

Again as the Economist says this windfall will likely dwindle soon. The firm may be scooping up market share at quite a clip. But the bigger picture is still far from pretty. Goldman and other survivors will benefit from the coming wave of debt issuance by federal, state and local governments. But dealer spreads are sure to shrink as markets normalise and those that have retreated return to the fray. This is likely to be offset only partially by a pick-up in businesses tied more closely to economic growth, such as advising on mergers and acquisitions.

Mothers and Corporate Governance

2009-06-23T23:35:00.000-07:00

How complicated can the RIL-RNRL dispute get? Very. Well, that’s what it looks like if you look at the arguments from both sides.

RIL’s legal team likes to make it seem like a business dispute between two companies and not a family affair, which I guess is right. RIL also feels that the High Court order has adverse financial implications for the company besides national implications and it gave an unfair advantage to the ADA group based on a family agreement in 2005. Besides, company sources have argued that the ruling, in a way, would override the government’s gas allocation and pricing policy. Then there is the scope for miscarriage of justice since RNRL will get gas at half the cost ($2.34 per mbtu) of what it costs ($4.65) for other gas buyers of RIL. So which way the dice is loaded ?

For RNRL, it's the MOU that's sacrosanct. Nothing more, nothing less. End of the argument.

Yeah, then there is the mother factor. Kokilaben is also drawn in to mediate in case the brothers get around to it. Given that both companies are widely held joint stock corporations where there are millions of other shareholders involved, how fair it is to leave business judgments to family members that have never held executive positions in the company or are not adequately trained or exposed (I mean first hand, not of the kind *I-had-been-at-the-dinner-table-with-my-husband-and-sons-as-they-discussed-business*) ? Is that good corporate governance leaving the fate of millions of shareholders to mother of just one among them?

Why not let mothers be mothers for a change? It’s not like wandering into the kitchen sniffing for hot Dhokla and Khandavi that Kokilaben will be happy to engage with all her heart and soul.
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Allow listing of unsecured debt, but mark it "with recourse"

2009-06-02T20:15:00.001-07:00

Somasekhar Sundaresan in Business Standard points to the area of ambiguity in SEBI’s latest concoction [SEBI (Issue and Listing of Debt Securities) Regulations, 2008 - (“Debt Regulations”) ] - whether every bond that is sought to be listed has to necessarily be secured to the extent of 100 per cent. He insists SEBI should clarify the issue since Regulation 17 calls for the issuer to simply make a disclosure of intention to create a charge or security and further under schedule 1 of the Regulations (prescribing the contents of the offer document) requires the offer document to contain a summary term sheet that includes “brief information pertaining to the “secured / unsecured” debt securities – meaning the Regulations also envisage issue of unsecured instruments as well.

But Merchant Bankers take the extreme path fearing SEBI reprimand. They advise the issuers that only Debt securities that are fully secured are only allowed to be listed. Quiz them more and they point to Regulation 26(6) that requires the issuer and merchant banker to “ensure that the security created to secure the debt securities is adequate to ensure 100 per cent asset cover for the debt securities.”

Sundaresan says it just means if the issuer is desirous of issuing fully secured instruments, then it has to be secured by assets to an extent not less than 100% of the issue size. Implying in the process, others that are intending to list unsecured debt are free to do so (as there are references to unsecured debt elsewhere in the Regulations and its schedules).

I am concerned. Should SEBI permit unsecured debt to be brought to public market where the participants are not so erudite? Will it not lead to emergence of con artists from the woodwork that will list everything including the toilet paper? Haven’t we learnt anything from the recent two trillion dollar global meltdown? Have we forgotten so quickly that it had its origins in the subprime ( unsecured, junk) bonds that got listed and recklessly palmed off by Wall Street swindlers ? Who has heard anything about a once venerated institution by name “Lehman Bros” lately? The CEO’s first name was “Dick” (Fuld) – incidentally.

I am no throwback and I certainly don’t believe listing of 100% secured debt would mean guaranteed repayment. Neither do I have any faith in swift realization of underlying security if the debt obligation is defaulted because enforcement of Indian laws isn’t so easy thro our overloaded Courts. But I have a great faith in the agility of the con men in our midst that will rise swiftly to the occasion and exploit a loophole. The expression “unsecured” is enough to make them sit up and take notice. And when their junk papers eventually get listed, they are safely absolved off all their liabilities since the risk is widely distributed [sometime later even credit derivatives (like credit default swaps) will also have to be allowed] and SEBI will gleefully point to the disclaimer that states “SEBI merely ensures disclosure and does not vouch for the soundness of the scheme” etc….. Next what – CDS, CLO, CDO, ABS on the doomed Wall Street lines? Just the way residential mortgages in the US became grist for quantitative portfolio management after they had been re-engineered into instruments that looked much like tradable bonds. The investment efficiencies generated large benefits for both investment banks and consumers but were quickly carried to dangerous extremes. Soon we will be forced to subscribe to the pretense that all of finance can be mathematized. Do that and the next credit bubble won’t be far behind.

By all means, allow unsecured debt to be listed. I am all for liquidity in the debt market. But do build in enough checks to make sure the it stays well within the repaying capacity of the company or at least block so much of its borrowing power from banks and other institutions to the extent to which the company has already geared its balance sheet debt. And most importantly, mark that listed debt "with recourse" – meaning in the event of a default, the issuer and it's founders/promoters will be liable to the holder (in due course) of the instrument and not just the primary allottee.

Bharti-MTN deal : Sniffer dogs at work ?

2009-05-25T20:06:00.000-07:00

My experience with M&A deal structures tells me that the level of distrust between the parties can be gauged by the magnitude of its complexity. By complexity I mean insistence on back to back cross holdings, layered cash and share swaps and other exhaustive clauses in the share swap agreements relating to Board composition, management, operational checks and internal audit.

Going by that, I am not surprised why the stock markets gave a thumps down to the news of Bharti-MTN merger. The Bharti share fell 5.41 per cent to close at Rs 811.85 on the Bombay Stock Exchange, on a day the Sensex rose 26 points.

The deal is not just complex by size, it’s structure too is no less contorted. Sample this. Under the deal, MTN will issue new shares (they prefer to call it “economic interest” instead of plain “shares” – probably an indication of refusal to imply ceding of management control to pacify regulators) to Bharti. The Indian company will also acquire around 36 per cent of MTN’s current paid-up capital from its shareholders at $10.2 per share, entailing a cash outgo of $6.8 billion. The fresh share issue will eventually take Bharti’s shareholding in MTN to 49 per cent.

In return, Bharti will issue 0.5 GDRs for every MTN share it acquires. The Indian promoters will eventually see a dilution of their 45.30 per cent stake in Bharti.

Even if it is to avoid regulatory hurdles, anti-trust allusions or even triggering of open offer requirements to other minority shareholders that can drive up the price ( open offer is triggered when stake in excess of 15% is acquired in an Indian company with the exception for inter-promoter swap or cross holdings), the deal structure is far too complex for execution because the exhaustive approvals and information sharing between the parties called for will certainly limit operational flexibility to a large extent – a factor that has been instrumental for the rapid growth of Bharti (and possibly MTN too) in India.

I see more of mutual suspicion than synergies in this deal. Shall be glad if proved wrong.

Press "Sell"

2009-05-22T09:21:00.000-07:00

So, the stock market has shrugged off its sloth, at least for the time being. The election results that brought back a seemingly stable Congress government clearly turbo charged the markets. That woke up many a sleeping investor and money no longer waits on the sidelines. That bodes well for valuations and for most companies it is clearly up by 50% from October 2008 lows.

They say banks are now all the more willing to lend to enterprises. Rising valuations will recharge the primary markets for sure going by the steady stream for DRHP filings with SEBI.

If that indicates improvement in liquidity (even to Real Estate companies that are now busy taking the QIP routes), I am sure I-Bankers will be on their toes to do M&A deals. But that’s exactly where I come from. When valuations are rising, it’s time that a few Indian companies should be selling out, not acquiring. Imagine if Tata Steel sold out to Corus, Hindalco to Novelis and Tata Motors divesting instead of acquiring JLR during the previous bubble ? They could’ve even reacquired these companies now when valuations of those companies have plummeted and Indian markets see a surge in liquidity. May be this is wisdom in hindsight, but they also say history repeats itself.

So it’s a word of caution from yours truly. More because I am selling my large cap holdings and swapping them for good mid / small caps that return 30% in as much as a week. It’s not a sound parallel I know, but then who can stop a blogger from speaking his mind ?

You know better than you think you do

2009-05-13T05:25:00.000-07:00

Massive inflows into the global equity / commodity markets in the month of April to me is an indication enough that repeated assertions by the talking heads – about money waiting in the sidelines - falls flat in their faces. I think now it’s getting very tenuous––the fund managers, retail investors across the board people are very nervous at these higher valuations. In that sense, I don’t endorse the capability of equity markets to forerun global economic fundamentals that are still weak, at least as weak as they were made out to be in the early days of liquidity crunch in Q1-Q2 of 2008. The expression I guess is, suspended disbelief - as in the super heroes in the movies, when you know humans cannot fly but you believe Superman can fly, so you can enjoy the movie.

That is not to say that we don’t enjoy the current rally while it lasts. The suspended disbelief here is in ignoring the reality of the economic fundamentals. At some point, delusions give way to reason and the tide ebbs all of a sudden. It’s hard to guess what can legitimately support equity valuations much higher than here, almost in any market around the world.

When you can’t guess it, it’s time you respect your fears and retrace a bit. Don’t repudiate your own instinct so much just because it comes to you free and it tells you to keep away from seemingly juicy opportunities, especially after a long, dry spell. Trust your own instinct. Your mistakes might as well be your own, instead of someone else's. Good instincts usually tell you what to do long before your head has figured it out. You know more than you think you do.

"Indian bankers, don't you carp later"

2009-05-06T05:45:00.000-07:00

It’s tough time for banks and borrowers alike. The stiff 5% CRR and 24% SLR leaves banks with no choice but to keep their cost of lending to corporates high. Working Capital has become all the more expensive to businesses at a time when cash flows are squeezed and order inflows have dried up.

I wonder why the banks don’t invest in equities (preferably thro a 100% SPV) of sound companies that come with a Board seat to enable them exercise a closer watch ? Now that equity valuations have come to realistic levels and companies badly need low cost funds to sustain till they get over the recessionary times. For the banks, it would be a great idea to adopt this neo-private equity model because it comes with built in tax benefits since the returns will be in the nature of long term capital gains that are either exempt or are taxable at concessional rates. Since these are in the nature of investments, the SPV’s don’t need any elaborate set-up and can at best be a desk in one corner of its treasury operations wing.

When Henry Kravis comes calling, that’s proof enough that Indian equities are good bets. So bankers, sit up and take notice. Or else, Kravis would have you for lunch and dinner before you say `protection’. Or worse, it could be the turn of J.C.Flowers.

"Long term? You must be kidding !"

2009-04-10T05:42:00.000-07:00

Yesterday, when the Sensex closed slightly above 10,800 mark (Nifty at 3342) I squealed with delight. After a long time, pretty long time that is – I made some money. In the normal course I, a not so sophisticated investor – would have lingered on. But not yesterday, especially since it’s been way too long since I’ve booked some profits.

All kinds of news flows abound. There are the general elections, the March quarter earnings and the good ol’ talk of markets bottoming out. The weather beaten ones like me would not buy any of it, they’d rather be happy if the portfolio doesn’t crack any further. Neither would they invest any fresh funds towards equities. Nobody is in any tearing hurry to abandon caution and get back into equities that have cut and carved them up right down their middle.

But then what’s fueling this rally? Nifty closed at 3033 at the beginning of this year, now stands at 3343 – a surge of 310 points or 10.22%. What has changed in just three months? Have we picked up on some signals that tell us our worst fears of a recession are misplaced? Have the foreign investors – that made and marred our markets – returned? In their own backyard, Wells Fargo sent the stock market on a dizzying rally on Thursday when it revealed that its mortgage applications surged to $190 billion in the first quarter, a sharp increase that would lead it to a record $3 billion profit for the period. Like other big banks, Wells appears to have benefited from a surge in mortgage refinancing because of ultra low borrowing rates engineered by the government and an exodus of competitors. Bank of America, JPMorgan Chase, PNC Financial and others have had similarly strong performances and are expected to post improved profitability when earnings reports are issued next week. Or so, they’d make us believe for now, until another wave of disclosures would tell the world they’d gone horribly wrong again.

As I admitted earlier, I am not so sophisticated to make any sense out of this. I hear a lot of bull crap - investors, mostly foreign institutions, are initiating trading strategies through equity options to bet on the likely rise in volatility blah, blah – but I am in no mood to buy none of that. When I see my stocks rise, I go out and book profits. To hell, with long term. Who knows how long is long term?

"ICICI Venture is lying"

2009-03-04T21:59:00.000-08:00

Just finished reading this BS report – “PE firms to rethink India strategy”. I say, “they had better” !

The report quotes Vikram Uttam Singh, Head, PE advisory group of KPMG “The Subhiksha incident will make PE firms more cautious on how much of a free hand they allow to a promoter. Some PE funds are concerned that promoters have a wide range of authority in their companies and could look to establish structures that limit some of this authority”.

Here are my observations.

KPMG may have compulsions to take sides with PE firms as their survival depends on such clients. But why does it credit PE firms with so much of naiveté? ICICI Venture had an exposure of 33% in Subhiksha of which it off-loaded 10% to Azim Premji’s PE arm (Zash Investments) for Rs.230 crore – apparently without discussing with Subhiksha itself that was badly in need of cash.

If the same money (Rs.230 crore) was introduced directly into Subhiksha, (instead of buying out ICICI Ventures stake), the company could have been saved to an extent. But I-Ventures wanted to lighten its holding and thought otherwise.

While it’s ok for PE firms to cash out, they need not profess their ability to have long term relationship with their portfolio companies and the “strategic managerial edge” their presence in the Board offers to such companies. When that is the case, what was Ms.Renuka Ramnath (one of I-Ventures nominees on Subhiksha Board and CEO of I-Ventures) doing when she approved the proposal for massive scale up by Subhiksha? Now is she telling us she was not aware of it, even as I-Ventures had the rights to appoint majority of Subhiksha Board? Or does it mean she was too busy to attend Subhiksha Board meeting where such a critical decision was made? Or is she admitting I-Ventures had no monitoring mechanism over its portfolio companies? That’s a bit too much. If I were a LP investor in I-Ventures, I would have taken it to task and would proceed against them for dereliction of duty. A bit too naïve. She certainly can do with some education on sophisticated lying.

Just as in the case of Subhiksha, the first thing PE firms do when they sense trouble is (a) to quietly off-load their stake to an unsuspecting investor and (b) withdraw its nominees from the Board so that they need not defend lawsuits filed against them by unpaid creditors/ bankers / statutory authorities like EPFO in this case.

In simple terms, PE firms are pure fair-weather friends. All talk of strategic advisory services and expertise all are pure bunkum. They have none and they are here just to skim the profits. At the slightest sense of trouble, they chicken out – like the proverbial rats from the sinking ship.

Nothing wrong absolutely. Buy why not say it upfront? Why the façade of management expertise when you know you have none? Why not tell the portfolio investors - “Take the money and pay us back 10 x returns. In case if you goof up, you’re on your own” !

And lastly about KPMG and its ilk of PE advisory groups. How come all those transactions advised by these so-called whizkids yield a negative return soon after the transaction? Are they whizkids or half-baked, mother fucking scumbags that shamelessly face the media and talk ill of the companies they ran a due diligence on and arrived at a "fair market value"? If after all their “expert” due diligence, their projections go haywire, should they not re-examine their processes and find out what’s going wrong? How long should the investing community put up with such sobs that are ready to even chomp client carrots if there is the word "fee" at the other end?

Why would they? They have mastered the art of orifice-licking and carrot-chomping. That should keep them in good stead besides the standard disclaimers that insulate them :-)
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Tweaks and twaddles - is that enough?

2009-02-24T23:38:00.000-08:00

As I see the government coming out with serial reform tweaks (FDI norms, Preferential allotments) and bureaucratic twaddles, I worry that we’re operating far beyond our economic knowledge. Every time the administration releases an initiative, I read different reports with diverse opinions. I worry that we lack the political structures to regain fiscal control. Deficits are exploding, and the government clearly wants to restrain them. But there’s no evidence that the UPA / NDA or the non-aligned rest have the courage or the mutual trust required to share the blame when tough decisions are to be taken.

