What the Libtards call as slowdown is in fact an upturn

Denouement of structural reforms introduced by Narendra Modi Government in India - mainly  Demonetization and GST have been mercilessly attacked for no fault of theirs. It is just that the old methods of tax evasion have been blocked and that has ruined the show for many. It is just the intervening period we are in.

NCLT Order is out on SDAL matter

First case resolution under IBC in India... But will tax authorities oblige...? http://bit.ly/2xlZ0Qt

"Not my fault, everyone else and his uncle's...!"

Here's what Sandesh Kirkire, CEO, Kotak Mutual Fund says defending underperformance of Mutual Funds as an asset class -

"Mutual funds are ultimately alpha players. My estimate is that almost two-thirds of the schemes (by way of assets) would have outperformed their respective benchmarks over the medium to long term. This is not bad when you compare it with the developed economies."

This is more or less the refrain of most Mutual Fund managers.  They blame everything but the quality of their own stock selection or fund management skills.  Even now they are not conceding their investment skills are as bad as any direct equity investor or worse, and blame it on everything else. The investors in their funds remember very well the loud declarations made by them regarding their investment prowess.  But when their Systematic Investment Plans (SIP) succeed only in systematic destruction of investor wealth, they shamelessly resort to semantics as the first line of their defense instead of candidly admitting their incompetence as the reason behind their inability to ringfence their fund portfolios from the vagaries of the market by "highly skilled strategic intervention" they advertised in their promos and commercials, not so long ago - which the lay investor believed and invested.

To me, the real road test for veracity of any fund manager's claim will come when they loudly advertise across media, with the same intensity as on the launch of new fund offerings, asking investors to *exit from their investments* [also cut down on SIP subscription] when markets enter a bubble zone and to *restart SIPs* after the bubble collapse.  But they invariably do the opposite so that they can sell their funds at the highest NAVs to pocket higher commissions based on larger corpus size.

If serious fund management has to happen, AMCs should benchmark fund managers compensation 100% to Alpha returns.  Then it'll be fun to invest because the casualness or the indifference with which they play with OPM (other people's money ) will end and they will be more sensitive to the investor pain before they bullshit over the media...!!!

L&T Finance Directors fleece the company

L&T Financial Holdings Ltd., just a three year old company (that had to wind up in its earlier avatar L&T Finance Ltd. because of mismanagement and reckless lending) with an annual turnover of Rs.112 crore seeks shareholders approval to pay its Directors a compensation which is unheard of amongst its peers in the Financial Services Industry.

All this, even as the company has a captive and ready customer base by way of customers of L&T Ltd., the holding company that is into EPC and Capital Goods business.  All that it has to do is to finance the equipment / services purchase by its vendors and sit tight.  No sweat.

For such a cakewalk, the company wants to pay its Chairman Y.M.Deosthalee, a Director on the board of L&T Ltd. a remuneration of close to Rs.7.33 crore and its non-executive Directors 1% of net profits.

IIAS, the proxy advisory company has quite rightly debunked this move, outraged by this incongruous payout, especially at a time when the investors in equity markets have been mauled badly by weak investor sentiment and gross under-performance by companies with sequential dwindling earnings.

This resolution deserves to be torpedoed.  Shareholders, do convey your dissent either through postal ballot or by personal presence at the meeting.  Mr.Deosthalee is nearing his retirement and is in a hurry to boost his kitty on his way out... But should you, the institutional and minority shareholders ensure that...?

Heads I win, Tails you lose theory of Mutual Funds

"..India's top asset management companies (AMCs) have continued to remain profitable, nomatter whether mutual fund investors made money or not in the tough market conditions. Rather, top players have posted growth in their profitability during financial year 2011-12..." 

I was suspecting this all along and exactly the reason why I hardly ever invest in mutual funds.  To those who solicited my custom (especially the executives at ICICI and HDFC Mutual Funds whom I had to sadly turn down each time they cold call me) I pop the question "will you charge me even if  my portfolio created by you wilts under water...?"  Their reply has always been in the affirmative and that was something that I could never digest. This spurred me on to quit my job and start my own investment management business  with a spunky slogan "...We wouldn't charge you unless we help make enough for yourself..."   I can proudly claim that I'd been keeping up that promise.

All my clients will swear by that, something that helps me effortlessly wean away clients that got creamed by portfolio managers and mutual funds and sincerely hope they keep going down that one way street so that my business is in tact, ethically miles ahead of them...!!!

Why Rupee weakening isn't helping our IT vendors...

That was the question I got from a client yesterday.

Her question wasn't out of place.  A weak Rupee should help Indian exporters as much as it dents our importers.  But she has been constantly hearing a weak Rupee will worsen India's fiscal deficit since it will go to fatten our oil import bill. And she is worried why this double whammy.

IT vendors like Infosys and TCS have negotiated price increases at a time when Rupee was appreciating. Now the trend has reversed, now it's their clients turn to ask for a wind down. Under normal circumstances, it should cancel each other out but it doesn't since 70% of their revenues come from US and Europe where there is a major social, economic and fiscal crisis.  Also the general weakening of demand is felt more in their major bread-winning vertical i.e. Financial Services.

