The GAAP relief

CFOs of transnational corporations hate it. They have to present periodic financial reports in the format prescribed by the regulators of respective countries, as there's often a mismatch of income/expense recognition norms. Not just a repetitive exercise, precious man hours are lost by engaging people to assist the foreign consultants in making out original spreadsheets. Many have openly expressed their ire at this phenomenal wastage of time, money and effort (increases the bulk of the Annual Report/proxy statements, higher incidence of printing/mailing charges) all for something that an ordinary shareholder (who merely looks at stock price / dividend) would hardly care.

Some relief for the disheartened souls. The US SEC recently took a step towards allowing foreign public companies to choose international Financial Reporting Standards (IFRS) or US rules (GAAP) when filing data with the agency. [Big Four stand to lose a good deal, though.] Read the full report here.

The reason why I am a big fan of cashflow statement is that it is recognized by all. Cash is real, something that an investor can easily correlate to a transaction – capital or revenue, equity or debt. Cash flow statement enables better intra-business as well as inter-business comparison too. No ambiguity at all.

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Income statement on the other hand, is an abstract estimate structured for complying with tax (and other) laws, where the taxman is `expected to believe’ the contention of the company. If (s)he doesn't buy your argument, fallout could be fresh demand for taxes. If you persist, you could be in for a protracted litigation cost of which may outweigh the disputed liability itself.

Can’t wish away income statements just yet – not until the tax laws are altered to recognize income in a simpler way that everyone can understand. Any takers ?

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New chic in town

TATA group is into everything. Well, almost.

You name it, they have it - Automotives, IT, Steel, Hospitality, Retail, Tea, Coffee, Insurance, Investments and a lot other. I sometimes wonder how long can they miss out on the lucrative business of Investment Banking. The business is strong that even one time boutiques like Avendus and MAPE Group have grown big in a very short time. Take a look at the incessant flow of M&A deal traffic (TATA must have paid quite a bit themselves recently) and you can see it. An old war horse like the TATA group cannot stay away from commercial sweet spots for long.

I am not too sure whether I vibed with him, but Ratan Tata probably had an epiphany on similar lines. They are getting into it now. Here’s the story for you – TATA CAPITAL is hatching.

All you CEOs of I-Banks, your people now have one more place to go....A very good one at that. So just get liberal with employee bonuses and keep them happy. Not exactly the time to worry about margins !

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When the tide turns

Shocking to see how the tide turns.

Reality seems to be playing out now. To directly compete with VC firms, cash-rich large cap Indian companies in diverse fields like healthcare, manufacturing and retail are also creating PE funds to tap the SME business investment opportunity. Ranbaxy now has Religare Securities, Dalmia (Cement) group has Landmark-Holdings, Pantaloon Retail (Future group) has Future Capital adding to the crowd of strategic investment majors like Intel Capital, Siemens VC , Applied Ventures etc.

Earlier startups could never meet the stringent norms and soon VC firms began deserting them to focus on expansion stage companies in the SME segment that matched their `no-risk’ instincts. Government of India reacted to this shift in attitude (that turned many a risk taking VC into speculators) and duly pulled the rug from under their feet by withdrawing (pass through) tax concessions granted to them.

In business, good times last till competition catches up. Particularly in Fund management, opportunities last only till the strategy is kept under wraps. Normally others sense it well before the buck rolls in.

More number of players is good. Will there be enough quality deals for all of them ? Perfect condition for a shakeout…Oops…they call it `consolidation’ perhaps !

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Consolidation in Indian skies - putting the cart before the horse ?

The frenetic activity in India’s fledgling airline industry [Jet-Sahara, Kingfisher-Air Deccan, Air India-Indian] intrigues me no end. I normally am tempted to go by the general opinion of investors across the world about this industry, which in summation is that - a profitable airline is a dysfunctional one.