All in all, I can see why the markets are nervous and dropping. And it’s also clear that we’re on the cusp of the biggest political experiment of our lifetimes. If Obama is mostly successful, then the global skepticism natural to conservatives will have been discredited. We will know that highly trained government experts are capable of quickly designing and executing top-down transformational change. If they mostly fail, then liberalism will suffer a grievous blow, and conservatives will be called upon to restore order and sanity.

It’ll be interesting to see who’s right. But I can’t even root for my own vindication. The costs are too high. I have to go to the keyboard each morning hoping Barack Obama is going to prove me wrong.

Was ICICI Venture CEO Ms.Renuka Ramnath dozing at Subhiksha Board meets?

2009-02-23T21:50:00.000-08:00

India’s premier PE firm ICICI venture (I-Venture) with more than $2 billion fund size can’t be so naïve.

I-Venture CEO & MD, Renuka Ramnath says the management of flagging retail chain Subhiksha (in which the firm has a 23% stake and has the power to appoint majority directors in its Board) kept it in the dark regarding the goings on. (She was one of the Board members then). She goes on to add "As a responsible investor, despite being minority shareholders and not having management control, we are talking to all players concerned and trying to seek a possible solution which will be in the best interest of all, including the employees”.

Here is the punch line "We didn’t know what to trust and what was the real intention of the merger” (with a listed NBFC Blue Green Constructions with which Subhiksha sought to reverse merge for widening its shareholder base).

Oh, really? A firm in which a leading PE firm has a 23% stake and the firm knows "nothing" about decisions as critical as a reverse merger? It was all over the media back in June, 2008 when Subhiksha acquired 40% stake in the little known listed entity Blue Green Constructions. The Board (in which I-Venture has majority) Meeting in which the acquisition was to be ratified was reportedly held on June 30, 2008 and then Ms.Ramnath didn’t seem to object.

The fact is, had the back door listing strategy worked well, I-Venture would have exited the firm lock, stock and barrel thro divesting its stake either in the open market or thro a secondary exit to other PE firms. The manner in which it “quietly divested” 10% stake for Rs.230 crore to Azim Premji’s PE arm Premji Invest back in September 2008. While I-Venture could dupe Azim Premji, it couldn't dupe the public investors since the merger didn't go thro.

Now why would a PE firm exits in a hurry if it wasn’t in control of the company and wasn’t aware of the murky goings on? Normally if there is a listing possibility, PE investors would rather wait for the market to discover the price. Even if one were to buy Ms.Ramnath’s argument – that Subhiksha did not submit audited accounts beyond March, 2007, it should have disclosed the fact to Mr.Premji which it clearly did not. I-Venture looked after its own interests, to hell with the company, co-investors or employees. But no one would blame the PE firm for that because it just cashed out on an opportunity. But you can’t excuse it if it says it was kept in the dark by the investee company management, despite wielding majority control of its board and in a company where it has a substantial 23% stake.

It’s a little too naïve – to expect the world to believe Ms.Ramnath. It’s ok if she chickened out fearing prosecution when legal notices (from unpaid vendors, employees, EPFO) started flying in. That's when she along with her colleague exited the Board of Subhiksha. But then it also means she wasn't exactly awake all the while at those Board Meetings leaving Subhiksha MD Mr.R.Subramonian to run the business as he did.

"You need their money, honey"

2009-02-12T22:35:00.000-08:00

So long as they were part of the ruling coalition led by Congress party, the Left played spoilsport and scotched every effort to relax FDI norms in specific sectors. They were vociferous against relaxing FDI in retail, telecom and insurance sectors. Now that they were out and recession is in, the government made the best use of the opportunity to throw FDI floodgates open. Now they say equity investments routed through companies in which majority ownership and control is in the hands of Indians would be treated as fully domestic equity.

Till now, the norm was that foreigners would be deemed to have an indirect stake in any investment made by the JV company in proportion to the stake held by them in the JV. In the revised norms, now there is no concept of any indirect holding, so long as the parent JV has a majority Indian holding.

Now, it’s not as if eyebrows aren’t raised.

The principal criticism is that now FDI will be linked to ‘control’ and ‘legal ownership’, completely divorced from “economic ownership”. But I can safely vouch - from my own experience while undertaking due diligence in several JVs that I'd been involved - the fact that FDI norms were easily got around even earlier by inserting specific clauses that vested control with the minority foreign partner, especially in strategic JVs. It just boiled down to who needs who more. If the business needed the strategic expertise that a foreign partner had but the stupid laws don’t let them have control, the majority Indian partners have little or no option to cede `control' discreetly to the minority than not to have access to the expertise at all. Shareholder agreements have vested in the minority foreign shareholder executive authority, super minority provisions to vote against a resolution, demand consent, right of first refusal, etc. Sectoral FDI caps in telecom, insurance and media have given birth to creative holding (thro preference shares / stock warehousing by domestic HNIs on behalf of foreigners) structures. Sometimes even lenders have better rights than majority shareholders in highly leveraged situations.

Laws should certainly regulate, not thwart opportunities. Sooner they realize it the better. But now the economic reality has given our government and its regulators a much clearer vision that they badly needed.

Stimulus ain't free nor funny

2009-02-11T22:24:00.000-08:00

It’s a busy season for stimulus packages that run into billions of dollars and sometimes even a trillion or two. (Suddenly `a million' sounds like small change!) For the announcers perhaps it gives them a few fleeting moments at the grandstand, but the global economies and its constituents including the stock markets are hardly pleased. The doubts don’t just linger around the quantum and quality of diligence behind these initiatives, it harp more on its viability – because they know their governments just don’t have so much money.

We thought Tim Geithner will be an improvement over Hank Paulson, at least in terms of practicality as he began by distancing himself from the `tentative steps’ of his predecessor even though he had been consulted upon. Anyway, the first vibes fail to soothe. For all the tough talk, however, the new plan, which will deploy the second half of the $700 billion Troubled Asset Relief Programme (TARP), was frustratingly light on detail.

Cut to home. Yesterday, the Government of India announced fresh borrowing program. As against Rs.2,22,154 crore raised in the ten months to January 2009, it intends to raise further Rs 46,000 crore (almost 21% of debt to date) between February 20 and March 20. Predictably, bond market reacted, sending yields higher (the additional supply will depress prices and push up yields). Though the RBI, the government’s debt manager, made haste to say the additional borrowing would be conducted in a non-disruptive manner, markets are not convinced.

So why do I say it’s not boding well for the economy? Government borrowing being seen as risk free, the rate at which it borrows gets set as the floor rate for all commercial lending. As such, borrowings by all other entities are seen as risky and so the mark up on interest rates go up. That drives the cost of funds up and hence the government cannot push banks to keep lending rates low to stimulate the economy.

Yet they call it stimuls. Now, isn’t that funny?

"Enough of draw down"

2009-02-08T17:00:00.000-08:00

say the Limted Partners (investors) in PE funds to the Fund Managers that let them down.

When I titled this blog as “General Partners V. Limited Partners” , it was pretty much apt for the situation then. General Partners that make the most critical investment decisions in their PE funds were held accountable for its outcome by the Limited Partners that funnel those funds. When investments don't yield desired returns, it's time for GP's to brace up for an LP interrogation, often that ended in LP deserting the funds and GP's earning a bad reputation. In the PE small world, word is out fast and that means near death for the GPs. They can't hop jobs so easily.

Now the situation has been upended. The new flip is that the Limited Partners are advising the General Partners not to press draw downs. May be, it's the liquidity crunch and absence of leverage that chokes many a LP funnel. But I like that in one way because somewhere the indiscretion has to end. The choice of investments they make is abysmal. Worse is the follow up supervision and near absence of timely strategic interventions. It’s not buy and hold anymore, buy and sleep seems to be the strategy for some.

"Outrageous"

2009-01-29T18:06:00.000-08:00

Sometimes you get to read funny combination of headline news. Today I had one such - on Wall Street bonuses and another on PE firms unlikely to invest now.

Even as the whole world reels under recession triggered by Wall Street excesses, they have no qualms in collectively showering upon themselves billion $ bonuses as usual. Barack Obama felt it’s “outrageous”. Indeed.

Another is not so retchy, yet funny. Now that valuations are at their near lowest, PE firms are unlikely to invest. May be they are waiting for hyper valuations to return so that they can stir in right earnest burning bigger holes in their investors’ pockets!

What they teach only at B-schools ?

After thoughts governments

2009-01-27T23:02:00.000-08:00

Placing a fielder after the ball gets struck

This is my favorite cricket metaphor. It typifies a late riser, usually a fielding team captain that moves around his fielders to spots after the ball gets hit and not before. Smart batsmen will sense this and occasionally mislead the fielding team by offering unorthodox strokes to spots where they are not so good at stroking (say, a right hand batsman playing a risky shot to the gully or extra cover on the off-side) – it’s just a ruse to rattle the field so that he can freely score at his favorite spots where there shall be no fielders. Smart captains normally set a field and make sure his bowlers bowl to the field, not letting the batsmen settle down.

Our administrators are of the former variety - of late risers. When our real estate market was red hot, global strategic and financial investors including PE were making the major mistake of investing large amounts of money in overvalued assets, our government came down with a slew of regulations – P-Note bans, setting high water marks for FDI, classifying convertible debentures as equity etc. They made sure that they punctured the swell until there was nothing but flat tires. Now after the investors are gone, the globe in a recession, real estate developers are broke, sense prevails.

The government is tweaking FDI regulations to exempt mixed development projects from the $10 million capitalization requirement, reduce the project size to 10 acres (from 25 acres) and cut the minimum built up area to 10,000 (from 50,000) square feet. The lock-in of three years after the date of completion of the project shall continue. The only condition is that 50% of the area will be kept open for hotels / tourism activities, shall be subject authority supervision and residential buildings shall not be put to use otherwise.

It was pretty much the same thing that RE developers earlier clamored for. Now after they are long broke or even dead and gone, the government is waking up to the idea. Anyway, I will stock up on some real estate stocks - expecting a rally :-)

Tax cuts or higher public spending - which is better recession remedy?

2009-01-26T16:12:00.000-08:00

This is often a confounding question that baffles governments and right thinking citizen alike. Arguments fly back and forth – tax cuts generate higher disposable income that goes to buy stuff and keeps demand buoyant. The opponents figure saved tax money just stays locked in. It doesn’t create jobs because businesses have put on hold large capex spends.

But then economic stimulus has its own detractors as well. Increased public spending on infrastructure, healthcare and education have long gestation periods. Committing the tax payer’s money to long term projects especially in recessionary times is not exactly sensible because there is no guarantee that businesses will continue to make profits in future years on which the government can expect to collect more taxes and keep those jobs in tact.

Here’s how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets — and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats. If that would mean lots of midair collisions, hey, stuff happens.

The common knowledge is that tax cuts are not always better than public spending. Tax cuts work when a particular industry is marred by business cycle or has been subjected to excessive levies or if it contributes to larger public good, like say clean tech. In general otherwise, public spending provides much more bang for the buck than tax cuts — and therefore costs less per job created — because a large fraction of any tax cut will simply be saved.

This suggests that public spending rather than tax cuts should be the core of any stimulus plan. But rather than accept that implication, conservatives take refuge in a nonsensical argument against public spending in general.

But I would rather weigh it on case to case, time to time than offer a sweeping solution.

L&T had no other option

2009-01-23T18:19:00.000-08:00

As more than active observer of stock markets, I was just wondering what would I do if I were heading Larsen & Toubro, that bought 4% of Satyam stock at Rs.170 apiece earlier this month, after which the stock just collapsed to Rs.20 levels...?

I would have just bought up more. Not just for averaging, since L&T has an infotech arm that isn't going anywhere, this is the best opportunity to hire a company that has some marquee customers like GE.

And they seem to have done exactly that... I, like anyone else was stunned by the volume of over 300 million shares that got traded in NSE and BSE tody. First I thought it was the interest because of new suitors (iGate). Later I get to know L&T was buying up. But it certainly didn't hurt... I exited my positions when the stock touched 39.25 and made a neat profit...

Will re-enter tomorrow between Rs.35 - 40 levels, if I get it.... I feel L&T should still be bying up until its 15% with them and then proceed to make an open offer for further 20% and as usual I wouldn't wait to tender, will just exit during the melee in the market and retreat to the sidelines...

IIP numbers, a mirage?

2009-01-12T20:59:00.000-08:00

Oil price is down, inflation is down, Rupee is down, Exports don’t look up. Still Banks don’t cut lending rates enough in proportion to cut in repo and CRR nor do they start some serious lending. This has created a sort of optical illusion in our IIP numbers that got released yesterday. The index showed an increase of 2.4 per cent over November 2007, which is not a great performance but apparently different from the 1.4 per cent decline in the previous month. However, the base effect seems to be largely responsible for both numbers. The October base was relatively high, with the index having grown by about 12 per cent in October 2007, while the November base was just the opposite, with the index having increased by a mere 4.9 per cent over the previous year. Stripped of the base effect, the optical improvement disappears and there is little question that the industrial sector is in a virtually no-growth period. On the face of it, this is likely to persist for some time. Even if the successive interest rate cuts and the various other measures that have been taken by the Reserve Bank of India and the government are enough to reverse the slowdown, the effects are unlikely to be visible until later in the year.

If the slowdown in manufacturing, gems & jewellery and other sectors is largely attributable to high interest rates, then the recent rate cuts must favor a turnaround in these sectors, though the cuts have not gone far enough. The missing link, of course, is the apparent reluctance of banks to lend money to people who might want to buy houses, cars or appliances. Until this flow of credit begins, a turnaround is not in prospect. However, the conditions, in terms of liquidity, are hopefully being put into place.
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ASATYAM COMPUTERS books weren't cooked; that was 3D virtual reality

2009-01-07T17:41:00.000-08:00

Here, I suspected it's no longer SATYAM.... Now I stand vindicated...

Speculations glaore. I go it's all worthless. May be it's worth the value of some pricey real estate that it occupies in India's southern city of Hyderabad provided its overcooked balance sheet has truth enough in its declaration of the company's debt-free status. Otherwise, one would assume that even the properties may have been pledged or worse, being that of a software company, it's created out of 3D virtual reality. Something as in Second Life.

I begin to doubt the Indiaworld acquisition that Sify (Satyam Infoway, sister concern of Satyam then) did for a mind boggling Rs.499 crore ($115 million in 1999 $). Did money really changed hands to that nondescript entrepreneur Rajesh Jain, CEO of Indiaworld? If so, why is he still stuck with some never-to-start startup? People with $100 million certainly will have a lot more options that the world would be curious to track. I have this feeling the price that Sify paid would have been far less, far far less and bulk of the money would have been stashed away by Rajus in some secret tax haven accounts.

But then they also say the liabilities are underfunded to the extent of Rs.1230 crore (about $24 million) that Raju has arranged by pledging his shares. Anyway, too bad that Raju used a wildlife metaphor while attempting to clear his conscience in his letter to the Board- "it was like riding the tiger and not knowing how to get off without being eaten" - and disgrace the animal.

It sure is a murky mess and it's only getting murkier. But there are some bravehearts too... And I sure can't stop envying the folks that were short on the stock yesterday...!
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After SATYAM-MAYTAS, it's HIRCO-HIRANANDANI

2009-01-03T09:33:00.000-08:00

It's the scam season, no doubt... First came MADOFF that made-off with billions of $ of investor funds, then closer home it was SATYAM COMPUTERS being sought to be shortchanged by its founders currently holding 5.3% minority stake by exchanging their loss making businesses in lieu of huge cash in Satyam balance sheet. To hell with valuations, due diligence or even corporate governance.

After SATYAM-MAYTAS fiasco, here's another; Hiranandani (Builders) attempts to take co-investors for a ride by opting for a merger with loss making family business HIRCO Developments with its AIM listed outfit HIRCO. The investors are irked because the decision is taken without undertaking appropriate valuation of the target, eerily similar to the Satyam deal that fell through because of shareholder revolt. In the Satyam deal, the promoters of SATYAM COMPUTERS (later found to be holding less than 6% stake) had decided to buyout their family concern MAYTAS infrastructure and MAYTAS properties both real estate businesses heavily in debt by using $1.6 billion cash in SATYAM's balance sheet. Later all the independent directors in its Board had to tender resignations owning up moral responsibility for their tacit concurrence by remaining passive during the Board meeting at which the issue was hush hushed.

Why does the expression chutzpah come to my mind...?

Should they junk SATYAM management?

2008-12-30T15:57:00.000-08:00

The (A)SATYAM saga is getting messier by the day.

