Do away with P Notes - Give us infrastructure

Has the recent crackdown by SEBI on P Notes issued by FIIs been effective? Will it yield the desired fruit – that of controlling copious flows of capital from unidentified or least regulated entities? Well, time will tell.

But RBI still has to deal with its daunting problem. The surging capital inflows continue to pose a policy challenge for the Reserve Bank of India (RBI), as it undertakes its mid-term policy review tomorrow, despite some measures taken to contain unregulated inflows. The central bank is unlikely to signal any easing of monetary policy with surplus liquidity in the system, as any lowering of interest rates at this point, could hold upside risks to inflation.

The Prime Minister's Economic Advisory Council had estimated that an increase in the forex reserves of the RBI of $26 billion in 2007-08 could be consistent with the current real growth of the economy, moderate monetary expansion ( 17.5 per cent) and a tolerable inflation rate (4 per cent). "In the current financial year up to early October 2007 itself, forex reserves have increased by over $50 billion and tackling this problem is the most crucial policy dilemma," S S Tarapore, former deputy governor, RBI has said.

I often wonder – why not RBI absorb the excess liquidity thro infrastructure bonds and divert the entire corpus exclusively to address India’s appalling infrastructure needs – better Airports, Ports, Dams, Roads and the like… Given the pathetic state of our infrastructure, no sum of money would be found to be `excessive.’ We pay humungous sums anyway by way of Airport tax, fuel surcharge, toll etc. Is it not time we expect something in return…?

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Lend but don’t call back

Looks like India has its own subprime disaster in the making. ICICI Bank recently took the unprecedented step of paying Rs 15.5 lakh in the form of fixed deposit and insurance covers to the family members of a Mumbai borrower who committed suicide allegedly after being harassed by recovery agents of the bank, there was a case of recovery agents being beaten up when they approached a borrower to ask for payment against overdue amounts.

Until recently, personal loans were one of the most sought after segment by banks after they found that individual lenders default rates were far lesser than corporates and other organized borrowers. They relied on agents to press recovery from defaulters and mostly it worked. Now this segment has also crept up to `organized’ category – at least in beating up recovery agents that come calling – the threat of willful default looms large even by those who can afford to repay.

Time to short banks? ICICI, HDFC, Indusind, Centurion Bank of Punjab have all built up a good deal of personal loan books. Great shorting bets, I guess…

What do you think…?

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Strange things the Rupee does

The relentless run up of the Rupee has one major outcome. It drove xenophilic Indian companies like Infosys to focus on burgeoning Indian markets. Even as IBM, Accenture, Microsoft, Oracle, HP and other IT majors drove in to have a slice of the Indian market, Infosys was unmoved, stayed riveted westwards. It didn’t like the low margins. Sat smug under the illusion that juicy 25-30% margins that it kept gouging from overseas clients will remain forever.

I had written earlier about the short life of those obscene margins here and here and the folly of ignoring the domestic market. After getting dented in earnings and sensing a fast eroding market cap (and the worth of his own holding besides that of other co-founders), it looks like Kris Gopalakrishnan has heard me.

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It's another thing that he hardly had another choice...

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The art of getting FII accounts

The din is rising. The clamor from brokerages to get FII accounts. At every turn as I meet a head honcho of a brokerage, they have one question to ask – can you give us some FII account?

Now this puzzles me. I have a lot of friends that work for FIIs. I come across them when I meet them on business and at parties. They have the same interests as we have and they are ready to listen to all that talk that makes sense. No big deal. Why make them such “in-demand” exotic beings?

I made friends in FII circles because of just straight talk. Many of them started out as my blog readers, enjoyed or debated what I wrote. They became friends anyway. I don’t tell them what they’d like to hear or ask for their account. I just listen to them, digest their needs and share my personal philosophies about investing. Perhaps they enjoyed it, they’re still my friends.