There’s this favorite airline industry stat, offered up by a recent Bloomberg article:

Historical profits: $18 billion
Historical losses: $32 billion

Internationally, the performance of aviation industry has been characterised by boom and bust cycles with a period of robust growth in operations and profits giving way to losses and an inevitable search towards consolidation. This is in the very nature of the cost structure of airline operations where fixed costs such as aircraft lease rentals, depreciation and staff costs could be as high as 50 per cent of sales. Even a marginal decline in traffic volume or a nominal addition to capacity arising from the entry of new players can undermine the viability of incumbent operators. The current wave of consolidation sweeping the Indian skies may appear to be in accord with the global trend, but is actually different in one respect. The consolidation is happening even before the industry has achieved a state of stable and orderly growth (and hence the title). The sector was opened to private competition, just a few years back. The period since then has witnessed one of the most exceptional record of buoyancy in national prosperity. In the event, the new entrants can perhaps be pardoned for viewing the future with an optimism that in hindsight may not only be regarded as excessive but did not prepare them to withstand the pressures of the market place.

Get this perspective from none other than legendary investor Warren Buffett:

"If I'd been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough -- I owed this to future capitalists -- to shoot him down."

Seems the airlines are in bad need of a visit from the business model doctor.

It seems Vijay Mallya and Naresh Goel have different ideas. Well, you can argue there are millions of Indians that haven’t had their maiden flight experience as yet, who would love to take to the skies if the fares are affordable. How easy a task is that - coming to think of soaring oil prices, high lease rentals, wage inflation, shortage of pilots and trained in-flight, maintenance and repair crew.

Well, who am I to say that? John M Keynes quote captures it best as he says -

“A large portion of our positive activities depend on spontaneous optimism rather than on mathematical expectation…If animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but mathematical expectation, enterprise will fade and die.”

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Won't you join me in raising a toast to that ?

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Era of mega equity offerings ?

Just as one thought it is curtains for DLF IPO, another is raising its hood.

ICICI Bank’s domestic issue is part of a $5bn capital raising program. In addition to the local issue, ICICI Bank plans to raise another $2.5 b from the issue of American Depository Receipts.

In addition to the equity issues, ICICI Bank is also raising money by selling shares of the holding company for its insurance businesses. The timing of the stake sale in the holding company would be determined by clearances from RBI and IRDA.

This week, ICICI Bank received permission from the Foreign Investment Promotion Board to sell up to 24% equity in ICICI Holdings. However, the bank will be offering only 5% to international investors.

“China is possibly 10 years ahead of us. Even if the top four banks in India are put together, the size would be lesser than that of the fourth largest Chinese bank. The combined market capitalisation of all banks in India would be lesser than half of the M-cap of China’s second largest bank,” points KV Kamath, MD & CEO, ICICI Bank.

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ICICI Bank, has a market cap of about $ 19.89 b that is the highest among financial services companies in India. ICICI Financial Services, the holding company for its insurance and asset management business, has been valued at $10.94 billion. Goldman Sachs, Swiss Re and Nomura, along with two other investors, have picked a 5.9% stake. Of this, Goldman Sachs has picked up 2.02% stake.

A few swallows (few days of downturns of stock indices) do not a summer maketh - and we thought the India story is played out. Can’t be more wrong.

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The DLF dilemma

To invest or not to ?

DLF IPO never ceases to surprise by contrasts. The moment I finish reading a news that says overwhelming response by Institutional investors to its mega IPO, there’s another article which elaborates why the IPO should be dumped by investors.

The issue opened on Monday 11 June. On the second day, the issue was subscribed by 1.28 times. However, the retail investors have not given warm response to the country's biggest IPO, as the retail portion was subscribed merely 0.101 times.

Valued at the higher end of the price band, the company would be the eighth largest by market capitalisation, post-listing. With negative cash flows and current earnings abysmally low compared with future projections, the company is demanding its price relying solely on its vast land holdings, the value of which is not clear.

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They've got balls, yeah !

I was a bit ahead of time then. I am referring to a few US based entrepreneurs interested in raising VC funding for their businesses who had approached me earlier. The businesses were robust, had global delivery models, could’ve been easily replicated in cost advantaged locations – yet Indian VCs weren’t interested. Remember, it happened at a time when most Indian VCs were crying hoarse about lack of investible ideas available locally.

Imagine my relief when I found ICICI Venture has bought out the venture investors from the Seattle, Washington, based Radiant Research for an undisclosed sum.