The issue has meandered around a lot of flaky bends. First it was the bid to diversify into real estate defying all norms of corporate governance by disregarding the need for shareholder approval before making a strategic business shift. Then came the relevance of independent directors on its Board, that remained passive to promoter Ramalinga Raju’s initiative to buy grossly overvalued family concerns. Almost all of them have since resigned. What followed was yet another rant on Raju’s wiliness – how could he pull off all this while his stake has dwindled close to nothing (all of his 8.6 % in SATYAM was pledged to institutions to raise funds to finance MAYTAS venture that lost almost 80% of its value in the recent real estate meltdown – the institutions have recalled the loans that Raju could not meet and they sold his entire stake in the open market last week as the story broke).

And the latest is, HP training its guns on SATYAM. Gartner studies say IBM leads the global IT services market with around 7.2% of the market, followed by HP-EDS with around 5.3% of the market. HP overtook second-placed Accenture after it acquired EDS earlier this year. The global market for computer services is estimated to be around $748 billion. Even after the EDS acquisition, through which HP gained over 20,000 employees of MphasiS, it trails both IBM and Accenture in terms of offshore strength. IBM has over 73,000 professionals in India and Accenture some 37,000.

And now a fresh debate. Should the existing management be allowed to continue given their track record of delivering consistent business growth? I too believe that a change could be harmful and are willing to give the existing operational team a chance. Had the management clearly realized its mistake and makes amends on the governance front, it’s better to run with the same bunch that ensures customer comfort and affirms durable relationships. It’s not easy to let go off clients GE, Qantas and regain their confidence in the short term for any new management.

SATYAM is up for grabs, pal

2008-12-24T00:08:00.001-08:00

Ok. Enough is said about SATYAM COMPUTERS in the last one week. I come straight to the point. Dice begins to roll on who gets to buy SATYAM now that it is a sitting duck for a strategic investor / a PE raider. Want proof? Check out the huge volume of 90 million shares changing hands in the Indian stock exchanges (NSE and BSE) even as we still have a good 2 hours of trading left!!

I stuck my neck out and wanted a piece of action. Bought some SATYAM stock today. Here is some perspective on the India Offshoring scenario that I checked out before buying it. Feels good, buddy... the stock is already up by 5% from the price I bought...

So....I am already in-the-money :-) on my SATYAM buy of this morning. Aren't you too?

Art of getting independent directors to act

2008-12-22T00:13:00.000-08:00

Why do independent directors discard independence? Protecting minority investors yield them nothing. That’s why.

If they dance with the founders/incumbent management, they get generous sitting fees, commissions, occasional foreign junkets, vacation homes and transport free for them and family. For ex-B School faculty and bureaucrats that deck up as independent directors (just to check the columns in the compliance sheets) these freeloads are incentive enough not to disturb the peace and quiet at Board Meetings.

Few have the courage to transcend political correctness (at Board level, read "Promoter Correctness") and strive for human righteousness. Character is doing the right thing when nobody's looking. There are too many people who think that the only thing that's right is to get by, and the only thing that's wrong is to get caught – like the independent directors in (A)SATYAM COMPUTERS recently realized. In the end, if you have integrity nothing else matters and if you don’t have it, nothing else matters as well. So why load up excess baggage?

To the regulators, I would say please don’t slap more laws. We have enough. Laws control the lesser man. Right conduct controls the greater one. Have the courage to blacklist independent directors when they fail. Deprive them of all their Board seats and disqualify them straightaway. Companies Act has provisions for disqualification of directors already. Go enforce them.

Or better still, let the minority shareholders pool in and give them freebies :-)

It's time SIEMENS relocate to India

2008-12-17T16:05:00.000-08:00

Poor SIEMENS. It just got unlucky.

Too much is made out of a bribery scandal. What did it do after all? It ran a cash desk for its managers to draw money at will and offer kickbacks to get deals. Over time, they say it added up to $800 million or so. So what? Didn’t late Dhirubhai Ambani (and now his sons) build the Reliance empire by bribes? The Ministers do its bidding in the Parliament. They fight its war. Even as RIL (led by Mukesh Ambani) backtracks on its earlier agreement to sell gas to RNRL (led by feuding brother Anil Ambani) at concessional rates, Murli Deora, the Minister for Petroleum and Natural gas will force his bureaucrats to file an affidavit to help beef up the RIL case. The bureaucrats in the government where Reliance had something to do get two pay checks every month. A smaller one from the government and another one much larger from Ambani’s cronies. In return, they let Reliance import capital equipments at `NIL’ rate of duty by accepting its classification as `gift’ – yes, gift of an entire plant by an overseas supplier and more.

But that’s in India. In Europe and America they look down upon corruption. They won’t let companies get away with bribed deals. They are grilling SIEMENS and imposing massive penalties. But a Bernard Madoff type $50 billion ponzi schemes are allowed. Their investment banks are allowed to issue junk bonds that have little or no underlying asset that have the power to bring down their economies. [Hell the serial collapse of Wall Street banks looked like some Communist government issuing a “shutdown-or-else” diktat to free up pricey real estate – like they do in China pushing the poor people into hinterlands to make room for Olymipic stadium and other urban infrastructure. They let their auditors, credit rating agencies and regulators get away scot-free. Even Governors can sell senate seats and the courts don’t allow their removal.

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Hypocrisy? Well, ok for lack of a better word.

I have some advice for beleaguered SIEMENS management – Relocate to India. You have all the right qualifications :-)

ASATYAM COMPUTERS ?

2008-12-16T22:51:00.000-08:00

“Satyam” in Sanskrit and a host of Hindu Dravidian languages like (Tamil, Telugu, Kannada and Malayalam) means Truth / Honesty.

“Asatyam” means just the opposite.

With the investor backlash over the attempted skullduggery by its management (with just 8% stake) to bailout the slumping Raju family group (Satyam founders) concerns MAYTAS Infrastructure and MAYTAS Properties (MAYTAS incidentally is SATYAM spelt reverse) for $1.6 billion (that's all the cash in its balance sheet!) and the subsequent calling off, there seems to be a good case for renaming the company as ASATYAM Computers. It’s not its first attempt by the minority management to oppress other minority shareholders. The group is known for its several dubious pursuits committed with impunity earlier.

Mortgage crisis, Madoff madness - so what comes next?

2008-12-15T20:04:00.000-08:00

Agreed. Mortgage crisis was because of a complex web of sliced and diced mortgages that escaped instant scrutiny. But how about a ponzi scheme run by an ex-Nasdaq broker dealer?

As a broker-dealer, Mr. Madoff's firm was already heavily regulated, and news reports say the Securities and Exchange Commission investigated him in 1992 without finding anything wrong. The SEC said in a statement Friday that its New York staff also conducted inquiries into Mr. Madoff's firm in 2005 and 2007. Mr. Madoff's separate investment company registered with the SEC in 2006, which is all that hedge funds would have had to do under the SEC's proposed (but failed) hedge-fund rule of a few years back.

The recent spate of scams from the US has made this once famous financial innovation powerhouse a den of con artists and shoddy regulators. Alright how about foreigners that invested so much money?

Without this flow of easy money into the U.S., globalization in its current form would not have been possible. The U.S. was the consumer of last resort, absorbing cars from Germany and Japan, electronics from Taiwan and Korea, and clothes and furniture from China. The earth was flat, and why not? Pluck a laptop from Taiwan and pay for it with a home equity loan, which—if you trace back the connections—was at least partly funded with foreign money, too.

The big unanswered question, for years, was why this money flow persisted. Why the heck were foreign investors willing to lend the U.S. such large amounts of money on such good terms? Economists and journalists spun out hypothesis after hypothesis (we'll see more below), but there was no agreement on why.

What comes next? The fallacy is punctured. Globalization will be seen as what it is—a game with risks that can't be wished away. And U.S. prosperity will depend on the success or failure of its ability to innovate—not its ability to tell an implausible story to foreign investors.

Breaking the back of Indian Realty

2008-12-11T17:12:00.000-08:00

Readers of this blog may be wondering why there is a sudden slowdown in posts. Well the truth is there is not much worthy of finding a place here and I don’t post something that I don’t feel seriously about. Moreover, volatility in the stock market has given me little time to waste and make use of every available opportunity to make a quick buck. After all, it’s time we make some money now that the market has occasional rallies – bear market or not.

Now I find this. Realty prices in India could correct by over 30% - now this is it. This is when reality dawns on realty. How long could they hold back? Stock markets have given a thumb down to the sector, there is a credit crunch and bankers are loath to lend to real estate players. But these scums wouldn’t budge. Now it seems their back is breaking.

I am normally not a saddist. But as far as unreasonable realty sector is concerned, I’d gladly be one.

Farewell Mr.Kamath and Welcome Ms.Kochhar

2008-12-06T03:25:00.000-08:00

ICICI Bank finally nails down its succession plan. Outgoing CEO K.V.Kamath (who will now be its non-executive Chairman) is to be replaced by Ms.Chanda Kochhar, currently Joint MD & CFO.

Kamath has been instrumental in turning ICICI, the erstwhile public sector project finance outfit into a private sector full service commercial bank and then in hoisting it as India’s second largest bank (balance sheet size) until recently, when the impact of the bank’s overseas bond portfolio facing massive erosion triggered a run on the bank. Depositors panicked and pulled out deposits that almost eroded the bank’s substantial deposit base. Among Indian banks, ICICI Bank had one of the largest exposures to overseas assets. According to statements tabled in Parliament, ICICI Bank suffered mark-to-market losses of $264 million in the credit derivatives segment. The bank had about $2.2 billion worth of exposure to credit derivatives while the largest bank in the country, State Bank of India (SBI), has an exposure of about $1.1 billion. Though the bank has not directly invested in the US market, it has taken a beating due to the depreciation in value of securities witnessed in the global markets.

In comes Ms.Kochhar at a time when a collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies is having a ripple effect around the world. She is going to have a tough time ahead because she has to lift a troubled bank out of a mess created not just by itself, but the global financial world.

But if she is lucky enough to have the bailout and economic stimulus tailwind propelled by central banks and governments around the world, she has the caliber to see the bank through its crisis.

Let’s welcome her to the hotseat. And farewell Mr.Kamath !

See how they squeal

2008-12-03T17:01:00.000-08:00

I was at the Reuters India Investment Summit last week. The usual suspects were in full attendance – Akhil Gupta of Blackstone, K.V.Kamat, ICICI Bank, Manisha Girotra of UBS besides some irregulars like Arun Shourie of BJP, Arvind Virmani the chief economic adviser to MoF, Suresh Senapati of Wipro, G.V.Prasad of Dr.Reddy’s etc.

Here is the report from ET. I tuned my ears to Akhil Gupta of Blackstone who wanted more policy freedom as it was facilitating “crooks” and not strategists. He found support from the investment fraternity as well. "The flow price rule is a stumbling block," said Vedika Bhandarkar, of JPMorgan. "In a falling market like India, if you have a six month rule you can't do a deal. That rule, we expect to be relaxed soon."

I allowed myself a smirk. Aren’t these the same guys that clamored for the rule to stay when prices were soaring? They enjoyed the flow price rule and were valuing on the basis of last 6 months average price and forcing company management to accept it because the regulations said so. Now when the prices have caved in, it hurts them. Now Akhil Gupta worries the rules favor a crook, while he goofed up on his choice of investment in Gokaldas exports and (Ushodaya enterprises that went see-saw) the like. Blackstone, Gupta’s employer is famous for big time goofing up. Remember their $36 billion acquisition of Equity Office Properties Trust from Sam Zell way back in Nov.2006 when mortgage prices were peaking? In less than a year, they realized their blunder and started stripping it off its priced assets. But its CEO Stephen Schwarzman smartly went public and cashed out before the serial guffaw took its toll on his personal holdings. And Gupta is squealing about crooks outside!

PE funds need to talk straight

2008-11-29T20:30:00.000-08:00

Private Equity can do with some straight talking.

“One of [PE’s] defining characteristics is never, ever, to admit to a mistake in public. By convention, most buy-out bosses maintain that they anticipated a recession and acted cautiously. In reality, the buy-out industry had its biggest-ever binge just before the bust began. Most big firms paid silly prices for companies using sillier levels of debt.”

I have solid data on PE investments in Indian companies at obscene valuations. Some of them were mandates that I had turned down because the asking price was too high. But there were ambitious investment bankers / fee hungry brokers that went ahead and goaded their PE clients to invest in. Result - every company in PE portfolio has its valuations deep underwater. Recognizing their liberty to keep it locked down for several years, the PE fund managers get away without marking their investments to market. But the pension funds and other investors in the Funds, have regulatory mandates advising them to mark down their investments and disclose the level of erosion.

Now I have mandates from three funds that badly need to reshuffle their portfolio. Tell you what? There are no takers even at this down to earth valuations, not even the owners and majority shareholders!

NTMA - asking for bankruptcy

2008-11-25T23:20:00.000-08:00

India’s bond market is nowhere near the maturity level of its equity markets. Reasons are not so hard to seek since equity offers ownership while debt carries an obligation to repay. When a debt paper is issued and if it is held till maturity, the obligation to repay rests with the issuer. But if it is allowed to be traded, the issuer gets back in the picture only if the instrument allows recourse. Naturally, when it comes to soverign (or Public Debt raised by Government) debt, our policy makers played safe and entrusted RBI to be the custodian, issuer, manager and Regulator of its financial needs. It suited just fine.

Earlier in the 2007-08 Budget, the monetary and debt management aspects of RBI is sought to be separated. On Friday, the government released a draft Bill to create a statutory corporate body called the National Treasury Management Agency (NTMA) to carry out debt management, cash management and management of contingent and other liabilities of the Centre and states – in the process stripping RBI of this responsibility. Former Finance Secretary S.Narayanan blows the whistle in his Livemint column.

Primarily Mr.Narayanan’s concerns are –

(a) Moral hazard – Minus the regulatory oversight by RBI, that it has ably executed for the last 60 years, NTMA functioning under the budget division of the ministry could become a carte blanche for Finance Ministers to raise funds at will. The propensity for excessive borrowings by the Governments are well documented in the past. Our budget deficits are a direct result of that profligacy.

(b) Mortgage of sovereignty - The draft Bill envisages that government bonds will be available for sale in India and abroad. It means that for the first time since independence, we will be offering sovereign bonds to overseas investors. Earlier, finance ministers and governments have shied away from this, for committing a sovereign to a debt that can be called outside the country has been a very sensitive and emotional issue. It has been a principle so far that the sovereign, the state, would not issue debt overseas.

(c) Fiscal discipline – It will in effect, empower immature policy makers to design debt instruments that they hardly understand. The recent mortgage crisis in the US that is still playing out, breaking banks after banks in the process, stands ample testimony to all likely outcomes.

As the citizen of this country, we’re already exposed to the recursive cycles of inflation and deflation. As a nation of savers, we are already parking most of our savings with the Governments (Post Office savings, PF, PPF, NSS, NSC, RBI bonds, Sr.Citizen bonds etc.) A tradeable bond market will only enable some dubious corporates to stick their trash debt paper to some unsuspecting and gullible public. We know the allegiances of Finance Minister Chidambaram, Petroleum Minister Murli Deora, Telecom Minister A.Raja et al. Now we don’t want self-imposed bankruptcy added to that. Do we?

Not just because Mobius said so

2008-11-25T17:06:00.000-08:00

Mark Mobius is an omen. I remember him saying the market is overheated back in 2000 that marked the beginning of market collapse. Now he says India looks attractive and he is serious. He is somebody if he is heading $24 billion in AUM of Templeton. His words carry the weight.

So sleeping tigers, pick up your loose change (if that's all what is left :-) and go for broke. Anyway when you’re down by 60%, you ain't got much choice, have you?

Not just because Mobius said so...

Turnaround strategy for airlines - "shut down"

2008-11-24T17:08:00.000-08:00

Vijay Mallya is flamboyant even in the face of absolute ruin. Here he says "This long-awaited initiative will stabilise the aviation industry and provide much needed financial stability to airlines. In response to the initiative from the government, Kingfisher will immediately reduce air fare across the board as soon as the declared goods classification is approved."

But has he got a choice? He knows he is in deep trouble after having lost 60% of his passengers ever since he cannibalized Air Deccan (the LCC) and hiked the fares. The whole of aviation industry is bleeding as former air travelers flock to not so badly run Indian railways. I used to fly Bombay-Delhi often earlier but after my recent journey by Rajdhani Express (overnight, complete with A/C sleeper, dinner, breakfast, beverages and water), I am a card carrying member of the Rajdhani user club. Soon I’ll be a fan of Indian railways.

I save a lot too in time and money. The airport is an hour’s drive from home, will have to check in at least an hour before and then at the destination, I’ve to pay for the cab for another hour’s drive. The total cost of one way travel between Bombay – Delhi will be about Rs.8500/-. By train, it costs me just one-fourth of that. Given that there is a recession around and the stock markets are scraping at the bottom, the savings don’t hurt at all!