But if you want those contacts, well, I suggest you do it the old fashioned way. Get your existing clients to make some money and have them walk the talk…. Or just let me do it for you…!!
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Review of PE / VC ecosystem in India

Here’s a great article and a review of PE / VC ecosystem in India... Nice read.

[ Hat Tip : Alok Mittal, VentureWoods ]

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A quick and clean surgery...?

He may not have gotten the coverage like a Chris Cox gets. But M.Damodaran, Chairman of SEBI is no less charismatic.

He stood his ground on restricting the use of participatory notes (P-notes) by foreign institutional investors, but made two important announcements.

The first is to allow proprietary sub-accounts of foreign institutional investors (FIIs) — i.e. sub-accounts that are formed to invest their own money — to issue P-notes provided they apply to register themselves with SEBI in the next 24 hours.

The second is to put registration of FIIs on the fast track. Addressing FII representatives from all over the world through a video conference, Damodaran, however, said the issue of offshore derivative instruments by other sub-accounts of FIIs will not be possible after the changes it proposed last week come into force.

Hope Damodran performed this surgery quick and clean, like he fixed the mess at UTI. Now will the market get back to its surge up north…?
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Can't buy a bank stock

I can never buy any bank stock; Public sector or Private Sector – no matter what a multibagger it may turn out to be.

All I can remember is sitting there all day tearing my hair out and screaming within (at the teller) why can’t she release a banker’s cheque quickly or trying to figure out how to get the lady to stop updating her colleague on her latest jewellery acquisition and wondering if you need to call an exorcist because maybe the bank is possessed by the devil. You need to be a bit psyched up too to buy the bank sock. I know it’s not very smart – but then you know I am only human.

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As long as it lasts

If you can't sleep, then get up and do something instead of lying there and worrying. It's the worry that gets you, not the loss of sleep. Don't worry about things that you have no control over, because you have no control over them. Don't worry about things that you have control over, because you have control over them. This seems to be the credo of global markets that are either behaving as if the worst is over for credit and housing problems or they remain convinced that the central banks can offset whatever bad news may unfold.

I say the credit squeeze is much centered around mortgage finance that resulted from subprime crisis in the US. Other sectors are pretty much insulated. After strenuous effort, banks have managed to find buyers for $9.4 billion of the $24 billion needed to finance the takeover of First Data, a payments processor, by Kohlberg Kravis Roberts, a private-equity firm. According to JPMorgan, even the structured products that caused so much disquiet during the summer are moving again—$6.2 billion of collateralized-debt obligations were issued in the last week of September.

Somehow that flies against other theories that float around. Who knows? Markets have their own logic.

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LIC in for a bounty

As bidders line up to buy 26 per cent equity in Industrial Finance Corporation of India (IFCI), they will have to keep an eye on the next move of Life Insurance Corporation of India (LIC), the domestic behemoth. IFCI owes nearly Rs 500 crore in debt to LIC, which has the option to convert it into equity and take its total stake from 8.4 per cent now to 49 per cent. IFCI’s proposed strategic sale has attracted expressions of interest from 10 entities, of which 8 have been shortlisted.

The successful bidder will also have to make an open offer for another 20 per cent to take its total holding to 46 per cent.

Companies interested in buying a stake in IFCI will be aware of LIC's option to convert its debt into equity at par (Rs.10/- that is, now the share price is Rs.96/-) value.

Talk about the advantage of being a (very) early investor…

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Nothing stops the deal frenzy

And you thought the liquidity squeeze following subprime fiasco has affected the PE appetite for leveraged buyouts… Hardly.

Bain Capital, a private equity firm, decided the 28-year-old Network equipment maker 3Com Corp. still has enough potential to justify a buyout carrying a hefty 44 percent premium to the stock's Thursday closing price of $3.68 per share. At one point in 2000, its shares briefly rose above $100 apiece. For 3Com the $2.2 billion buyout by Bain would mean giving up its independence, but it's gaining freedom from the whims of the market and a chance to expand in China. The cash deal announced on Friday also gives Huawei Technologies, China's largest manufacturer of telecommunications equipment, a minority stake in the technology pioneer - something that could improve its prospects in Asia and raise eyebrows in Washington. 3Com, which faces brutal competition from Cisco Systems Inc. and others, is now a shadow of the high-flying star it became in the late 1990s technology boom. 3Com now counts more than 6,000 employees in over 40 countries, and annual revenue of $1.3 billion.