Another reason is, during low demand situations, companies will hedge their revenues to protect their margins by booking forward covers for their forex exposure.  As a result, our IT vendors would have booked these covers (sold Dollars forward) when the Rupee was Rs.44-46 against the Dollar.  Not many would have expected Rupee to weaken so dramatically (20% in 3 months) and throw a spanner in their works.  Now Rupee is weakened to a low of Rs.55 against the Dollar, they are left to lick their wounds.

Nobody said Life is easy, after all.

Escorts merger - sleight of hand...?

Kudos to investor activism in Escorts merger...

Let me elucidate it with an easier example.  Let's say I, you and 48 others own a company -XY Farms Ltd.  Imagine I and you hold 5% shares each and 48 others own the remaining 90%.  Some time later,  to help sell the products of the company, we set up a retail store - XY  Retail Pvt. Ltd -  in a nearby city, using the company funds.  In this case, XY Retail is a subsidiary of XY Farms ( Parent Co. or Holding Co.).  As such, I, you and 48 other shareholders have identical interests in both the companies.

A few years later, I and you feel that our shareholding in XY Farms Ltd. is only 10% put together and worry that if a few shareholders from the minority get together, they can throw us out of the management control using their collective voting power far in excess of 10% that I and you hold.. So the option before us is to buy out some of those shareholders and boost our stake in the company.  But what if nobody wants to sell..?

So we storm our brains and come up with an idea. Since XY Retail is a subsidiary of XY Farms, why keep both companies as distinct entities...?  Let's merge the two and run the business of XY Retail as a division of XY Farms instead of as a separate company, with a separate management.  It helps reduce  many functional overlaps in accounting, inventory, sales etc., that consume capital. 

All corporate actions should be seen in the light of how it helps increase the shareholder value.  Here since XY Retail is 100% owned by XY Farms, the parent company need not `pay' any consideration to merge it back with it. Only regulatory approvals need be obtained and accounting entries passed to validate the transaction.

Here is where Escorts Ltd., tried to play foul.  While it seeks to merge its 100% subsidiary with itself, it wants to allot shares as "consideration" to its subsidiary that will eventually merge with itself and cease to exist. And then it wants to transfer those shares (treasury stock) into some company owned Trust, controlled by Trustees that include CFO of the parent company.  This arrangement is a foul since it leaves out the minority shareholders (who are also part owners of the subsidiary and therefore entitled to the proportionate treasury stock) without any say on how to administer the treasury stock. 

Proxy advisory firm IIAS has called the bluff... Let's hope the institutions vote against this proposal in the interest of upholding shareholder democracy.

...Shibulal, do your own thing...

No sooner Infosys announced its Q4 2011-12 results with a lower guidance, than the market pundits started pummeling it for hoarding up all its cash and not going in for acquiring businesses. I am tempted to ask - What else will they do...?

The problem with stock market / industry analysts is that the so-called free strategic advisory they proffer is nothing but a leaf out of the consultants' manual that is the thinnest ever tome with a two-size-fit-all strategy. First, if they are hired by a diversified firm, the consultants would advise them to merge/consolidate/ integrate. And if the hirer is a single vertical behemoth, they'll say Break-it-down. With just this two options, they get a life, ruining the clients' own. If you guys know a third strategy a consultant has, feel free to write in.

Now they see Infy sitting with a cash pile of Rs.20,500 crore (Roughly $ 4 billion) and they are urging it to acquire businesses. Why wouldn't they ever concede that if a company management was smart enough to pile all that cash up, wouldn't it know when and where to deploy it...? We all know the major acquisitive frenzy unleashed by Wipro with its string-of-pearls strategy got it - to the 4th or 5th place in the pecking order from its 3rd place after TCS and Infy. Like a good hunter, Infosys should wait for a right synergistic acquisition that falls in line with its future growth projections. Sitting on a cash pile is any day better than soaking it up into a bad big-bang deal and going down with it. Infosys CEO S.D.Shibulal is a veteran and I think the decision is better left to him. I am sure Infosys will get its act together, in time...

The Retail Rats...

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 !

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 !

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Back and in deep freeze mode

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

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.

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

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.

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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...?

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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 !!!!

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

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!

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

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New Tag - Rally Buster

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

This was pure music....

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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!

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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 !!!

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Never blame securitization

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.

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The Goldman heyday

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.

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Mothers and Corporate Governance

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 ?

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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"

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.

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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.

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Bharti-MTN deal : Sniffer dogs at work ?

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.

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Press "Sell"

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 ?

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You know better than you think you do

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.

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"Indian bankers, don't you carp later"

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.

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"Long term? You must be kidding !"

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?

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"ICICI Venture is lying"

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?

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.

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

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).

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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.

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"You need their money, honey"

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.

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Stimulus ain't free nor funny

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?

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"Enough of draw down"

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"

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 ?

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After thoughts governments

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 :-)

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

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.

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L&T had no other option

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?

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

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.

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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.

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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.

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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

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.

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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.

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

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Should they junk SATYAM management?

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.

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SATYAM is up for grabs, pal

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?

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Art of getting independent directors to act

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.

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

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It's time SIEMENS relocate to India

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.

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

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ASATYAM COMPUTERS ?

“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.

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Mortgage crisis, Madoff madness - so what comes next?

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.

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Breaking the back of Indian Realty

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.

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Farewell Mr.Kamath and Welcome Ms.Kochhar

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 !

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See how they squeal

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!

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PE funds need to talk straight

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!

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NTMA - asking for bankruptcy

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?

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