As I see it, there’s one sure way how airlines can get back into black – “shut down”!

"Never even try"

2008-11-20T23:00:00.000-08:00

Dr.Jaimini Bhagwati calls for public sector (government controlled) Credit Rating Agencies (CRA) to deliver objective evaluation of security instruments in the interest of investors.

His concern is genuine since there is just the three globally recognized CRA – S&P, Moody’s and Fitch that run the show. (In India we have CRISIL, ICRA and CARE and that’s it.) He explains how the flawed rating processes of S&P helped rate sovereign rating of GOI bonds lower than that of ICICI bank at one time, an year or so ago. His case – CRAs are paid by issuers and hence there are limitations to the level of objectivity an investor can expect out of them. Need of the hour, therefore is establishment of an Indian public sector CRA to increase competition and provide benchmark standards.

I take off from there. Then what happens? Like PSU oil companies, populist interest will upend commercial imperatives. Our politicians will call the shots. Will RIL bonds get a bad rating if Murli Deora is the Minister in charge? Look how he made GOI intervene in the ongoing dispute between RIL and RNRL in the matter of KG gas distribution. Now imagine Amar Singh at helm – ADAG group companies could be awarded ratings equal or better than sovereign ratings of GOI bonds. Reliance Capital will run M/o Finance, SEBI and Company Affairs. Every shift in incumbency will influenze the rating outlook. Are investor interests protected or are they imperiled as the saga of ambivalence plays out?

Today CRAs have authority but no responsibility. I suggest a participative method – make them what I call `backstop underwriters’ by entrusting a portion of underwriting obligations to CRAs, making them own up to their ratings. This is how it works. If the rating awarded is downgraded within say, a year of issuance or if the issuer defaults in its commitment to the retail investors within that period, then CRA will have to step in and bailout the investor. Investors will be glad to pay a small nominal premium for that reassurance. That way, CRAs can augment their income (fee for backstop underwriting besides rating fee) and ensure the objectivity of their processes as well. Investors get a toe in the door and Issuers save on the retail portion underwriting fee as well. Win win?

Bringing a politician have only complicated issues everywhere. Look what’s happening in appointments of PSU / Nationalised Bank Chairmen, Central and State Police Administration and frequent transfers among Income-Tax bigwigs. Think of Shibu Soren at the helm and imagine what would Anil Agarwal of Sterlite get away with? I go “Never even try”.

"Vaccum before you dream again"

2008-11-20T03:31:00.000-08:00

“The stock and commodity markets seem to go just one way and that’s down. Hundreds of millions of market cap eroded, value destroyed. The recession is here to stay and no policy measures, interest rate cuts, liquidity infusion seem to work. OMG, it’s pushing us back to where we started out – point zero.

Not that I am scared. But it’s a daunting task to claw your way back from such depths. I’d managed it with little resource and a lot of will. But I was a lot younger then. Now after a couple decades, if I’ve to repeat that trek, I might have to reinvent. Then I was alone; now I’ve got a family too!”

This was the kinda’ talk that did rounds when a bunch of us old pals met recently. There were software pros, engineers, finance pros and even one professor of economics in the gang. This concern about the future and the hard times that we’re forced to go thro was the common thread.

They say if we are facing in the right direction, all we have to do is keep on walking. But who knows? Suddenly we feel like a bundle of beginnings. In front of us lay a stone with a hole in it. Who could’ve bothered to drill it? Nature. The drops of rain make a hole in the stone not by violence but by oft falling. That meant something. It really did. You can't go through life quitting everything. If you're going to achieve anything, you've got to stick with something. Consider the postage stamp: its usefulness consists in the ability to stick to one thing till it gets there. The race of life is not always to the swift, but to the one that keeps running. Fall seven times, up eighth.

Coming to think of it, this recession is like a mountain. Nobody trips over mountains. It is the small pebble that causes you to stumble. Pass all the pebbles in your path and you will find you have crossed the mountain. So why despair? It's often the last key in the bunch that opens the lock. You may not be there yet, but you're closer than you were yesterday.

And what if your dreams turn to dust? Simple. Just vacuum before you dream again ;-)

The serial bailout ?

2008-11-13T23:21:00.000-08:00

Following Wall Street rescue, the opportunistic bug seems to have bitten battered Indian businesses. Politicians, the chief patrons of Indian business turn willing side kicks. Recently Praful Patel wanted Airlines to be bailed out until Chidambaram refused to play ball. He just stopped short of restricting it to friend Vijay Mallya (Kingfisher Airlines) and by extension Naresh Goel (Jet Airways) to limit tax payer burden. Air India, the government run airline never mattered to him as much even as it was notching up losses for several years now and making do with ageing airplanes. It suited his friends better to let the country’s premier Airline to bleed. But it just worked out the other way round – the private airlines began to bleed.

So what to do now? Ha, we take a leaf off Wall Street rescue staged by Hank Paulson, ex Goldman Sachs dealmaker. Bail the airlines out too.

Last week, the stock of Las Vegas Sands Corporation collapsed. Bankruptcy seems a real possibility. Indeed, the whole casino gambling industry in Nevada is facing the worst crisis in at least a generation, maybe ever. Casino gambling directly employs more people than the domestic automobile industry. Add in the supply chain for both industries, and casinos still employ almost half as many people as the automobile sector.

So what about a bailout for the casino industry? Ridiculous! Right? What next? Bailout Matka, then drug dealers, Mafia…? [Dr.Vijay Mallya is a liquour baron!]

Mr.Bernard Shaw has been perceptive

2008-11-10T03:44:00.000-08:00

"If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience" – George Bernard Shaw

So I read Sandeep Singhal, MD, Nexus India Capital ( PE fund) and Pankaj Dhandaria, Director, Transaction Advisory of E&Y, reaffirming India as an attractive Investment destination for PE funds as it has robust financial, legal and regulatory framework, mature markets and although moderated, still being reckoned as a growth economy. The long-term perspects of funds, with 7-10 year lock-ins, is aligned with India’s medium- to long-term growth potential. So isn't it time for all the old rhetoric to make a comeback? You bet -on india’s long term prospects, an aspirational young population, the entrepreneurial spirit, resilience, perseverance and innovativeness of Indian promoters that promises great returns to patient PE investors or so it begins to go.

So I ask, why did they run away…? Have something changed in between…?

Pankaj argues Indian infrastructure and Industrials offer great opportunity since there are several projects now reasonably valued, yet to achieve financial closure. They all need capital.

So it’s been always… They found it so and that’s why they came here… What made them dump it all and run…?

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According to Bain & Co, a consultancy, private equity funds invested a total of $1.4bn in 2006, and $3.6bn last year. However, in the year to date aggregate, Pipe investments have totalled $1.4bn.

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They had better recognize the problem is with the PE investor mindset. Especially the foreign ones. They chased projects madly when valuations were ridiculously high, deals I thought should never happen, happened. But they haggle for downside protection and guaranteed returns now when demand has slumped and a recession looms. I hear them say as FT quotes it “Private equity firms will no longer invest in straight public equity. If we do these investments, we want some kind of structured protection.” Here’s another from Sri Rajan, Head - PE practice, Bain & Co, India: “Given the current investment climate, the existing Pipe model has lost favor among private equity funds operating in India. Understandably, firms are now looking to invest in ways that offer them downside protection.”

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O.k, some late wisdom that. It dawns only when PE investments go deep under water (Blackstone’s $165 M in Gokaldas Exports now down by 51%, it's $150 M exposure in Nagarjuna Construction is down by 69%). So is PIPE investments made by Warburg Pincus, Apax Partners and General Atlantic. Recently one of my clients in infrastructure space sought a valuation of 15x multiple (it used to be valued at 35x earlier which it felt was too low), the PE fund didn’t budge. They insisted the project be valued at 5x. But when market had been at its peak and PE multiples of 50x were offered for companies yet to find as much as a name, they hardly batted an eyelid and emptied their coffers.

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So it’s a strange kind of logic, PE investors follow. [Mr. Bernard Shaw has been perceptive, ain’t he?]. Blame it on their B-Schools and chill out...
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"Hire, but sterilize"

2008-11-08T05:52:00.000-08:00

Ok. So the global financial meltdown offers a very good opportunity for Indian Investment Banks and Brokerages to poach back talent from global peers.

As the hirers seem to reason, the investment bankers with global experience could win some bulk institutional clients for their masters and will be adept at selling exotic derivative instruments etc. as they have a better understanding of such products.

But hey, wait a minute… Is it not the same tribe that brought their clients (and Masters) down by inventing toxic `Yen Carry’, `MBS’, `CDO’ and `CLO’s that finally did them in? Who will want a re-run...?

So I mangle the old signature phrase Ron Reagan used while warming upto Soviet Union - "Trust, but verify"..... I go "hire, but sterilize"

Welcome the SME exchange

2008-11-05T16:45:00.000-08:00

I can’t wait for the SME exchange to arrive. I have at least 20 mandates from SMEs that form majority of my client list to raise capital in the region of Rs.5 crores - Rs.50 crores. During the crunch times like this, Banks are too cagey and they just act up. Local financiers are hawkish and money doesn’t flow exactly at remunerative costs.

SME exchanges can bridge the gap since it could bring together savvy public looking for portfolio diversification. SEBI has rightly set the minimum lot for investment at Rs.1 lakh so that investors with requisite savvy and having the optimal risk appetite only participates. I welcome it for yet another reason – it would give significantly higher visibility to future large cap contenders as could be multi-baggers as well in the short to medium term…

Who is calling the money shots?

2008-11-05T16:20:00.000-08:00

Who is India’s monetary authority? Is it RBI or Ministry of Finance? Traditionally RBI it is but of late the center of gravity is shifting more towards North Block. The pattern is too obvious not to be noticed—the real decision-makers are now in the central secretariat in New Delhi. Ideological divide, perhaps? RBI remains the statutory authority, but it is an open secret that the man in charge is P Chidambaram. A peskily independent RBI governor has retired, and a strong-willed finance minister has made sure that he will not be faced with another situation where his views are either ignored or not acted upon.

First, a new governor of Reserve Bank of India was appointed and, in a symbolic departure from past practice, the new incumbent went across directly from the finance ministry. Then, a new ‘liquidity committee’ was set up, chaired by the finance secretary. Now, a new economic advisor with a strong background in finance has been appointed in the Prime Minister’s office. A day later, the finance minister calls the heads of the state-owned banks with the intention announced in advance that he wants bank lending rates to drop. On cue, immediately after the meeting, one bank chief after the other announces interest rate cuts.

Critics of Dr.G.V.Reddy (Raghuram Rajan and Percy S Mistry) often argued the western orthodoxy that RBI should focus on a single objective of achieving a target rate of inflation. They usually oppose central bank interventions in the currency market, want quicker movement towards capital account convertibility, greater integration with global financial markets and the introduction of sophisticated financial instruments. But traditionalists supported Dr.Reddy with the counter-view that the financial crisis that has gripped the western world is not an advertisement for financial integration, that India can do without the periodic financial crisis that has consumed other developing countries with open capital accounts.
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I like a hybrid. Coming from a business family and community, one can understand why Chidambaram is hawkish on stock markets (except in matters of FDI ceilings where he surprisingly shoots down CCEA and DIPP moves seeking to allow FII to breach them). While RBI should indeed be the strategic authority, constructive suggestions from Ministry of Finance and other regulatory authorities can be heeded if not obliged. Controlling inflation is indeed the primary responsibility of RBI, but inflation is not the outcome of monetary logistics – it is rooted in market demand and supply imperatives. RBI can at best control money supply, hike or cut CRR, SLR or Repo rates but it can’t stop you from paying a higher price or ask you not to buy stuff. It could not even bring down the inter-bank call rates that hover around 11-12% as opposed to the normal 2-3%, despite the recent rate cuts. That can only be possible if the economy has multiple sources for fund flows. It can infuse or squeeze out liquidity to an extent, but it can never replace a generous flow of funds coming from a buoyant global sentiment. Over-indulgence by either would lead to catastrophic outcomes.

Welcome to mezzanine... but will it work...?

2008-11-05T05:11:00.000-08:00

Hard times call for novel solutions. Real estate sector took it in the chin and is deep in trouble. Bankers don’t lend, properties don’t sell, investors shun the asset class and even Private Equity that once was its messiah wouldn’t take to it kindly.

In comes Mezzanine financing. It is a debt-like instrument consisting of cash income and an equity-linked component, sandwiched between debt and equity on a company’s balance sheet. Here usually a strategic investor (say a PE firm) funds a company through debt and equity. The net cost of investments is 20-25%. Of this, 15-20% is paid as interest on debt and the remaining 5-10% is offered to the private equity investor as warrants at zero cost.

Now my question. The real estate sector lost its sheen when land prices rose to obscene levels and construction inputs like steel, cement, equipment and consumables became unremunerative. The final product, a house or commercial unit could not be sold at a reasonable cost. When liquidity dried up, the highly capital intensive real estate sector lost its only lifeline for working capital – Bank / PE funding. That was the death knell.

So how is mezzanine structure going to solve the problem of absent cash flows? When you expect the payback in the form of part interest and part stake, cash flows matter all the more. How will the borrower meet the interest obligations? Equity may come cheap, but if the sector takes longer to recover and people continue to give priority to survival than property acquisition, how do they expect valuations to improve? Even if valuations improve, with equity markets in a downward trend, how long will they stay put with value erosion and no interest income?

Clearly more than a missing link here. May be the structure envisages high margin collateral to cushion the downside. But most real estate companies are already highly leveraged, no cushion will offer complete comfort ;-)

No more band-aid; Need bold fixes

2008-11-01T05:05:00.000-07:00

Just got back after a vacation to Mussoorie hills for over a week. Had a great time driving around the hills and eating choicest Punjabi, Tibetan, Chinese and South Indian food. It had been more of a `getaway’ - unless someone truly wanted to witness the market mayhem.

Now back to work. The first thing that strikes me in the morning is the now almost daily paean from Mint Street. They have done it several times in the recent past. Tell me – does it really matter?

If RBI is serious about liquidity reinfusion, it should by now have realized that the cuts of 50 basis points or 100 bps are loose change in these times of massive financial drought. Cash flows of businesses are fast drying up; the ones that have cash to spend are fearful of counter party risk. No one is trusting the other. There is no real economic exchange.

So I have a one line agenda for this crucial Monday meet, if it is meant to be that – facilitate Economic Exchange. Let's call it EE.

If the meet were ever to yield a positive outcome, it has to be by way of drastic measures. I for one think post cut repo rate at 7.5% is still a bomb. It has to be around 5% levels so that banks that borrow can make some meaningful credit forward. Why do I say this? I am glad my bank deposits earn me 11% if I park it in my mother’s (a senior citizen) name, but I am equally wary that the bank has fewer avenues to deploy that high cost money. How many takers will lift credit at rates higher than 14% (assuming that bank will have an administrative cost of 2% leaving it a margin of just 1%)? If ever they do, what business will earn still higher return so that they are able to pay it back to the bank? So I worry about the sustainability of that higher return that I get before moving on to worry about the probability of retrieving my capital.

So this is what I suggest to D.Subbarao, RBI guv. He shouldn’t just stop at cutting rates, he should inspire the banks to lower their lending rates and deliver EE. Money flow has to resume. Liquidity is the current that can drive the economy forward. We’ve all experienced it during the bull years April 2003 – Sept 2007 and we know the difference now. I would even go FM and SEBI should be infected by RBI’s bold moves. It should leave the doors open for every serious investor to walk in with his money and do business on our markets. That's EE for you. Short term measures and band-aid type fits and starts don’t mean much in these hellish times.

How about tax exemptions for equity investments for the next two years? Cut Dividend distribution tax? Lower income tax rates leaving more money in the hands of the investors? Think on these lines and surprise us on Tuesday morning bozzos... and see the markets giving a thumps up to that ;-)

The analyst and his forecasts

2008-10-12T19:18:00.000-07:00

The analysts are a shameless lot.

Their forecasts have been proved wrong time and again, still they don’t hold back. Wonder who pays them to dish out muck!

Goldman Sachs? Its analysts earlier predicted crude will touch $200 a barrel. It slid to $80 levels. Thank the consumers that lowered their demands. Now they guess it to touch $50 a barrel. Should we be scared it will climb back to $100 plus…?
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The crooks beat me by a wide margin

2008-10-12T18:42:00.000-07:00

It takes a lot to build a reputation. To ruin it, takes not more than a few split seconds or just some fast spreading SMS rumors. ICICI bank realized it lately when some small town sub-broker (bent on shorting ICICI stock) viralled mass SMS saying the bank is in trouble.