ICICI Venture has bought out the stake of the original venture capital backers of Radiant who had stayed invested in the company for about 10 years. “Our original venture capital investor group had been involved with Radiant since our inception in 1998. This change in ownership represents a natural transition from a start-up company to an established company with the financial resources to strategically advance all of our late phase service offerings,” said Pamela Spaniac, CEO of Radiant Research. “We are particularly excited about the potential for international expansion opportunities that ICICI Venture will provide.”

Now at least I know one Indian VC that has balls – to look beyond boders.

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The Good, The Bad and The Ugly

I came across some interesting bits of news today. All related to DLF in some ways.

The Good – DLF IPO subscribed 41% on day one. The QIP portion is fully subscribed. The initial public offering of real estate major DLF, which is expected to mop up Rs.96.25 billion ($2.40 billion), received 41 per cent subscriptions within an hour of opening on Monday.

The Bad – Analysts say the issue is overpriced and figure that the concentration of DLF land bank in Gurgaon (near Delhi) does not bode very well for the prospects of the company. Sample these -

Brokerage house Enam said: "At the upper band of Rs 550 the stock trades at a significant premium to our base case valuation of Rs 404. We believe the stock is overvalued and initiate coverage with Sector Underperformer rating and a price target of Rs 404."

Raising concern about DLF's over-dependence on Gurgaon, Angel Broking said that this is a big concentration in one city, considering the fact that Gurgaon is a satellite town and it took DLF 30 years to develop the 3,000 acre DLF township.

The Ugly - After a brief respite, the city [Gurgaon] is again sweating under unscheduled power cuts. New Gurgaon, like DLF and Sushant Lok, seems to be the worst-hit. DLF phase II suffered a power cut on Tuesday night, while phase III has been experiencing unscheduled cuts for the past two weeks. Read the full report here.

DLF issue could have very well done without these bits. What do you think ?

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FCCB rope trick

“FCCB offers thrive, especially when stock market and the economy are booming. Investments are made with an objective of generating certain amount of returns and reinvesting the money in other instruments. Once expected returns are earned, investors can exit without waiting for maturity of the bonds,” says Kiran Vaidya, head of investment banking, Religare Securities. Corporates are also benefited in that they can raise funds at a premium which is added to reserves and helps strengthen their net worth position, he said.

What Kiran - like most other I-Bankers - obviously misses out is its impact on the issuer (company) when Rupee is appreciating like it does now (1$= INR 40.50). The FCCB that stood as debt (borrowed when 1$ fetched INR 45) in the company’s books, becomes a high cost equity upon conversion (now when INR is dearer). Besides the impact of (unintended) cheap conversion, it dilutes earnings and has also to be serviced for life unless bought back. It's a triple whammy for the issuer !

Here’s what I think. Why not issue FCCB with the caveat - if the issuer’s domestic currency appreciates beyond a (hurdle rate) % during its pre-conversion term, the issuer shall have the option to repay the debt at an additional % point of interest over what has already been contracted…Law as it stands now, does not seem to have anything against this condition.

I think that would have saved the day for many issuers today. What do you think ?

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Did you say valuation ?

Earlier during my career, I had known several companies where owner CEO `A’ meets another owner `B’ at some party and talk deal. It could either be a total buyout or acquiring one of its divisions or brand or some assets. No due diligence, no valuation exercise, not even verification of asset quality or title. In owner CEO situation, you can’t ask questions. Just do it.

But will TATA do something like it ? It seems when driven by despair, even they would.

The Tatas are paying Rs.140 per share for acquiring Mount Everest Mineral Water, which values the company at around Rs.4.60 billion($115 m). For a company with an annual turnover of Rs.250 million ($6.25m), it’s a very steep price. Mount Everest’s net profit in the quarter ending December 2006 was a mere Rs.3.3 million ($82.5 k). Earnings per share added up for the four quarters ending December 2006 amounted to only 53 paise ($ 0.013).

After Vodafone buyout of HutchEssar, yet another case of acquisitive ego defying valuation math…full story here.