Here’s yet another and bigger deal. Shareholders of communications and software company Avaya Inc. voted to take the company private Friday, selling it for $8.2 billion to two private equity groups - Silver Lake and TPG that valued its shares at $17.50 apiece. The deal is expected to close by end October. Avaya, based in Basking Ridge, N.J was spun off from the former Lucent Technologies Inc. in September 2000. Shares have jumped more than 25 percent since word of the deal leaked in late May. The deal comes with its set of strings too. The agreement also provides a 50-day "go-shop" provision for Avaya to solicit proposals from third parties. If it ends the merger agreement after receiving a superior proposal from a third party, Avaya must pay Silver Lake and TPG Capital an $80 million termination fee. Also, Silver Lake and TPG Capital must pay a $250 million fee to Avaya if the merger agreement is ended under certain circumstances.

So, la, la, la time for PE firms has not fizzled out. The party is on in the buyout street… Will it have an impact on Avaya Global connect, the Indian company…? Jury is still out.

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The Wipro way

Wipro, India's leading IT vendor, it seems have found a way to counter the Rupee appreciation threat to its bottomline. It is also aloof to all the noise around made by most others, in not rushing to the Ministry of Finance or RBI asking to rein in the surging Rupee. It maintains its cool and is moving straight ahead with its stated strategy of inorganic growth, by acquiring companies from diverse geographies.

I am talking about Wipro’s latest acquisition - Oki Techno Centre-Singapore (OTCS) in an all cash deal spread over a period of one year together with all its Intellectual Property Rights as well. The company will also establish a dedicated development centre for OKI to utilise design resource efficiently and enhance product development capabilities.

OTCS is focused on wireless design and has demonstrated innovative capabilities in RF (Radio Frequency) and baseband design. It has a 40 member center with SGD 8.8 M (USD 5.89 M) as the revenues of the fiscal year ended March 31, 2007. The company has key customers in Japan in product engineering space.

Way to go, Mr.Premji. The acquisition will give Wipro a footprint in the large market in Japan and East Asia. I go it’s way better than whining about exchange rates, something over which none has control.

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Clueless RBI opens flood gates

The rise of the mighty Rupee against a weak dollar has forced RBI to relax its currency regulations. It goes with the usual refrain - “one more step towards full capital account convertibility”. Gee, making a virtue out of necessity? Not so nice, Guv…! How many more steps left? Story behind the story is RBI just woke up and realized that they've lost control of their own industry. Now they're desperately scrambling to get back on their feet. Left with not many options, it opened the floodgates wider praying that some of the incoming dollars may flow back too. Now, know your limits –

- Individuals can remit up to $200,000 against $100,000
- Companies allowed to invest overseas up to 400% of net worth overseas against 300% till now

- Partnership firms also allowed to invest overseas 400% of net worth
- Ceiling on portfolio investments by companies raised to 50% of net worth from 35%
- The requirement of 10% reciprocal shareholding in listed Indian companies done away with for overseas portfolio investment
- Companies can prepay ECBs up to $500 million against $400 million now
- Mutual funds allowed to invest an aggregate of $5 billion overseas against $4 billion now

Will it cause a dent ? I doubt. There are not many parking bays available for the greenback than emerging markets. No other market in the world is yielding returns as do emerging markets (EM) like India. China and Brazil have become way too overstretched. Developed markets have been consistent underperformers. That leaves the dollar to leave Indian shores only when Indian companies begin repaying or foreclosing their ECB borrowings made earlier. That’s wheels-within-wheels scenario since prepayments shall be triggered only if there are significant dollar earnings from exports, which is too much to ask when every dollar of export is fetching less and less Rupees. Add to that the Fed rate cuts. The recent 50 bps rate cut by the Fed on September 18 has only accelerated the inflows - FII reacted by increasing their investments in India with $1.54 billion of investments in just 3 days between September 19-21. RBI may use its sponge to mop up dollars, but in July alone, it bought back $11.42 billion.