Result – stock price plummeted (Friday it fell by 27%) and depositors withdrew their funds. What began as a trickle in some remote Tamilnadu town soon spread across the country catching the bank unawares.

The bank management did everything possible – it’s CEO gave repeated assurances, got even FM and RBI / SEBI to make public statements in support of its inherent strength, stuck notices on ATM counters - to arrest the damage. But it seems the drain of deposits and goodwill has been massive, or so it seems after the seriousness of purpose with which it is going after the offenders – that includes a Tirupur sub-broker of Motilal Oswal and a mass SMS portal and a free research site (with disabled stock tip links)!

Talk of Web 2.0 empowerment! Like guns, the crooks use it first… Email? Spammers run amok. Bulk SMS? It’s the fiefdom of hole-in-the-wall operators and pranksters. Now a small town sub-broker giving India’s second largest bank a run for its money - quite literally! Wish I could do something positive – say, build my business – by unleashing its power. But that I’ve found is not as easy. The crooks beat me by a wide margin! All that I could manage was to reduce my exposure to ICICI bank. May be silly. But, they say only the paranoid survive. Who is not afraid…?

A bailout for everyone?

2008-10-10T21:41:00.000-07:00

Bailout – seems to be the latest trend. After Wall Street banks lined up before the US Fed, it’s the turn of India’s private carriers before the Ministry of Finance.

They want the government to bail them out by -

- Offering Interest-free loan with a “bullet” (one-time) repayment after three years
- Bringing ATF under ‘declared goods’ for uniform sales tax
- Reduction or withdrawal of duty on spare parts for aircraft maintenance
- Scrapping customs and central excise on ATF
- 50% reduction in airport landing, route and terminal navigation charges for 24 months
- Freeze on further increases in airport service charges

Vijay Mallya (Kingfisher Airlines) has an interesting aside “The government has not moved at all. It seems it wants everybody in this country to travel by train because the airlines are bleeding heavily”.

Imagine Vijay Mallya in Punjab mail…!!!

Heading into anti-bubble?

2008-10-05T04:26:00.000-07:00

I think we are getting into some kind of an anti-bubble.

In a bubble, prices become disconnected from values because purchasers believe that, whatever the fundamentals, they will soon be able to sell what they have bought at a higher price. The bubble must burst eventually because the supply of new people willing to buy at ever higher prices will be exhausted, and generally bursts sooner than that because people come to realize this.

In the opposite of a bubble, prices become disconnected from values because sellers believe that, whatever the fundamentals, they will soon be able to buy what they have sold at a lower price. The anti-bubble must also eventually collapse because the supply of new people willing to sell at ever lower prices will be exhausted.

And then there are some that chooses to live in denial. And there are others that believe otherwise. Where do you think we’re headed?

Bailout bill passed; now comes the hardest part

2008-10-04T07:18:00.000-07:00

Yes. Getting the $700 billion mother of all bailout up and running.

From what it seems like Hank Paulson and his crack team (filled with ex-investment bankers, attorneys and accountants) has its priorities cut out. It will have to decide which assets to go after first, and who to buy them from. Congress has given Treasury wide discretion to decide what assets to target. Although most of the funding is likely to go toward buying up mortgage-backed securities and whole home loans still held on the books of the lenders who originated them, Treasury can also buy up construction loans, home equity loans, or even credit-card debt or car loans if it decides that is necessary.

Does that mean Treasury is likely to start out buying from banks, in an effort to shake the credit markets back into shape – biggest banks first, in that order? If so, whether to go after widely held MBS or exotic one-of-the-kind stuff…? Whoever Treasury buys from initially, the biggest issue is one of pricing the assets since market for these securities has dried up, making it hard to figure out what any of them are worth amid fears that the underlying mortgages have gone sour faster than expected. If they price it too low, banks won’t attend the auctions. If they price it too high, the government will be taking too much load. The task will be somewhat simpler when Treasury buys assets from firms that have already marked down the value of their assets to current fire-sale prices. Anyways, the initial success of the plan should have a multiplier effect in helping bolster other banks, even if they don't take part in the auctions. By purchasing assets similar to those that other institutions hold, Treasury would essentially establish a new market price, which the nonparticipating banks could use to improve their balance sheets. That might also reassure other investors enough that they start buying as well.

The irony is, Paulson will not be able to find asset managers to run this that don't already have distressed assets on their own books; there's no one else to do it. Hiring people to fix the very problem they helped create will be an issue. For that matter even Hank Paulson is an ex-Goldman Sachs alumnus – a part of the problem in a way. Conflict of interest or not, success of the program could hoist Hank Paulson a big hero, may be win him a candidature for next Presidency. Failure would mean a return to economic dark ages - not just for America, if the downward drift of global markets (post passage of the bailout bill) is anything to go by!

Parsing the crisis

2008-10-03T19:50:00.000-07:00

T.T.Rammohan squeals in Business Standard

On risk management and quality of leveraged assets

“The top investment banks have vanished as a class [not] because they were highly leveraged: In financial institutions, leverage or the ratio of debt to total assets, can be misleading as a measure of financial risk. The management of asset risks is equally important. A financial institution can be highly leveraged but if its assets are of high quality or are highly diversified, the institution is not exposed to high risk….

Investment banks may have had a leverage of more than 20:1 but some high-profile banks in Europe today have even higher leverage. What counts is leverage after adjusting for the risks of various assets. The European banks in question would not be allowed to operate if their leverage was not in conformity with regulatory norms. ….The trouble with the investment banks was not so much leverage as poor asset quality and heavy dependence on short-term funds.”

On short selling

“Short-sellers were right on Lehman, so short-selling should not be banned: Yes, short-sellers were right in sensing that Lehman had more problems than it had disclosed. But, in times of crises, it makes sense to ban short-selling because a fall in share prices sets off a vicious spiral that pushes an institution quickly into bankruptcy. A fall in the value of equity causes leverage to rise, which causes the debt rating to fall. This, in turn, prompts demands for higher collateral, which forces distress sale of assets, which erodes equity value. Before you could say ‘Hank Paulson’, the firm is gone. In financial crises, as in times of war, the normal rules of information must stand suspended and this applies to price discovery [enabled] by short-sellers.”

Splendid. Wonder how well K.V.Kamath’s defense goes down with people!

Foreclosure of FCCBs?

2008-10-03T09:19:00.000-07:00

Remember FCCB frenzy of 2003-07 period? Almost every public listed company went ahead and borrowed in foreign currency egged on by the cheap (Yen carry) debt available then. When mixed with the rising stock markets back in India, the convertible bond was simply irresistible as a funding option for financing acquisitions and new ambitious projects. The option looked so alluring given the bubble valuations that most companies got. Let me put this in perspective with one example.

Take for instance Subex Ltd. This was known as Subex systems before, a micro cap company that was into developing software for telecom fraud management / revenue assurance (billing) solutions. The company was doing fairly well when the market frenzy drove its stock price up from Rs.150 to Rs.850 levels. But then the inevitable happened and it was bitten by the M&A bug. Acquisitions by Subex include the fraud management assets and technology of Mantas in March 2006, Lightbridge in August 2004 and Alcatel in July 2004. Along came street smart merchant bankers that peddled GDR / FCCB routes and Subex never looked back. Then it bought out UK based Azure solutions in April 2006 at a phenomenal price of over $140 million and its balance sheet was by now stretched way too thin.

The promoters recognized the fortune and smartly began to cash out. Now they hold just 9% of the company. Majority shares are with FII, GDR custodians and general public including body corporates. Now the FCCB is coming home to roost. FCCB outstandings are currently about Rs.846 crore and conversion hurdle is far away at Rs.897 per share, whereas its stock is currently languishing at Rs.82. So the investors are certain to press redemption in which case the company’s net debt will rise to Rs.1057 crore. Peg that against revenues of about Rs.178 crores and a net loss of Rs.78 crores for trailing four quarters. [EPS is –Rs.22]

Can this company with a negative earnings Rs.22 per share repay a debt of Rs.1057 crore? Of course, we know worst cases have turned around. I can think of ESSAR STEEL that defaulted in its FRN obligations back in the 90’s. The first of its kind to get that ignominy. But that was a steel company that collapsed under the weight of industry downturn. Not because of overstretching its balance sheet for adventurous acquisitions. So when the industry turned around and its realizations got better, the company came back into black and with a few calculated forays into Oil, Shipping and Telecom – it became a trailblazer in the Indian stock market history.

Subex is not alone. The list is long – Aurobindo Pharma, Hotel Leela, HCC, Bajaj Hindustan, Ranbaxy… so it goes. Never forget the fundamentals. Go for a forex loan only if your earnings in the same or a stronger currency is enough to cover the projected outgo in constant currency terms. Better still, have the proceeds deployed in tangible assets that can be liquidated without jeopardizing the solvency status of the company. Acquisitions can wait.

The symptom is worse than the disease

2008-09-30T04:34:00.000-07:00

So, DLF goes about the mock play – sorry buyback.

Earlier I had concluded that such false bravado is a symptom of DLF management being new to the listed public market. That explains why they try to zig and zag with the price action in the markets. Markets dance to a non-rhythmic rhapsody, not a synchronized symphony. Company managements can't keep pace with it without breaking down. Stock prices may go up or down in public markets, but management’s priority should be effective supervision of operations. By announcing a Rs.1,100 crore buyback when stock prices sag while having plans to raise QIP of Rs.10,000 crore in hardly six months down the line, they betray impulsive overreaction. As I said before, DLF may be a large enterprise; but they lack the maturity required to stay put in that bracket.

Get your act together, IT vendors...!

2008-09-28T21:27:00.000-07:00

Readers of this blogstream should be wary of my screams for innovation in India’s IT vending space.

Now here is an analysis that explains why overwhelming focus on one sector – Financial Services – is extremely vulnerable. With the Wall Street turmoil, some of India’s big IT outsourcing vendors face a frosty weather.

I shall repeat. Go beyond BPO, ADM and easily replicable services. Differentiate. Make meaningful dents in diverse high-end fields like system integration, data center management, remote architecture support, process automation coupled with product innovations that stun the markets with their utilities and features.

And…And…And… Focus on domestic market. You’ll be in far better control. See Bharti has awarded its $1 billion IT infrastructure maintenance contract to IBM, not to any of our famed vendors ;-)

When balls choke up your lungs, hardly can you talk

2008-09-23T19:42:00.000-07:00

Candid admission by KKR. Given that the buyout firm has not yet gone public, that frankness is quite refreshing. Yet unusual by Indian PE fund manager standards, huh?

Yet it is. More to follow.

”The lack of credit has materially hindered the initiation of new, large-sized transactions for our private equity segment and, together with declines in valuations of equity and debt securities, has adversely impacted our recent operating results,” KKR said in its SEC filing.

The firm’s total investment loss for the first half of 2008 compared with a total investment profit of $3.4m in the first half of 2007. Its net loss for the 1st half 08 totals $1.1m, compared with a profit of $667.4m for the same period 2007.

KKR, which has made investments in numerous household names such as Toys R Us, mattress maker Sealy and asset manager Legg Mason Inc, said its fee income in the first half of the year was $135.3m, compared with $115.4m a year ago.

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Imagine the fate of India investments of PE funds. There is far less swagger in their gait and I hear them talking a lot less these days. When balls choke their lungs, they just can’t talk; let alone getting candid ;-)

Killing I-banks is stifling innovation in structured finance

2008-09-22T17:56:00.000-07:00

In a watershed moment, Goldman Sachs and Morgan Stanley last night abandoned their status as independent investment banks (and morphed into larger Universal Banks) in a move marking the end of an era on Wall Street. While the change appears to be a technicality, it means that both banks have equal and permanent rights to access emergency funds from the US central bank, the Federal Reserve – their only lifeline to stay alive. They will also be far more tightly regulated.

Well, in a way the Fed has ruled, though in this late hour of credit crisis, enough is enough. Suddenly I hear all Wall Street honchos, analysts and even erstwhile CEOs of these investment banks publicly admitting that it is the way to go. The era of independent investment banks had to end – as it has, now.

I look back a bit. Is it so simple? Isn’t it a bit ironic that the time-tested business models of the independent I-banks have suddenly become unviable? Were they inherently weak or has it been the lack of prudence that did them in? Or is it the lack of oversight and the unfettered, excessive leverage in ratios of 33:1 to blame?

Specialists are specialists. They will have to stay that way. Can someone bring cardiology, a specialized domain under general practitioners because a few recent heart surgeries performed by cardiologists have failed?

I have a feeling they are prescribing the wrong medicine for the illness. What do they want, United Socialist States of America?

The USSR brand of socialism failed because it was founded on anarchist theory – everybody’s property became nobody’s responsibility. Amercian free market economy is based on greed that is just human instinct like lust, envy or anger. They implore one to beat competition and excel. They are creative spurs, not unsystematic or anarchist self-serving socialist wet blankets.

Get local. A Tata Steel ranked 65th in the global steel industry could acquire a Corus (ranked 5th) because of the liquidity provided by those enabling models. Now it’s going to be a slog all the way for the ambitious. This is like turning off the tap on growth when all that was needed was enforcing stricter compliance by a bunch of alert regulators. There is a strong case for these I-Banks to remain independent for the global economic engine to keep purring. The leverage that provided liquidity to help the poor afford homes is not entirely a bad idea. The level of social benefits that it entailed is not to be easily forgotten. The fault lay in promotion of fallacies like the house prices will always rise. Blame it on running poor credit checks on borrowers and allowing reckless leverage models. At best, are they not simple process lacunae? More importantly, haven't they been emitting strong enough signals for the Fed and SEC to reign them in, which they chose not to? Isn't it something that can happen even now, under Universal Banking? You agree?

I-banking as a division of another commercial bank will sure lose focus, its innovative drive and finesse. It can never be as nimble if it is burdened with the yoke of reserve requirements and Credit-Deposit ratios. It will lead to sub-optimal performance and deals won't get done in the same pace, at least. It will certainly fail to attract the best brains that can thrive only in a liberal, innovative ecosystem that spurs creativity and ingenuity. Can we make do with Levi Strauss type archaic regimes devoid of dynamic innovative spirit? Can we honestly say we never need structured finance innovations (imagine the convenience of a `sale and lease back’ and other factoring mechanisms) with changing times and dynamic business needs? That would be pure tactlessness wearing the masks of precautionary excesses. Just not up.

We're easily the most resilient amongst BRIC

2008-09-17T20:14:00.001-07:00

Are we the best amongst BRIC?

Here is the update on the stock markets of Brazil, Russia and China. I think comparatively India is far better.

In Brazil, yield spreads of Brazil's government overseas bonds over comparable U.S. Treasuries, as measured by JPMorgan's EMBI+ index, widened sharply, reflecting an increase in investors' risk aversion toward Brazilian assets. The index 11EMJ showed the country's bond spread widened by 39 points to 349, the highest since November 2005.

In Russia, Government and central bank officials were locked in talks with the chief executives of Russia’s biggest investment banks throughout most of the day on ways to halt the market collapse, which has wiped nearly $800bn off the country’s stock exchanges in a matter of months and sent stocks spinning down to levels last seen in 2005. The two main bourses, the MICEX and RTS, had suspended stock trading until further notice from the state’s main financial regulator.

China? Please don’t ask. Here is a report from Epoch Times I had linked above -

“The truth about China’s stock market is actually not a secret, and most investors probably already knew it. That is, China’s stock market is a tool used by the government to re-distribute and re-organize social wealth on a grand scale, which means that it is a tool to clean out Chinese people’s savings accounts. The biggest winners in this process are, of course, government officials and their relatives who are the most well-informed about the actual value and re-organizing plans of those that control state wealth; as well as institutional investors who collaborate with them and who rely on insider tips to control the stock market. Those people have already made huge fortunes in the process. This is the truth about China’s stock market….

Actually, the goal of China’s stock market was not purely an economic one when it as originally established. When former Premier Zhu Rongji set up stock market in Shenzhen, he said that China’s stock market was meant to get money--to get money in the market and give it to companies that were unable to get money, and because these companies were unable to make money, they needed monetary support.

China’s stock market has been established to operate like an ATM for the listed companies. For the majority of the listed companies, economic reform is nothing but a mechanism to trap money. Many heavily indebted State-owned companies have been listed in the stock market after re-packaging. All of a sudden, they become the new stars in the market with easy loans and finance. The foundation of a stock market is the listed companies. With a weak foundation, how can any high stock price be affordable? The deflation in stock prices is therefore predictable.”