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"Simplifly"

Capt.G.R.Gopinath, Founder & CEO of Air Deccan, India’s low cost carrier (LCC) is a smart man.

Just as everyone was about to write it off as a sick airline headed for its grave, yesterday this wiry ex-soldier of Indian army quietly palmed off a 26% controlling stake to Vijay Mallya’s Kingfisher Airlines for Rs.5.50 billion ($137.5 m) – Rs.155 per share (IPO was at Rs.150/- a share). In the process getting a return of almost 6 times his original investment of about Rs.930 m ( $ 23.25 m). As per the deal terms, he will continue as Chairman of the Company. The company had a last quarter loss of Rs.2.21 billion ($55.25 m) and its EPS is a cool negative figure. Coming to think of it, the strategy is fairly simplistic and well executed - go float a capital intensive business, shake down the whole market by suicidal pricing, break the back of existing established players almost forcing them either to buy you out (to stop bleeding price cuts threatening their very existence !) or to go out of business and eventually sell it to one of them and make 6 x returns...ain't that smart...?

Now to a little abstraction. Remember the Captain did it in India, a hotbed of spirituality where your good karma never goes unblessed or unrewarded. True to his words, he made air travel affordable for many a cost-conscious, VFM minded people (not necessarily poor) and he can safely count on all of their blessings. In particular, of those who could make it only because Deccan made it affordable for them, at real low cost – “Simplifly” goes its slogan – without a worry and no frills.

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Now with $137 million in his pocket, in all probabilities, this Captain would want to do more of good Karma. Unless he makes it clear, every industry has reason to worry !
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Can Subhash Menon be cool with this ?

Subhash Menon must have found it overvalued if he didn’t say “Oops, I missed it” ! Or has he had his fill with Azure and Syndesis under his belt ?

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I was a bit surprised to see him letting go off Cibernet to PE firm Warburg Pincus. Who am I to guess ? It could even be that he felt SubexAzure’s leadership in telecom OSS space is so formidable that the solutions portfolio offered by Cibernet [of financial settlement of voice, data, and m-commerce transactions, inter-company billing protocols, roaming administration tools and financial settlement programs] looked just plain vanilla.

Taking a close look at the services provided by Cibernet to over 300 wireless operators across the globe, SubexAzure will have to go some length before it can be the Full Monty in this space. Subhash may keep his nose to the grindstone, but the kind of revenues, customer portfolio and market share presented on a platter by Cibernet is alluring. Fresh from the acquisition and integration of Syndesis, he could be excused for feeling pleasantly weary if not suffering from acquisition fatigue.

It’s a dog-eat-dog world out there. No room for let ups.

I'm just a freelance I-Banker and a blogger. Subhash should know better.

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Ruias could use some sleep, badly !

Ruias must have been losing sleep ever since the Vodafone deal.

Good reason to think so since the Ruias are getting ready to *monetize* 33% that they hold in HutchEssar (now Vodafone Essar) – apparently to raise around $4.5 billion debt for overseas acquisitions (of non telcos).

“The fund-raising proposal will put the financing at a loan-to-value ratio of 82 per cent, which is quite high for a deal backed by shareholding in an unlisted company,” a banker reportedly said.

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That's it...Ruias could use a safety valve. The deal is all about an unlisted company, valuation on paper, futuristic…ah, ever so many strings. Even as the deal was underway, several eyebrows have been raised over the stratospheric valuations offered to [HutchEssar] the unlisted, loss making telco having negative cash flows – purely on the basis of 22 m subscribers [ cost of acquisition = $ 852 per subscriber].

While there could be the buffered comfort of that put option, [which allows the Ruias to sell their 33 per cent stake in the company over the next 3-4 years in the open market at a minimum benchmark price] in the dog-eat-dog corporate world, you can’t sleep in peace unless you cash it all in – which Ruias are yet to - especially when the fortune has been a chance event, happened by bid frenzy instead of sweat and toil.

Is it blind leading the blind or a house divided against itself that hurried Ruias to monetize ?

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Ruias could use some sleep, badly.

