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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