So, India - is far better any day. We just have 12% plus inflation and some high interest rates. There is no sham in the system, the companies are real and investors are long term. Stay invested if it is your personal savings and not borrowed funds. We're in for some not so quick turnaround - to allow the dust to settle around the world. As for savvy global investors, it seems to be their only emerging market bastion that's left...

Doctors failed to diagnose own symptoms

2008-09-17T20:14:00.000-07:00

A.V.Rajawade makes some intuitive statements on the Wall Street fiasco. The best I quote

“…With total assets of $640 billion, [Lehmann Brothers] would be the largest ever bankruptcy filing in history. Those who charged millions of dollars as fees for advice on restructuring or selling others’ businesses could not manage to save their own…”

I concur. I have been way too immersed in the I-Banking sector to refute that. I know their mediocre and credentialist ways. In the PE world, mediocrity just rules the roost.

Dreamworks - high on ideas, low on fuel

2008-09-10T08:13:00.000-07:00

The much hyped deal between Steven Spielberg’s Dreamworks and ADAG’s Reliance Big Entertainment now rests at the mercy of JP Morgan Chase.

Although Reliance is poised to invest $500 million in the venture for a 50% ownership stake, that deal hinges on the group getting a firm guarantee from lead bank JPMorgan Chase to raise up to $700 million in debt financing to satisfy the business plan to make four to six movies a year. JPMorgan, which will not underwrite the entire portion of the loan as DreamWorks had hoped, will now attempt to syndicate it -- and that could take months.

Did you say months? That soon? Given the turbulence in the wall street, Spielberg will not have many options that are not already underwater.

Crude breaches $100; So what?

2008-09-10T07:57:00.000-07:00

Quoting at $98.49 a barrel, crude violates the $100 psychological level. Since crude surged to a record $147.27 a barrel on July 11, it has tumbled by over $40, or more than 27 percent. Still, prices remain close to 14 percent higher this year than in 2007, and a barrel of benchmark crude still fetches four times what it did five years ago.

Now hang on, don’t rush to the gas stations. The dollar has breached Rs.45/- level, so you pay almost the same in dollar terms, pal ! Mukesh Ambani’s mole in cabinet has already sounded you out ;-)

Way to go, Guv

2008-09-10T05:44:00.000-07:00

Is it upstart flamboyance or anticipatory bail application? I am not too sure as I read into RBI guv D.Subbarao’s statements barely three days into office.

While sticking to 8% growth peg (bravo!), he uses terms like “mathematical inevitability” – now what does that mean? Does he believe the economy could outwit slowdown advocates or does he swear by the efficacy of statisticians at his disposal to bring up that magic number or does he put the onus on the fickleness of number games?

Early days anyway. But he did mention “shared responsibility of RBI and all other regulators” – now that’s an inclusive statement. Even if his faith in the economy (or his statisticians) holds out or not, he will not take it in his chin, alone.

Can’t think of a better way to begin the innings ;-)
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Wait until they mop up

2008-09-08T18:45:00.000-07:00

More on DLF buyback.

Realty and infrastructure is a capital intensive industry that is badly mauled by the global liquidity crunch. With demand for high end luxury homes and commercial complexes waning, the focus is on low margin budget buildouts. Even as realty companies conserve every rupee they can to meet the resources crunch, DLF worried about the falling share price (down by more than 50% from its peak of Rs.1225 in Jan 08) and announced a Rs.11 billion buyback (at price not exceeding Rs.600/- a share) to reassure itself and its minority investors.

Now is that a wise decision at this crunch time? As a long term shareholder I can’t care less. Know why? This whole buyback exercise is a temporary prop. Remember what happened to Ranbaxy stock recently? Even institutional shareholders like LIC and GIC tendered their entire holdings in the offer and the stock fell to Rs.450 levels from Rs.580 post buyback. So if you are a long term investor and want to pick up asset rich DLF cheaply, just wait for the mop up exercise to be over. Even after a recent downgrade, Deutsch Global values DLF NAV at Rs.532 a share.

Not bad. The news is that after the statutory cooling period of six months (for fresh capital issues) is over, DLF has plans to raise Rs.10,000 crore by way of private placements. When the market knows this, the buyback offer is just false bravado... The problem is DLF may be a sizeable enterprise; but its management is new to public markets behavior. So when the stock price falls because of market's general indifference towards the realty sector, DLF management is overreacting.

They too will learn...!

"Follow the money"

2008-09-07T00:31:00.000-07:00

When you have almost three-fourth of the world economies reeling under trade deficits and hyper inflation, companies like Nokia issuing profit warnings, it’s time to explore alternative destinations to do business. After all, the dictum is – follow the money :-)

I was recently part of the team that did some early due diligence for a Korean firm interested in issuing Islamic bonds in the Persian Gulf and far east. Yes, Islamic bonds. But why should a Korean major drool over religion tainted security? The question was not for us to ask, they were paying us. But as we delved deep into the task, a few facts got cleared.

Sharia-compliant mortgages are typically structured so that the lender itself buys the property and then leases it out to the borrower at a price that combines a rental charge and a capital payment. At the end of the mortgage term, when the price of the property has been fully repaid, the house is transferred to the borrower. That additional complexity does not just add to the direct costs of the transaction, but can also fall foul of legal hurdles. Since the property changes hands twice in the transaction, an Islamic mortgage is theoretically liable to double stamp duty. So how do we structure it?

Confidence is one thing, hyperbole another. Most of all, the industry’s expansion is tempered by its need to address the tensions between its two purposes: to serve God and to make as much money as it can. We faced difficulties in design and structuring an instrument that has to comply with Sharia – that needed to be communicated to the client, a non-muslim. Hell, it needs to be certified not by a professional rating agency, but by Islamic scholars that are terribly in short supply! So we struck a deal with some American financiers that recycle documentation rather than drawing it up from scratch. But to our amazement, we found something pretty weird. The contracts they now use for sharia-compliant mortgages in America draw on templates originally drafted at great cost for, hmmm… no, you would never guess it - aircraft leases!

And we thought we have to refine our systems and processes to adapt to a changing financial world order. But there are imperfections and mediocrity galore even in the most credentialistic circles. That knowledge allows us enough headroom for creative neglect and recreation. We could even be setting trends with what we seek to build. Now we are all charged up. Someone is paying us too.

Why do you think I love this business? I am on my way, getting to be a Sharia specialist ;-)

Rip the control freaks; they ran out of arguments

2008-09-04T20:16:00.000-07:00

Nice argument in Business Standard editorial seeking sugar decontrol.
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Why should the cabinet put on hold the proposal to free up sugar supplies by the food and consumer affairs ministry? What are its concerns?

Do they fear rise in sugar prices fueling inflation that is already high? Think again. The 11 million ton carry over from last year’s record production covers 55% of our annual consumption of 20 million tons. Even if the acreage under cultivation drops, it’s absurd to assume that it would drop over 45% - especially at a time when sugar is turning a multi-use crop needed for production of ethanol and even power generation beyond just sugar and alcohol. Decontrol in fact, allows sugar mills to press more supplies from the buffer stock into the market that will help push the prices further down, not up.

Will decontrol make PDS sugar costlier because state governments will have to buy from open market when levy is abolished? Not at all - since the proposal recommends central government to compensate the state governments by subsidies that was so far being borne unjustly by the sugar producers instead of the government. It will also eliminate the arbitrary price determination by central /state governments that often doesn’t consider market realities and result in expensive litigation.

I add one more point. How long can governments mask economic realities? Prices crash during times of over production and will creep back up when there is a shortage. It happens with Gold, Steel, Cement, Paper and all commodities. Any attempt to artificially control prices will only lead to manipulation and corruption. Why have the illusion of control and not just let go? We had controlled petrol, diesel, fertilizers and sugar and still we got a double digit inflation. So why harp on to something that is fast running out of arguments?

SIP for Land acquisition...?

2008-09-03T22:44:00.000-07:00

And you thought small investors learn from big investors. Well for major corporates in Real Estate it seems to be the other way round.

DLF is setting up a Land Acquisition Fund – by transferring 15% from its annual revenues to its corpus to avail of any good buying opportunity – akin to Systematic Investment Plan (SIP) often recommended to small investors for buying mutual fund units every month. The advantage being, a small investor need not time the market and can take advantage of market at every level by investing fixed sums of money every year.

Good idea? What do you think? Next what? Pay STT and gain LT capital gains exemption?

Tight rope walk

2008-09-03T20:00:00.000-07:00

Bolstered by the initial success of its bid to acquire UK-based Imperial Energy, state-owned Oil and Natural Gas Corporation Ltd (ONGC) is planning to list its wholly-owned overseas exploration subsidiary ONGC Videsh Ltd (OVL) sometime in 2009. Well, the aims are clear – to get a premium valuation from international markets, build up its net worth (share premium stands credited to General Reserves can be capitalized through bonus issues to existing shareholders later - helps expand paid up capital) besides gaining acquisition currency.

But being registered in India, regulations require a domestic float before an overseas one.

Except that there is one hitch. The Indian government will be itching to use its revenues to subsidize the loss suffered by state owned oil marketing companies (like it does with ONGC) that sell petro products at a steep loss – to keep it affordable for the masses. No government ever had the guts to say `No' to subsidies so far. Now if OVL is listed abroad, will those foreign shareholders like their company to subsidize oil guzzling Indian masses? Will they understand APL – BPL divide? Looks like a tightrope walk. OVL will have a tough time convincing Indian government why it can’t subsidize India’s oil marketing companies and conversely will have it stiff explaining why it should support Indian government’s efforts in controlling oil price parity while on roadshows that precede the IPO.

Resurgere surge - stock in play?

2008-09-02T05:49:00.000-07:00

Resurgere mines (RESU.BO: Quote, Profile, Research) IPO debut took my breath away.

Coming at a time when bearish overtones rule, the miniscule 4-4.5 million shares offered in this IPO received bids of about 1.2 times. A very lukewarm response. In normal conditions one would call it a “scrape through”. Debut listing price was also at a very marginal premium of Rs.2/- (i.e. Rs 272.05) on the BSE, over its issue price of Rs 270. No marked bidding frenzy was observed when the book was open. QIB had bid for 1.3 times and HNI about 2.4 times. Retail turned their back on it with just 0.4 times. CRISIL had assigned a '1/5' grade to the offering, citing the management's limited track record in the iron ore business and the fact that the company's financial returns are vulnerable to spot price movements of iron ore.

Normally such dubious issues begin to slide post listing or just maintain price levels. But this was not to be. What happened later was astounding.

Within minutes of listing yesterday, the scrip touched a high of Rs 299 and over 3 lakh shares exchanged hands. The share price surge in a weak market at record volumes - 33 million shares on the BSE - raised eyebrows given the low rating and cautious brokerage. It closed at a whopping Rs.524, a premium of about 100% on day 1. Today the scrip rose by another 20% and hit the upper circuit to close at Rs.625.

Clear signs of something-wrong-somewhere. But not enough for SEBI to sit up and take notice. May be, we should wait for a couple years for CBI to ferret out the rot, well after the smarts have pasted it on unsuspecting investors that might get caught in the wild dance...

The leftist misfit

2008-09-01T23:42:00.000-07:00

In Buddhadeb Bhattacharjee, the progressive Chief Minister of WB, we get to see a helpless reformist that doesn’t enjoy the support of his party colleagues.

After Mamata Banerjee, the Trinamool Congress leader managed to stop work on Tata Nano project at Singur, now it’s the turn of real estate major DLF to push the CM with “act-fast-or-else-we-move-out” language. DLF has plans to develop 4840 acres at Dankuni, 20 kilometres from Kolkata at a cost of Rs.330 billion. It has paid Rs.2.7 billion to the state government as advance, but only 20 acres have been acquired so far.

Recently while meeting corporate leaders in WB, to a question on “government-sponsored bandhs” and “Opposition-sponsored bandhs,” the Chief Minister replies: “I do not support any bandh. I agree it is not helping anyone...But unfortunately as I belong to one party and they call a strike, I keep mum.”

Then he added, to loud applause: “But I have finally decided that next time I will open my mouth.” Woof! This is spunk.

Could this be the man the WB can afford to disgruntle? It’s difficult to make up our minds who has erred in this whole drama. Have the govt. acted in haste in allowing these industries to acquire farm lands of poor farmers? Have they not been offered the right prices? Have the jobs offered in these projects adequately compensated for the loss of farm income for those land owners? And finally, what else does Mamata want?

Buddha is too right to remain a leftist misfit. Mamata didi looks more left than right. She should join the Left and Buddha should leave WB and head for Gujarat, Maharashtra or other industry friendly states if he wishes to feel welcomed (Read “CPI(M) distances itself from Buddhadeb's remarks “ topic)

That is commitment

2008-09-01T20:05:00.000-07:00

43 years with L&T, 33 years in the same house and 15 in his first boss' room - constance defines the man A.M.Naik, Chairman and MD of L&T, who's building much of India's infrastructure.

“L&T is my hobby, the rest is work,” he says in this interview.

His post retirement plans include moving to an apartment near L&T’s Powai factory so that “when I die, I’ll be facing L&T”.

That is some commitment quite!!! Remember Naik is a professional CEO, L&T not being his family business…

Smart Cricket

2008-09-01T19:40:00.000-07:00

Rajasthan Royals won the DLF IPL cricket tournament is old story. Now the champions are going public – not with their fame, with private placement and further on the stock markets with an IPO!

In January this year, Rajasthan Royals, the only foreign-owned team (investors include Lachlan Murdoch, son of Rupert Murdoch) among the eight IPL franchisees, made a bid for $67 million for the team, the lowest among all the DLF IPL teams. Led by Shane Warne, the Royals won the tournament. Reportedly the only team that is in the black — first-year expenses were estimated at $20 million and revenues are in the same range.

Wonder what other franchisees that are still licking wounds feel as they read this…

"Remember, nobody got hurt between 2003-07"

2008-08-30T11:23:00.000-07:00

Manjula Chawla and Srinivasa Rao debate `treaty shopping’ and `round tripping’.

"Treaty shopping" occurs when a third-country resident derives benefits from a tax treaty intended to serve only the interests of residents of specific bilateral treaty nations. "Round tripping" refers to the practice of local investors that take money out of the country and bring it back in under the guise of a non-resident to escape the tax net.

I say subjecting capital to excessive regulation is dumb because it encourages smart people to lock up capital in unproductive boxes. Say No to drug money or terror funds by all means. But capital that takes a trip just because of excessive tax rates should be viewed through a different prism. Keeping in mind our infrstructure needs, it should be winked at.

I would rate it as enterprise. It is smart money anyway. If you don't let it flow, it will head elsewhere. Isn't it downright stupid to let go ?

Why spoil the party? Let the good times roll. Remember nobody got hurt between 2003-07 bull run ;-)

What say you, reader?

For some, a bubble is forever

2008-08-28T21:43:00.000-07:00

This one looks like a googly. What to make of this?

An Indian company [Great Easter Energy Corporation (GEEC) promoted by Y.K.Modi – that is into CNG exploration and production] listed in AIM of LSE in London is now seeking to issue shares in the Indian market. Reportedly a Rs.10 billion issue, 50% of which is an offer for sale by existing GDR holders (they call it `sponsored’ issue quite funnily - even as the GDR holders are seeking to exit the venture!). About Rs.5 billion will accrue to the company out of the issue proceeds (and remaining Rs.5 billion to exiting shareholders). GEEC currently has accumulated losses of Rs.216.37 million in its balance sheet.

Net increase in paid up capital will be just Rs.50 million or so. That means a fat premium of close to Rs.199/- per Re.1/- share in a down market even as the company is barely into revenues (Rs.49.39 million for FY 2007-08). The company has initially raised $20 million in December 2005 (1$=Rs.44 then) – that means the investors are in a hurry to recoup 5.68x their initial investment. Begs the question - why the hurry?

It will be fun to watch how this rip-off IPO is rated by the agencies and how it gets palmed off to investors – both suspecting and unsuspecting. But the real fun will be to watch its outcome, that will be an indicator of the level of investor gullibility ;-)

Issuers should take Merchant Bankers to task

2008-08-27T22:35:00.000-07:00

Talk of clumsy merchant banker allowing semantic distortions and when hauled up by SEBI, refuses to yield. Outcome? Botched business plans of issuers!

SVPCL, a Hyderabad based manufacturer of computer stationery floated its IPO in October last year, and raised Rs 34.5 crore. Though the issue was fully subscribed, BSE denied permission for the shares to be listed on the exchange because of an apparent misstatement in DRHP. This was because UTI Securities, the lead merchant banker responsible for post-issue compliances, had expressed its inability to give an undertaking as required by BSE under Section 73 of the Companies Act, 1956.