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Between an SEZ here and an SEZ there…in China

When the people of Uttar Pradesh elected Mayawati’s BSP with a thumping majority (overthrowing Mulayam Singh’s Samajwadi Party), her first item in the agenda for governance was a given – review all SEZ cleared by the Mulayam Singh, the former Chief Minister of the State.

In one of its most significant decisions since assuming power, the Mayawati government in UP has announced its intention to refer the allotment of 1,200 acres of land to Reliance Anil Dhirubhai Ambani Group for setting up an SEZ, to the Union government for review.

I also had a lookback at Nandigram riots in West Bengal (over Tata's SEZ) where the Left rules – for several decades now.

I was reading Vinnie's post on instant Chinese cities (Thanks Vinnie, for the pointer) and felt a bit wistful. How long would it take for our people to learn from our enterprising neighbors?

Excerpts from NatGeo article -

“In 23 minutes, they designed an office, a hallway, and three living rooms for factory managers. On the top floor, the workers' dormitories required another 14 minutes. All told, they had mapped out a 21,500-square-foot (2,000 square meters) factory, from bottom to top, in one hour and four minutes. Boss Gao handed the scrap of paper to the contractor. The man asked when they wanted the estimate."How about this afternoon?"

The contractor looked at his watch.

It was 3:48 p.m.

"I can't do it that fast!"

"Well, then tell me early in the morning."

That’s how they do it in China. We bloody well understand and fast…

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Communism in China ? Are you kidding ?

The turn of events in China clearly shows that capitalism doesn’t need democracy. Capitalism’s wide diffusion of economic power offers enough incentive for investors to take risks with their money. But capitalism doesn’t necessarily provide enough protection for individuals to take risks with their opinions.

But that’s old news. The latest is that the Chinese are ready to walk the extra mile and do the unthinkable – To let private equity manage a piece of their huge forex kitty, shaming even the most capitalist of countries that view private equity with skepticism. In one final fling, Chinese are ready to consign to hell the Mao Zedong brand of philosophy that shunned private enterprise. I like that gutsy bit - no place for anything that stands in the way of progress – not even venerated ideology.

As per plans, the Chinese government would acquire a $3 billion stake in the Blackstone Group, the private equity firm, in the country’s first effort to diversify its $1.2 trillion in foreign-exchange reserves beyond US treasury bills and into commercial enterprise.

An investment agency modeled after Temasek (the investment arm of the Singapore government and owned 100% by the Ministry of Finance) in China would effectively create the world’s largest hedge fund – voila ! Some analysts say that the China fund’s investment of billions of dollars in the global financial markets could push global asset prices higher, affecting American and European stocks, bonds and interest rates, as well as the value of energy and natural resources in Africa and the Middle East.

Full story here.

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Dr.Manmohan Singh, Mr.P.Chidambaram and Guv Y.V.Reddy- even you are having problems with the surge of $$ inflows, aren't you ?...and you wrung your hands in despair while letting the Rupee appreciate...look at your smart neighbour and take a leaf or two - NOW...!

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Yet another gatecrasher…!

If you believe in something, go for it. This is the only way to really find out. Mathematically, the naysayers are right 95% of the time, but believing you’re in the 5% is what makes VCs they are.

Just as Ankur Srivastava, MD of DTZ brings out this report which talks about oversupply of commercial office space (in Chennai, it’s excess by 200% as they say) in Indian cities, Oak Investment Partners, the US based VC fund is setting up a Real Estate VC fund in India with a $ 200 m corpus. Can we call it the Symposium effect ?

Normally if you enter in an oversupply situation, the downward price pressure (or rental pressure, we are talking about real estate here) would take a long time to stabilize. That’s when leveraged investors (who have mortgaged the properties to Banks to fund their buys) begin to get margin calls from Banks and feel squished. Warren Buffet, the legendary investor's saying “the markets can remain irrational longer than you can stay solvent” comes to my mind.