How much more can it suck in? And is it advisable? Well, I’ve dealt with that already.

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Slap on the face of banking reforms

60 years of independence; Even more years of Indian Banking. But reforms have done little to save our folks from the clutches of loan sharks.

Each time a farmer commits suicide, there is the obligatory reference to high interest rates charged by the usurious moneylender. Predictably, two standard courses of action follow. First, public sector banks are asked to increase their footprint (after the usual ex gratia payments are made to the bereaved families) and two, demands are made to monitor (it used to be ‘regulate’) moneylenders and their activities. While the first is a good thing, it is irrelevant in the current context; the second would be disastrous, given how many households in the country are dependent on moneylenders.

IIMS Dataworks’ Invest India Incomes and Savings Survey 2007 throws up some interesting findings in this context. Of every 100 persons who have taken loans in the country over the last two years, 31 per cent have got loans from moneylenders, compared to 20 per cent from banks.

The short point is that, until institutional mechanisms develop to meet the credit needs of people with different needs (including subprime category) the moneylender is meeting very real needs.

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What will RBI do now ?

The sign of maturity of any economy is in its attainment of functional automation without having the need for frequent policy interventions. In that sense, if central banks gradually loosen their grip and reduce the frequency and magnitude of their intervention and monetary control, the economy should reflect a fair sense of its health through its currency exchange rates in relation to that of others.

But TCA Srinivasa Raghavan in his article has observed that the balance of opinion is in favor of intervention, for some reasons. One is that no central bank chief wants to be held responsible later for not warding off a recession. So he or she does the popular thing. The other reason is perhaps that everyone has learnt from the Asian crisis that when the going gets tough, the credit flow must start going. To choke off the tap is to invite disaster where people who had nothing to do with the problem lose their jobs and property.

So do Bankers that expect the Reserve Bank of India to soften its view on interest rates in the light of the US Federal rate cut. Domestic loans and overseas borrowing may become cheaper, they say.

But I go if central banks intervene, are they not defending or even protecting the bad guys who were indiscriminate in their processes (like subprime lenders that overlooked creditworthiness of borrowers) and screwed up not just themselves, but everyone in the end? Do they deserve to be bailed out? How different is it from the tax amnesty schemes that ridicule many an honest taxpayer?

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Banish them all

There’s always big trouble if you take brokerage reports seriously. They analyse everything to death.

I know there are surgical processes for genital rejuvenation, liposuction and buttock implants. Is there something for Analyst annihilation? Me thinks investors world over will only be too happy to pick up the tab.

Every day they brazenly appear on business channels, newspapers (and even your email inbox is not spared) advising you to buy some or other stock. You go by their words and you’ll never get out of it. They talk as if they are economists (they connect Ben Bernanke’s rate cut with the fortunes of Indian Banking stocks and still say “decoupling”), scientists (wax eloquently on the potential of a “new” drug discovery that never takes off) and technologists (a sure dud, it will be) all rolled into one.

Yesterday just five minutes before the market opened, one analyst said Sugar stocks have no scope for another year. He quoted over supply, low prices, policy hurdles and what not. Up they went 20% and hit the upper circuits. It had me in splits.

I have 40% of my portfolio in sugar. All bought at 52 week lows when everyone was busy buying overheated Real Estate, Infrastructure and Power sector stocks. I had another reason. Not one analyst put out a `buy’ on it.

Bernanke did it, finally...

It’s a tight rope walk for Ben Bernanke, no doubt. If policy makers cut rates too cautiously, they risk a recession; if they cut them too much or too early, they risk stoking inflation.