The IPO, which got subscribed little over one time, was stalled after BSE refused listing permission as the company had inadvertently mentioned on the cover page of its red-herring prospectus that at least 50% of the net issue to the public shall be allocated on proportionate basis to QIB. The legally appropriate term to be used was ‘up to’, and not ‘at least’.

Why not the merchant banker be hauled up for errant drafting that they do? Should they not make it up to the issuers? Who is responsible for semantic distortions creeping into DRHP?

What else the issuer pays fee to the merchant bankers for? If they were to draft it, why would they hire a merchant banker? The CFO and Company Secretary can sit together with lawyers and bring about even an IPO, except that SEBI mandates appointment of Merchant Bankers. Now that it has lost the case against the exchange, SVPCL must file proceedings against UTI securities for refund of fees and for damages...

Economy? Go to hell !

2008-08-26T04:15:00.000-07:00

“The battle against inflation will likely come at the expense of economic growth, which looks set to decelerate in the second half of 2008 amid cooling domestic demand and persistent external weakness,” says Sherman Chan, an economist with Moody's. The recent decline in global oil prices will not lower India's rate of inflation, which will remain "stubbornly strong" in the coming days despite monetary tightening by the central bank. Until next June, energy prices will also remain notably higher on a year-ago basis because of the cut in subsidies two months ago. The rise in global commodity and food prices is still a major driver of inflation in India. The retreat of oil will only help ease the pressure on the government to further raise domestic energy prices, according to Ms.Chan.

Makes sense. Now read what the Deputy Chairman of Planning commission Montek Singh Ahluwalia has to say. The fiscal deficit target set at 2.5% of GDP for 2008-09 is set to be higher by a significant margin. It is estimated the deficit will be breached by almost twice the budgeted target due to high oil prices and a whopping fertiliser subsidy bill. There had been a substantial increase in off-budget numbers and there were good reasons for this. He said the fiscal deficit is not a long-term problem as, next year, some of the increases would not be repeated and a significant revenue buoyancy would help ease the situation.

All hopes. On the ground inflation remains the growth killer. RBI can raise interest rates, mop up dollars to arrest a falling Rupee (that inflates oil bill) and introduce monetary measures like hiking CRR and Repo rates. Now the key element is augmenting commodity supplies. Who controls that? Commerce and Industry Ministry? It’s just a toothless caricature of its once powerful self (when quotas prevailed and licence raj was full on). Now I conjure up its icon Kamal Nath only as our emissary at WTO to make sure the talks fail!

Enough drama. Getting back to reality. Raw material costs are up 26% while interest charges are substantially higher at 34%. But instead of passing on these higher costs through price hikes, companies have retained them on their accounts so that growth is not compromised. Is this compromise sustainable at such low net margin growth? But then, there are more important issues to resolve!

How fair is Fair Market Value?

2008-08-25T23:37:00.000-07:00

The whole world seems to despise Fair Value or Mark-to-Market (M2M) accounting standard that is, what an asset would be expected to fetch right now in a sale. It’s when regulators enforced it, the banks had to expose their ugly underbelly that led to massive write downs. It now stokes a fear that whether the liquidity crisis will eventually lead to a solvency crisis. As holders of mortgage-backed securities (MBS) and the like revalue their assets at fire-sale prices, they are running short of capital—which can lead to further sales and more write-downs. Are the bean counters ensuring a crash? Asks the Economist.

So is historic cost accounting an alternative? Hardly. It could be worse. In a crisis prices fall until bottom-fishers start to buy. Yet when assets were booked at their original price, rather than at market price, banks could delude themselves—and investors—that dross was gold. Look at Japan, where the economy was sunk for most of the 1990s by stagnant loans to “zombie” companies. Historic-cost left investors in the dark about valuations; it was also prone to fraud and fraught with moral hazard, since sloppy lending went unpunished.

It would be perverse to ignore market signals when finance is increasingly based on broad capital markets. Fair-value accounting is indeed flawed. To paraphrase Winston Churchill, it is the worst kind of accounting, except for all the others. But one can be careful on selection of the benchmark.

what it takes to discipline

2008-08-24T00:51:00.000-07:00

So it takes huge 6.07% fall in quarterly profits to discover self discipline….
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The PE bland dish

2008-08-20T23:52:00.000-07:00

In the spiceland of India, nobody likes a bland dish!

But that's what PE funds have lately become. I revisit their fundamentals. Private equity investing may broadly be defined as "investing in securities through a negotiated process". The majority of private equity investments are in unquoted companies. Private equity investment is typically a transformational, value-added, active investment strategy. It calls for a specialized skill set which is a key due diligence area for investors' assessment of a manager. The processes of buyout and venture investing call for different application of these skills as they focus on different stages of the life cycle of a company.

This is the world view of PE and the reason why savvy investors buy into private equity funds, classifying them as a premium asset class and crediting its managers with superstar status.

But in India, the superstars hardly sizzled. Strategic input? My foot! They whimper and whine and take refuge in quoted equity. They settle for minority stakes, wield no great influence in the board and look no different from passive public market investors. So do their dull and dreary strategies and they do what an average investor does – see how they follow Rupee cost averaging.

I think the investors in these funds will fare far better buying Index funds. They can at least save all that management fee and the carried bonus they pay for bobbing up and down with the market sentiment.

Bonding with convertibles

2008-08-20T22:48:00.000-07:00

No I am not talking about sexy Alfa Romeos here.

Falling stock prices mean that investors have to increasingly rely on the bond part of the convertible securities for returns.

More than $1.4 trillion of equities worldwide are now on loan, about a third higher than at the start of 2007, data compiled by Spitalfields Advisors, the London-based firm specialising in securities lending, show. Almost all of that is being used to speculate shares will fall, according to James Angel, a professor at Georgetown University who studies short-selling.

Negative Yields Investors were willing to accept negative yields of as much as 11.5 percent in January to buy Reliance Communications Ltd.’s zero-coupon convertible bonds maturing in 2011, as the company’s share price on Jan. 9 climbed to a record 821.55 rupees, 71 percent higher than the 480.68 rupee conversion price set when the $500 million of securities were sold in March, 2006.

Investors are now asking for more than 5 percent yield to buy the bonds of the Mumbai-based company, India’s second-largest mobile-phone operator, as the stock has fallen 48 percent from its record, according to Nomura Holdings Inc.’s prices.

“This market is becoming a busted universe, offering little equity value,’’ as a HK based analyst Viktor Hjort said. “As stock markets are repriced, people should treat the share option portion of a convertible bond just as a lottery ticket and start looking at the asset from pure credit fundamental perspective.’’

But then there are many other wide open, lucrative avenues for ever enterprising investment funds.

The telco balls of brass

2008-08-19T23:56:00.000-07:00

Here. Admire the telco chutzpah. Telcos getting back with a vengeance with 3G iPhone pricing that is nothing short of a rip off. Get ready to pay Rs 31,000 for the entry-level 8GB phone and Rs 36,100 for a 16 GB memory. Both Vodafone and Airtel will launch the iPhone on August 22 and early reports suggest that they would be able to sell over 100,000 phones in the next 12 months.

It is much cheaper in the US (because the telcos subsidize it) where the handset is available for $199 (Rs 8,358) plus $99 (Rs 4,158) as an annual contract with the carrier that has the exclusivity. In India however, neither company will offer a subsidy.

The telcos here flout all license conditions but will shamelessly cry for a level playing field when TRAI chose to open up open access internet telephony to ISPs that are technically resellers and not carriers. Our experience with Indian carriers has been one of abject apathy to overcharging despite their vast customer base. Unless TRAI tracks down areas where telcos gouge Indian customers and direct them to slash costs, they will never. Opening up internet telephony is the latest.

But tell me something. Isn’t there a recession that we’ve been bracing up until a few days back? Now I hear folks queuing up to buy iPhone at nearly 3x the price that it sells in the US. Have we turned incurable gadget freaks or is it that we have suddenly discovered a ton of data to download or that we get lost on our way home without a state of art GPS or will we die starved of entertainment feed from much touted direct connection to YouTube that the 3G avatar is expected to provide?

Why not let go ?

2008-08-14T11:04:00.000-07:00

Why is the Government so much bent on micromanaging individual company financing decisions? Take ECB rate ceilings for one. They say for accessing foreign loans of 3-5 year tenor, the current interest rate cap is 200 bps over six-month LIBOR. For loans maturing beyond five years, the ceiling is 350 bps above LIBOR.

[Today 6 month LIBOR is 3.10 %. RBI wouldn't let Indian companies borrow at rates in excess of 3.1 + 2.00 =5.1% for loans of 3-5 year tenor. Contrast this with Indian bank PLR of 14-16%. Now which is beneficial to a borrower? Do the math.]

I have a client that is badly in need of funds to complete its commercial complex that is in its last leg. We have identified a willing lender in a foreign bank. But regulations stand in the way.

Now why would RBI strangle business plans? Well, I can understand the borrowing risks borne by individual companies do translate into an overall country risk. But this problem is already addressed by the overall annual cap on foreign commercial borrowings. Within the overall quota, the government must accommodate smaller companies, which may have to pay somewhat higher interest rates. Currently the bias clearly appears to be in favor of big corporate houses and, in fact, 30 per cent to 40 per cent of the foreign borrowing quota every year is cornered by three to four big industrial groups. The small- and medium-size companies suffer the most in an economic slowdown as they do not have the muscle of big businesses to withstand the pressures of business cycles. The Government by its diktat prevents them from borrowing at a higher cost, slamming the only way they can get lenders interested in them. In these times, policy must provide them succor rather than make things more difficult.

A company is best placed to assess its own risks. If a small company can manage its business efficiently even after borrowing a little dearer, so be it. Take the case of my client. Even if it borrows at 500 bps above 6m LIBOR, it would still be borrowing at just 8.1%, which is a good 600 bps below Indian bank PLR! But RBI says it's ok if you sink deep into high cost Indian debt, but says no to significantly cheaper foreign loans. Isn't this ridiculous? That too when we have a problem of surplus foreign currency reserves at about $300 billion at the last count! The industry is demanding this be relaxed in view of the general uptrend in interest rates globally. To the extent interest rates have moved up globally, it makes sense to relax the interest rate ceilings.

Will RBI relent? It will have to, soon. The Prime Minister’s EAC read the tea leaves and is confident of the ability of the financial sector, as also the maturity of the corporate sector to support the higher growth process. But for that to turn real, RBI should let loose all those strings.

any which way the cookie crumbles

2008-08-14T01:24:00.000-07:00

Did you say, bad times for I-bankers? Oh, Really...?

The smarts don’t buy it. They make money every which way. If they don’t get to do enough deals, they’ll make money undoing it.

"Yahoo shelled out $36 million in the first half of 2008 to the outside advisers that helped the company navigate stormy buyout talks with Microsoft and the ensuing proxy threat from activist investor Carl Icahn.

Yahoo leaned on investment banks Goldman Sachs Group, Lehman Brothers Holdings and Moelis & Co., and law firm Skadden Arps Slate Meagher & Flom, after Microsoft made its initial $44.6 billion offer, which was made public in February.

The negotiations collapsed in early May when Yahoo rejected an even richer $47.5 billion offer, but Microsoft came back later that month with an offer to buy Yahoo's search operations a la carte. As that failed, Icahn, who has a long history of challenging corporate boards, threatened to replace all of Yahoo's directors with his own hand-picked slate so he could negotiate a sale.

Yahoo's $36 million tab, disclosed in a regulatory filing, amounts to about 5 percent of the $673 million in profit Yahoo reported in the first six months of the year."

So, now you know the name of the game... it is survival...!!! Fling a deal and see if you can pull it off; and if you can't, make sure that it's botched right ;)

Something is gotta' give

2008-08-13T23:46:00.000-07:00

As I sat listening to that lilting Phil Collins number – "One more night...."

"Please give me one more night, give me one more night
One more night cos I can't wait forever
Give me just one more night, oh just one more night
Oh one more night cos I can't wait forever...."

Something rhymed deep inside... A chime....?

Yeah, got it! My friends working in I-banks have just one prayer these days - God, give us just one more bubble - like that famous Phil Collins song... First, some M&A deal stats –

No. of transactions - 663 in the H1-07 to 467 in H1-08, with a sharp slump in deal value dipping by over 40% from US$38.4 billion in H1-07 to US$21.4 billion in H1-08. The active sectors include Pharmaceuticals, IT&ITeS, Banking & Financial Services (BFSI) and Real Estate. The outbound investments accounted for US$ 8.2 billion of M&A activity spread over 96 deals.

Financing overseas acquisitions has been tougher owing to the global market conditions and high interest rates. The global crisis sprang from expanding credit squeeze, high oil prices and rising inflation and now they cause slowdown in M&A activity in H1-08.

Even the macro numbers aren’t giving room for hope. The Prime Minister’s Economic Advisory Council (EAC) has revised the growth rate down to 7.7% for 2008-09 from its earlier estimates of 8.5% (and last 4 year average of 8.9%). Rubbing salt in the wound, It also expects inflation to scale 13% soon. Takeaways –

Trade deficit is likely to widen to 10.4% of GDP in 2008-09 compared to 7.7% in 2007-08. Merchandise imports would grow to $332 billion, Exports would grow to $205 billion, leaving a deficit of $127 billion. Export growth could be $22.5% while import growth would be higher, thanks to high crude prices.
High oil import bill and a decline in capital flows are pushing current account deficit to an all-time high of 3.2% of GDP during 2008-09. The estimated deficit for the year is $41.5 billion. In Q1/Q2 of 2008-09, deficit could be over 4.5% of GDP. The estimated 3.2% current account deficit for 2008-09 is more than double the deficit of 1.5% in 2007-08. The only year when it crossed 3% was 1990-91 — when it touched 3.1%, as we were facing a major foreign exchange reserve crisis. The silver lining now is that forex reserves stand at over $300 billion — far above the comfort level.

Capital flows would decline to $71 billion in 2008-09, far lower than the previous year’s $108 billion. Despite the decline, the net addition to forex reserves would be $30 billion.

Now to fiscal mismanagement. The government comes down heavily on private sector for not being transparent about its currency losses. But when it comes to its own affairs, it sweeps a lot under the carpet – think off budget Oil / Fertilizer subsidy funded by bonds that pose serious risks to the extent they are unfunded in the budget. But then you can’t speak much about that.

Just hope something is gotta’ give! Another bubble...? I don't mind... ;)
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Domestic VC firms get a reprieve

2008-08-10T03:22:00.000-07:00

The new guidelines, being drafted by the finance ministry and the capital market regulator SEBI, may not allow VCs to invest in listed companies and restrict them only to startups.

I see this as an attempt to remove the differences in treating foreign and domestic VC funds. One of the aspects being reviewed is the minimum capital required for VCs to set up shop in India. Currently, domestic VCs need to have a minimum capital of Rs 5 crore to operate, while foreign VCs don’t have any such requirement.

So end of the road for pipe investors? Not really. I say this to PE firms. Mature. Now that valuations are beaten down, start looking for buyouts (or buy-ins). Act like a true blue private equity investor. Don’t harp at pre-IPO minority stake buys, listing gains and easier exits. Develop specific domain expertise and prowl for worthless company managements that are badly screwing up shareholder wealth. Believe me, there are plenty of them across the listed segment – Large cap, mid cap and small cap. Get immersive, play active roles in shaping the fortunes of those companies and see if you can truly make a difference.

If yes, you’re in the game. Stick around and have fun.
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Unjust enrichment - ESOPs for nominee directors?

2008-08-06T02:34:00.000-07:00

Has SEBI yielded to the pressures of IAS lobby? It seems likely.

Financial Institutions (FI) and Banks that take direct exposure in companies nominate their representatives in the Board of the assisted companies to safeguard their investments. They ensure that no decisions affecting the interest of their employers or that as might jeopardize the return on their investments should be taken by the company boards. So to the company concerned, these people offer no strategic value. In reality, they just pocket the sitting fees and incessantly nag the company managements with requests for availing company guest houses (or shamelessly ask for hotel accommodation where no guest houses are available) for their family vacation or call for their cars for their family trips. At the board meetings, they are busy devouring the fried cashew nuts and feeding on anything that looks like food while the managements play havoc with the enterprise (declaring dividends even as the company is reeling under high cost debt, siphoning off company funds by way of unsecured inter-corporate loans to below investment grade (promoter) group companies at low interests, passing liberal executive remuneration resolutions, writing off personal expenses of directors). Remember, the appointment as nominee flows directly from their employment with the investor institution.