I have often wondered why the Bubble horn is still not blowing. Aside of occasional rants by Deepak Parikh, Chairman, HDFC Ltd., India’s leading player in real estate and housing finance, not many seemed really concerned. [“How many malls can afford to pay Rs 100-150 or Rs 200 per sq foot? Look what happened to Crossroads (India's first mall). Only restaurants are left because food sells and the Piramals have sold out. The same thing is going to happen to other malls. There are many international brands, but they too cannot afford to be present in every mall”...Mr.Parikh squeals]

If you are riding the wave, why rock the boat....Welcome to party, Mr. Jerry Gallagher and prov'em all wrong !

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Happy flippin' ...Renuka !

Ever tried turning an ocean liner like you do a speed boat ?

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Nah… When you want to turn a speedboat, you turn the wheel. For an ocean liner, you have to plan two days ahead. RMS Titanic couldn’t swerve the iceberg because of it. The only tribe that seems to have managed it so well is Private Equity managers. The ocean liner metaphor here is to a Public company and the speed boat is what it becomes in the hands of private equity. I am referring to the art of buying out companies, sprucing them up and staging lucrative exits. It calls for a lot of guts.

I really wish the trend to pick up in India. Like many firsts to its credit, ICICI Venture can deservedly bag this too – why not…when it’s slogan is “fueling your aspirations”. If she can pull it off, Renuka Ramnath, CEO will surely be tap dancing her way to office soon after laughing her way to the bank.

As per this report, ICICI Venture, the country's largest venture capital firm, is likely to make a return of four times on its cost of acquisition. It had acquired the refractories business from ACC for about Rs 250 crore in 2005. Of that roughly 40% (Rs 100 crore) was equity and the balance was debt. ICICI Venture expects the prospective buyer to shell out Rs 550 crore. Taking out the debt portion of Rs 150 crore, the return on its investment will be Rs 400 crore, equalling four times returns.

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UBS Securities is believed to be advisor to ICICI Venture for the sale of ACE. If ICICI Venture is successful in selling ACE, it would be its first exit from a company, in which it has made a complete buyout. Other companies where it has gone in for a buyout include Infomedia India (formerly, Tata Infomedia) and VA-Tech India (engineering services firm).

The ease with which you flip, is a function of timing and discretion. The next opportunity that’s lying in wait often prods it and the cycle rides on. Too bad these guys not being at the wheel of the Titanic on that fateful night…!

Happy flippin’….Renuka !
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If you can't score, try shifting the goal post

Steve Pavlina says the best way to “win” an argument is to go for an entirely different goal than trying to prove the other wrong.

This also seems to be the strategy of Rajeev Chandrasekhar, [currently VC with Bangalore based Jupiter Capital as well as a Rajya Sabha M.P] who seem to be fairly upset about the recent stamp of approval given by FIPB to Vodafone-HutchEssar deal. Rajeev was previously the majority shareholder and head of BPL Mobile before it was sold to Essar Teleholdings in a deal valued over $1 billion. He is outraged since the Foreign Direct Investment (FDI) policy of the Government stipulates a maximum 74% ceiling for FDI in Indian Telecom sector, HutchEssar deal managed to slip through the policy net (by recognizing the 15% proxy holdings of two individuals as "resident holdings" - who were clearly surrogate stand ins for the foreign owners).

The background. In February, Vodafone had acquired Hutchison Telecommunications International Limited's (HTIL) 52 percent holding in the Indian company Hutchison-Essar, in which the Ruia-controlled Essar group is the junior partner with a 33 percent stake, 22 percent through a foreign holding firm. The remaining 15% is *ostensibly* held between Hutch CEO Asim Ghosh and Analjit Singh, MD of Max India, both reportedly Indian residents. Technically therefore the FDI sectoral caps have not been violated by HutchEssar by virtue of 26% stake is still held by Indian nationals (11% Essar, 15% Asim-Analjit joint holding). Smart move indeed.

Rajeev wants to know "is it the case of the government that where there is sectoral cap, any Indian citizen (or entity) standing proxy for foreign source of capital is enough to satisfy our requirement of being an Indian investor," in his letter questioning this model that is rampantly finding favor in the country.

"The question is not attempting to target any one company, but rather I am raising this issue as an issue of principle to start a debate about our country's approach towards foreign investment, the loopholes in our approach and the disrespect of the laws of our country by a few foreign investors. I have posed similar questions recently pertaining to foreign investment in Land on coastal areas," he groans.