In reducing its benchmark interest rate by an unusually large one-half percentage point, to 4.75 percent from 5.25 percent, the Federal Reserve made it clear that policy makers viewed the turbulence and disruptions of the past couple of months as too dangerous to ignore.

The reaction in stock markets was ecstatic: the Dow Jones industrial average jumped 200 points almost instantly and ended the day up 335 points, or 2.51 percent, at 13,739.39.

With a weak dollar that helps surge in American exports, for a change, the US is no longer the world’s engine of growth; the global economy could now become the engine of American growth.

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Academics test drive at hedge funds

Yale University professor Roger Ibbotson

The growing and lightly regulated hedge fund industry is attracting new players — business school professors eager to test their theories in a field known for big risks and occasionally bigger rewards.

Hedge funds are becoming a tempting tool for faculty members looking to sharpen research and giving a Wall Street perspective to their students, all while making some extra money. Economic consultant Peter Bernstein reportedly said the link between academic theory and Wall Street is not new, but the interest among professors to run a hedge fund is.

While hedge funds frequently outperform more traditional investments, some have failed spectacularly. Last year, Connecticut-based Amaranth Advisors wrongly guessed that tropical storms in the Gulf of Mexico would cause natural gas prices to spike. The storms didn't develop and Amarath lost billions within a week, prompting lawsuits and congressional hearings. So did several others that chased subprime debt.

Does this enthusiasm to test drive academic theory explain why there are more busts than booms in hedge fund domain? Why does the expression “up by the stairs and down in the lift” come to my mind?

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In my other blog

Tech Trends and business ideas

Pimp your I/O
Devices are cool
Farmed out sourcing

All go rhythmic

Free world, yeah
Don’t grudge the central banks
A whiff of freedom
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Rewarding the Lemons

Lately, this story from my younger days cross my mind often.

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The Emperor Paul, of Russia, was so provoked by the awkwardness of an officer on review that he ordered him to resign at once and retire to his estate. “But he has no estate," the commander ventured. “Then give him one!" thundered the despot, whose word was law, and the man gained more by his blunders than he could have done by years of the most skillful service.

An involuntary smile came to my lips as I think of the ravage caused by subprime mortgage lenders and the liquidity infusion from central banks of US and Europe….

Rewarding the lemons?

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Black Swan - CNBC killer?

Thanks to this post by Matt McCall of DFJ Portage Ventures, I could read this splendid write up by Michael J Mauboussin of Legg Mason Capital Management on Strategies. Find the link in Matt’s post.

Stowing away some startling insights for my own recall and for you, my readers.

- The difference in [investment] return has nothing to do with knowledge; and everything to do with emotional and psychological factors. (Curtis M Faith – Way of the Turtle)

- What separates the good from great investors is not knowledge or raw smarts, its but patterns of behavior.

- All investors must be alert to black swans – events that are outliers, have an extreme impact and are explained only after the fact. We get closer to truth if we focus on`falsification’ (seeing one black swan) instead of `verification’ (seeing lots of white swans does not allow for the statement all swans are white; but seeing one black swan does disprove the theory).

- Cognitive errors including loss aversion are often the source of sub-optimal investment decisions. They tend to focus on frequency [of losses/gains] than on its magnitude. Buffet distinguishes between experience and exposure. Experience looks to the past and tries to predict the future. Exposure, in contrast considers the likelihood and impact of an event that history, especially recent, may not reveal.

Great nuggets of wisdom…. I had never been a fan of quant models of investing. (Confession : I had consulted on a quant venture some time back for a friend from the hedge fund world. But that I did for a living… can’t thrust personal beliefs on clients) My logic – no model can predict a million minds and their billion different views that spur investment decisions. Now I am a total heretic. Buffet, Taleb, Mauboussin, Matt and now I, give you one more reason why you should stop watching CNBC that gives rebirth to the breed of analysts that should have long been dead and gone…

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