Now these nominees are being allowed entitlement for ESOPs from the companies where they are nominated. Here is a funny story of two LIC directors on the Board of L&T fighting it out :-)

Last year, there was a two-month face-off between LIC and GIC and their nominee directors, B P Deshmukh and Kranti Sinha, on the board of Larsen and Toubro (L&T) after the nominee-directors refused to return shares allotted to them by the construction major in spite of directions by both the institutions that its nominees should not accept any Esops. Sinha and Deshmukh held 20,000 and 30,000 L&T shares, the market price of which was Rs 3.5 crore and Rs 5 crore, respectively, at the time.

The two financial institutions moved the Bombay High Court to bar their nominee directors from dealing in these shares. Both directors lost their jobs on the L&T board. The matter was later settled out of court after the former directors returned their employee stock option shares to the company. After this, all financial institutions that hold equity stakes in various companies had written to them asking them not to issue Esops to their representatives to avoid a similar situation.

I have a few questions –

a) Aren’t nominees just what they are - employees of investor institutions? How can they be entitled to a perk that is available to the permanent employees and non-wholetime directors of companies even as their attendance at the board meetings are only to protect the interest of their employer?

b) Where does the loyalty of the nominee (post ESOPs) lie? To the management of the company that enriched him or to the PSU employer that pays him a piffling salary in comparison?

c) How can the employer expect the ESOP awarded nominee to protect their interests? Why would they go against the company that enriched them?

d) What strategic value could the nominees offer to the assisted company that belongs to an entirely different vertical? Let’s say an IDBI nominee (a banking professional) in the Board of a power company - can he ensure leakproof transmission and distribution of power? (Now don't tell me he could suggest low cost financing measures - we know how financially savvy they are; just take one look at earnings growth of their parent institution itself. You get the picture?

Sleight of hand or indifference?

2008-08-05T21:05:00.000-07:00

Ah, well there you have it. Companies reporting financial results in ways as are most convenient.

Under the Indian laws, Companies prepare accounts for two different purposes under two different set of regulations. The one under Schedule VI of the Companies Act, 1956 for statutory purposes and shareholder review. Another is in compliance of the Income Tax Act, 1961 that is recognized by the Income Tax authorities. While the former lays emphasis on disclosure and shareholder information, the latter stresses on revenue recognition and tax compliance. Often there are divergences between the two because of which the financial results are often at a variance.

For example, Schedule VI of the Companies Act permitted companies to adjust the exchange gain/loss to the cost of fixed asset. So if a company bought a fixed asset for $10 (Rs 400) with a forex loan and suffered an exchange loss of say Rs 30, it could add this loss to the cost of the fixed cost (Rs 400 + 30). They get to claim depreciation (read tax savings) on that inflated cost of the asset as well.

And then there is the accounting standards prescribed by ICAI that falls somewhere between the two. ICAI AS-11 calls for recognition of this loss of Rs.30 by charging it to P&L account without adjusting the actual cost of the asset (which is eligible for depreciation). The existing treatment allowed companies that had foreign currency borrowing for acquisition of assets to inflate their assets position on account of adjustment of exchange differences every year. The companies that did not resort to foreign currency borrowing for acquisition of assets had a disadvantage as they were required to write off their financing cost in the profit and loss account.

As of now, the first-quarter results of several big companies such as Reliance Industries, Reliance Communications, Bharti Airtel and Jet Airways would have been a lot worse had they followed the Accounting Standards (AS) 11 rules prescribed by the Institute of Chartered Accountants of India (ICAI).

Even under the International Accounting Standards (IAS), Prior to the 2003 revision of IAS 21, an exchange loss on foreign currency debt used to finance the acquisition of an asset could be added to the carrying amount of the asset if the loss resulted from a severe devaluation of a currency against which there was no practical means of hedging. That option was eliminated in the 2003 revision. ICAI too followed suit in 2003.

But reading that news item gave me scope to laugh a lot. The excuses of Reliance Industries, Bharti, Jet, sound so flimsy. Most of them have taken refuge under legal opinions (many retired judges depend on it for their livelihood) that are available for a price. Reliance Communication chose not to respond. When you are living in denial and trying to fool yourself, silence is the best option.

Or is it indifference?

The charity incentive

2008-08-04T18:56:00.000-07:00

“The Inflation can drop below 8 % if confluence of factors like fall in global crude oil followed by a good monsoon work”, says Prime Minister's Economic Advisory Council (EAC) Chairman C Rangarajan.

It touched 11.98 per cent for the week ended July 19.

And then? The improved fiscal conditions would be used as an excuse to pursue populist schemes in an election year. The government already have to fund the generous farm loan write offs ($18 billion at the last count) and the liberal pay hikes to the government staff ($5 billion in arrears and $2.5 billion annual outgo). The latter is now deferred (a bungling government waking up to the folly?) emphasizing the thoughtlessness of the award. Now I think of the majority tax paying tribe that gets no benefit from any of it - the non-government employee citizen or a farmer with no loan outstanding. You think I am biased? Here is Moody’s rating, for the record !

I might rather donate all my taxable income to the Red Cross. That will make me feel a lot better.

Doc says "Drug all analysts for a while"

2008-08-01T00:15:00.000-07:00

What do many financial analysts and business media have in common? A drive to talk our economy – into a depression.

To begin with, they over-research the financial services sector (FSS) and extrapolate it into their broadbased prophecies. Go tell them FSS is not the whole economy. FSS (at Rs.1.65 trillion) account for just under 14% per cent of India’s GDP (Rs.12 trillion). Ranting against RBI for its three rate hikes in two months betrays poor understanding on their part.

I ask them to set their clock back by about 5 years and take a peek. Back in 2002-03, we had rate drops in quick succession that drove up bond prices, when banks and bond funds declared phenomenal returns. Now it's just the reverse of that and such shifts in dynamics only confirm the prevalence of a cycle and hence room for hope that they will go back to where they came from. What matters at a world level and for countries is that total nominal demand should be rising fast enough to support a sustainable rate of real growth but not so fast as to generate runaway inflation. That’s exactly what Guv. Y.V.Reddy sought to rein in by hinking repo and CRR earlier this week. In spite of India’s exceptional experience in this “nice” (non-inflationary, constantly expansionary) decade, this demand expansion is rarely going to take place along a simple straight line, but it makes sense as an average over a period.

The world economy as a whole has clearly hit the buffers. Demand growth has been too high for world supply potential. This is the common factor behind the rise in oil, food and commodity prices, which has struck the OECD countries as a rise in imported inflation. At present, commodity overheating in some of the BRIC (Brazil, Russia, India, China) countries coincides with economic slack in Europe and North America. This is no more paradoxical than the situation that confronts central banks when some regions are depressed and others over-buoyant.

No one really knows what the permanent element is in the rise in oil, food or commodity prices. [Is it surging demand, squeezed down supplies or flip side of derivative positions in oil futures market?] Even if there is a long-term upward trend in these primary prices, there is likely to be a temporary fallback. Meanwhile, shall we ask the analysts to just shut up, stop staring at the screens and prognosticate?

Come hell or highwater

2008-07-29T22:59:00.001-07:00

Come hell or highwater, private equity goes about its business.

During the first half of 2008 while public markets choked by a grisly hug, PE funds did 207 deals worth $10.4 billion , as against 178 transactions worth $6.69 billion last year same period. Average deal size increased to $59 million compared to $41 million during 2007 same period.

Standard Chartered topped the charts with its $830 million investment in property fund of DLF Ltd, followed by Providence equity’s $640 m in idea cellular. Others include Symphony Capital's $450 m investment in DLF Assets, L N Mittal and Farallon Capital's $399 million in Indiabulls Real Estate and investment firm J P Morgan's 300 million dollar investment in Tower Vision India.

I like the way they go about business as usual. Oil prices are slowly receding and Y.V.Reddy is bent on reining in inflation. That’s the way it should be. Growth is not the purview of Central Bankers, that’s for M/o.Finance to handle by accelerating pace of reforms. Now that the Left is out of the ruling coalition, Govt. has a lot of bandwidth to flex its muscles. Rate hikes hit back with a lag, so it’s important for us to brace up before we are blown all over the place. Pretend as usual and go about life, investment and all.

Things will fall in place. Or where they fall is exactly their place.
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Not bad being a contrarian

2008-07-29T05:40:00.000-07:00

So RBI unveils credit policy and sends chill down the nation’s spine revising GDP growth expectation to 7.9% as against 8.1% earlier.

Repo rate up by 50 bps is now at a record 9%. CRR is up by 25 bps and it is at 9% too.

On the back of high oil and fertiliser subsidies, farm debt waiver and the implementation of the Sixth Pay Commission recommendations, how bad can things get? Let me mangle definition of optimism, true contrarian style - wait till things get so bad that the only way for them is to get better.

I should know. The stock markets have given a thumbs down by falling around 4%. The two sugar stocks I bet on have moved up by 7% and 8% today. My portfolio inched up by 2.6% too.

Not bad, huh!

They just don't `get it'

2008-07-27T03:10:00.000-07:00

It’s results season again. I glanced at the results of ICICI Bank and HCC.

For ICICI, the net profit for the quarter fell by 6.07% (Rs.728 crore) in relation to Q1-07-08 (Rs.775.08 crore). Nothing unusual, given the sluggish business sentiment tempered by high interest rates. But something else rankles. The bank’s non-tax provisions and contingencies (for bad debts / bond trading losses) rose nearly 43.5 per cent to Rs 792.49 crore during April-June this year, compared with Rs 552.27 crore during the corresponding period last year. The increase in interest rates and adverse market conditions hit the bank’s trading portfolio and treasury income by Rs 594 crore. This is for a bank that is quick to grab an opportunity, having an agile management that is high on financial savvy and in using sophisticated risk management systems. CFO Chanda Kochar can play down the worries on the lines that the provision levels are `nearly’ the same as in earlier quarters, but they are mistakes in a row just yet. An indication that they are clearly losing sight of the market risks.

For HCC, revenues grew 22% to Rs.895 crores (Rs.731 crores for Q1-07-08 quarter) but PAT slipped to Rs.31 crores as against Rs.34 crores. What stands out is a provision of Rs 50.6 crores on account of foreign exchange losses on foreign currency loans including FCCB. This is bad choice of debt since prudence demands raising Foreign currency loans only if you have foreign currency income to hedge its exchange risk. But construction companies merrily used FCCB route to bet on rising values of land banks and a seemingly ever appreciating rupee (so that they will end up repaying less as Rupee gets stronger). But the trends reversed, the tide ebbed and they realized they were swimming naked.

Where did they let up? Were they not forewarned of the risks by smart managers that signed up for such financial arrangements? The numerous credit crises from the past (remember the great depression, the asian meltdown) has destroyed the idea that unregulated financial markets always efficiently channel savings to the most promising investment projects. Several Indian companies took on unsustainable debts, pushed around by I-bankers and other “debt merchants” who made a quick buck by disregarding risks. While this happened, our central bankers though a little unnerved by the swelling forex reserves, were still marveling at the creativity of capitalism. When the bust came, most borrowers / bond traders aiming to make quick bucks on currency / bond appreciation were left catching the hot end of the rod.

So I begin to distrust the individuals in charge as also our macro economists. Neither `get’ the true picture of the flip side of risks they assumed. The I-bankers that peddled these instruments never really understood it themselves to explain it to the borrowing clients. Now I see the same pattern in the manner in which both RBI and Finance Ministry handle the oil price shock and resulting inflation in commodity prices. Finance minister can hide behind his oft-quoted statement `it is imported inflation’ only for so long. He may have to soon come up with a plausible defense. Clearly, arresting inflation and maintaining price stability is an important task of the central bank as is ensuring financial stability. But this dimension is completely absent from the macroeconomic models now in use. In addition, since financial stability these days also depends on avoiding deep recessions, stabilizing the business cycle should also be of the concern of the central bank.

But that is at a macro level and CFOs can’t rely on that to shield their individual risks. ICICI treasury has clearly goofed up by ignoring cyclical nature of bond yields. Their bet on junk bonds went haywire. HCC and other construction majors played fast and loose with FCCB for long gestation projects where eventual profits (as and when they come) might have already been eroded by the exchange risks they suffer here and now. Stock prices have also fallen so badly that the lenders would not want to exercise the loan conversion (into equity) option attached to these bonds. They are reeling the under grave liquidity crisis in their home markets and could do well with a cash pay back.

So here are the lessons. Never miss the wood for the trees. Look at the indicators. Stock markets don’t beat down stocks without reason; and you can’t blame it all on bad sentiment alone. So Ms.Kochar and Mr.Ajit Gulabchand, it's time to roll up your sleeves and begin to see risks from a mile. That’s when you can claim you're really `getting it’.

Edelweiss' right pick for its ARC - Sibi Antony of IDBI

2008-07-24T22:44:00.000-07:00

Edelweiss Alternate Asset Advisors (EAAA), an arm of Edelweiss Capital is looking at launching a $200-million distressed asset fund under Sibi Antony (Ex-IDBI). I’ve met Sibi often at IDBI (Merchant Banking Division) during my earlier stint in corporate service and have found him to be an extremely capable manager. He has been instrumental in recovering a large portion of IDBI NPAs and in managing their SASF (Stresses Assets Stabilization Fund) ; hence must have a ready database of owners of stressed assets as well. I am sure he has several aces up his sleeves to turn them around (or to hive them off).

In the coming weeks, I will be closely watching him take on some of the biggest hurdles in ARC business I’ve outlined viz. –

a) Banks' reluctance to minimum 20% haircuts while transferring stressed assets to ARC;
b) Non rationalization of stamp duty incidence while transferring dud assets;
c) Govt. stand on triggering of takeover code when debt is swapped into equity in terminally ill companies;

Still the distressed asset market size is about $35 billion and the nine odd ARCs in India have of late been a bit passive since the stock market and realty markets are going thro a lull phase. May be if the conditions (high crude price, rise in Bank NPAs, inflation and liquidity squeeze) persist, Sibi will be looking at a much larger market size where his stated strategy of focusing on corporate / SME assets with accent on single assets than portfolios should payoff. But then much depends on bringing around lenders to accept ARC terms and getting the borrowers to accept the strategic and financial bitter pill offered by undertakers like Sibi. Sibi will have a great support from Rashesh Shah and his team of I-Bankers in finding premium buyers to these stressed assets anyway - and much less bureaucracy to deal with unlike with his previous employer IDBI.

"Good luck, Sibi... " [Now some sales pitch.] "Call me if you have some [not so] bad apples to get rid of, fast "

For better realty transparency

2008-07-23T21:04:00.000-07:00

Shobhana Subramanian of Business Standard contrasts the real estate market rules in India / China leaning on CRISIL and CLSA reports. She finds Indian laws on real estate developers way too lenient. I found the piece pretty insightful. Excerpts –

- In China, mortgage payments have to be utilized for a specific project; Indian builders divert customer advances for other purposes as well (say, acquisition of new land).

- In China, developers must develop the land acquired within a certain time frame, failing which the appreciation in the value of the land is taxed. Back home there's really no hurry to start any construction, the land can simply lie vacant and can even be resold at premium.

- Chinese developers hold relatively small land banks; some estimates put it to be sufficient for development over a 4- to 10-year period, depending on growth targets; in India developers are estimated to be holding on to land banks for anywhere between 8 and 15 years (of course, various Indian regulatory approvals can take years - goes the argument)

- The difference in the amount of debt that Indian and Chinese players have on their books is striking. The average gearing for listed Chinese developers, CLSA reckons, is 50-60 per cent with only a couple of them at 100 per cent. For companies back home, the average would be closer to 100 per cent with a couple of firms indulging themselves beyond that.

- In India, sales and profits of realty firms and recognised well before the entire project is completed. That just won't do in China; revenues there flow into the books only after the project has been completed and the property handed over to the buyers.

Here is another case for toning down regulations. Or even Housing Finance Companies (HFC) can also help if they choose to finance buyers in projects only when they are ready for occupancy and possession. Much better if they insist the HFC be made a (confirming) party to the transaction so that even the end-use of funds is validated.

Smartest buyback

2008-07-22T06:10:00.000-07:00

Here. ICICI Venture biting another bitter pill. It invested $22.5 million for a 43% stake in Dr.Reddy’s Labs (DRL) research outfit Perlecan Pharma in November 2005 and is getting back $9 million for divesting it back to DRL. Joining it in drinking that Karma Kool-Aid is Citi Venture that is in a brual *sell-all* mode giving in to CEO Vikram Pandit's earnest efforts aimed at resuscitating Citigroup by selling all things that it can find a buyer for.

I think of Dr.Anji Reddy. He must be allowing himself a rare chuckle (*rare* because the $754 million Betapharm acquisition is bleeding now). He had invested $7.5 million in Perlecan for a 14% stake. Now he has 100% stake for just $25.5 m – ain't that smart?