Reasons for his carping are not hard to seek. BPL's Investment Bankers and Lawyers (hired by Rajeev for BPL-Essar deal) were not so ingenious in putting together a deal structure which technically could pass muster before FIPB and stay well within the FDI sectoral restrictions. Instead they just threw the rule book at him without much thought – the 74% sectoral caps for FDI investments in Indian Telecom sector had restricted his options and made him sell to another Indian Telco leaving no scope for fuelling a bidding frenzy as happened in Vodafone-HutchEssar deal. While HTIL, by smartly categorizing the 15% holding as stake held by residents, managed to pull it off at a stratospheric valuation of $11.1 billion for the 52% stake in HutchEssar. By this yardstick ($852 per subscriber), BPL divestment should have yielded much, much more than what Rajeev got from Essar. It’s an open secret that both Asim Ghosh and Analjit Singh stood proxy for HTIL, the holding company of Hutch and have several restrictions which forbids them from divesting it on their own to any other third party.

Now you know why I felt Rajeev is going for a different goal (newfound patriotism which urges him to raise the issue of disrespect for Indian laws and even threat to national security since it's too late to wreck the deal) instead of trying to be right !

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What do you think ?

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2 and 20 has now become 3 and 50 !

Warren Buffet called them “2 and 20 managers” [Hedge Funds that charge 2% of funds managed as fees and 20% of profits as carry] and said this much – “when a man with the money meets the man with the experience, the man with the experience ends up with the money and the man with the money ends up with the experience”.

Call it the Groucho Marx problem: Of late Investors trying to put money into hedge funds frequently find that the managers they want do not want their cash.

Just as Groucho complained that he would not join any club that would accept him as a member, even very wealthy investors can find themselves faced only with hedge funds they do not want to invest with. As a result, some investors are resorting to devious tactics to get stakes in the best hedge funds.

Perhaps Mr.Buffet has been naïve to the latest phenomenon of mismatch of supply and demand that has given rise to the tendency of successful fund managers to jack up their fees — to 3% a year and 50% of profit in the case of SAC Capital — and impose long lock-ins, preventing customers from getting their money back for as long as five years. He might now call them “3 and 50 managers” – so long as they stick with those numbers.

Many of the industry's biggest names — Steven Cohen of SAC Capital, Paul Tudor Jones of Tudor Investment, Louis Bacon of Moore Capital, Steve Mandel of Lone Pine Capital and others — do not need to expand existing funds further and often believe that more cash would hurt their returns. Even when they find they have the capacity to take more money, they typically turn to their existing investors first.

But investors who know the tricks of the industry might be able to find cracks in the door. The most obvious way to get into a closed hedge fund might appeal to Groucho, but most people would shy away from it: Simply send your money to the fund's depository bank and rely on the fund's automatically issuing units, as LAtimes reports here.

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ARC or debt collectors ?

The activities of Asset Reconstruction Companies (ARCs) finally seem to have picked up in India. Using the topicality of the subject, I had made an earlier post here. The pace of reforms in this billion $ industry was somehow slackening. To enthusiasts like me, it used to be more exciting to watch the paint dry or the grass grow. Ah, but then they do give some mild surprises like what I found in The Financial Express here.

I somehow keep asking myself this question. Our Banking system itself has been subjected to a fairly high level of oversight by both RBI and Finance Ministry. They have to maintain a 9% Capital Adequacy Ratio (CAR), SLR, CRR requirements imposed by RBI through its annual credit policy besides the regulations flowing from Banking Companies (Regulation) Act. Despite such elaborate supervision, Banks have managed to create a mountain of overdue loans or non-performing assets (“NPA”).

If it happens despite regulations, may be it’s time to relax them. Something similar is brewing in the US over Sarbanes Oxley Act, where there is a mounting pressure to loosen the strings by the Government. Otherwise ARCs merely end up being debt collection agents of the Banks rather than resuscitators of ailing businesses or turnaround artists. Vulture funds or Private Equity model should work fine, though with some brutal maneuvers deservedly on borrowers who dodged repayments, that led to the NPA creation in the first place.