Short takes - The Coal India Ltd's dilemma

Last week, by a Presidential directive, the Govt of India advised (or arm-twisted, depending on the way one views it) Coal India Ltd [CIL], a GoI-owned listed company to enter into long-term Fuel Supply Agreements with Power Producers - to supply at least 80 percent of the requirements of these power producers - who have been troubled by the prospect of having to cope with sudden price spikes and even non-availability of coal. The decision has been in the line of fire from a number of quarters, starting with the CIL's own Independent Directors and other investors, prominent among them The Children's Investment Fund, Coal India’s largest foreign share holder, which recently initiated legal action against the government to protect its investment in Coal India.

The decision has been sought to be justified ostensibly with the public interest angle brought in, saying guaranteed coal supplies to power producers is vital to ensure the latter's viability given the unexpected spike in coal prices in international markets. Coal prices are currently ruling above the levels they had projected while bidding for the Mega projects. The FSAs effectively will ensure that the power producers are insulated from price changes of coal, but CIL will have to supply coal to them at the agreed price (at a deep discount to market price), either from its own production or by buying from the market. The latter scenario now appears highly probable, as CIL has not been able to add to its capacities due, again, to governmental restrictions on mining. Thus, we now have a situation where a company has been forced - through a government diktat - to supply its produce at below-market prices to a group of predominantly private sector players (NTPC is a beneficiary too), who had engaged in competitive under-pricing at the auction stage. The price risk has thus been willy-nilly transferred to CIL, whereas ideally this price risk ought to have been factored in by the power producers while bidding, either through hedging or through appropriate pass-through clauses in the Power Purchase Agreements they signed with the Power Distribution utilities. The audacity with which a few players threatened to stall work at their sites lest assurance on fuel supply came through was to be seen to be believed!

Only time will tell the impact of these FSAs on CIL's bottomline, if it is not able to augment its capacities soon.

The Mithya of Satyam; aka the Satya(m) of a Mithya!!!

Mithya --> Illusion

Satyam --> Truth (also, the name of the now infamous IT company)

It was with great disbelief that I heard the story of Ramalinga Raju's confession. In fact, till I read it, on the web, I didn't really grasp the enormity of the fraud. Now, his confession has showed us the 'Satyam' behind a number of 'Mithyas'. What are they?

Till recently, almost all write-ups on the economy and business environment had repeatedly pointed out that we have great / impregnable systems and checks in place and the absence of any major scandal after Ketan Parekh's proved that. Who could have guessed that a gigantic one was taking place right in front of us, without anybody knowing about it? It's next to impossible that the auditors and key finance personnel in the company could not find this out. Just the CEO & CFO managed to pull it off and that too for a number of years? No way, I'd say.

The fiasco showed us, again, that auditors, if not all of them, are hand-in-gloves with the perpetrators of frauds. However tight the auditing guidelines & accounting standards, if one is creative enough, fudging is incredibly easy. To find gaps, given the current technological advances in book-keeping & complex business processes, auditing professionals need to be highly skilled; we have a long way to go in this respect. Revenue recognition norms, especially for those firms in service industry, need a relook.

With Enron went Arthur Anderson; will Satyam episode lead to black-listing of PwC, given that it was already under the scanner for its role in the failure of GT Bank? No chance, if one were to look at the utterances from ICAI functionaries; they say action will be taken only against the partners and not the firm. Yours truly once had a great deal of admiration towards this firm; no longer it remains. A valuable lesson is that, being big is not a guarantee against failure; in fact, as you grow in size, stronger measures to manage operational risks are to be put in place.

Independence of independent directors is to be ensured through new means. One feels that, for companies which fulfil certain criteria in respect of their assets / market cap, SEBI should be the body which appoints independent auditors, so that, the independence is fully ensured.

Listed companies carry an aura of transparency with them, and subsequently, lower risk premia are attached to them. It is assumed that fear of a market backlash will prod them along the path of self-regulation. Raju's confession tells us that it was his fear of such a backlash and takeover attempts that made him cook up the figures! That is a direct barb at the short-termism of market participants. In fact, one is tempted to say that we are living from quarter to quarter. The behaviour of markets soon after the announcement of quarterly results is too wild nowadays; the stock is battered, even in case of growth, if the growth is not as per analysts' predictions and no thought is given to the long-term prospects of the company. Such an obsession with the Q_n figures needs to be restrained.

One's heart goes out to those investors who bought into the Satyam stocks on Jan 7, before the story broke. Who will compensate them [that is, the ones who have not yet exited], as well as others who invested in shares of other companies and suffered losses from the market meltdown that followed?

What needs to be done now?

• Speedy investigation, trial & justice
  
• Tighter regulation
  
• Revamp of audit practice – it's time competition is brought into the auditing profession; the ICAI's monopoly over the same is not good for the profession and the country in the long-term [yes, I'm an interested party here; but that does not dilute the logic of this line of thought].

What’s cooking for 2009?

Now, this – how 2009 will pan out – is a question that's been 'analysed' in many fora already. So, yours truly would desist from doing it. In fact, my mind wanders and seeks answers to a number of questions... Again, that is something my mind always does. For a change, I'll jot down a few here...

Governance

When will we, Indians, have a well-functioning government in India? We have an elected government, yes; we have a functioning government, yes; but, we lack a well-functioning one – an accountable one. Agreed, there cannot be any govt which satisfies all people's aspirations; however, every party in India always utters food, clothing and shelter for all. It's indeed a matter of shame that even after sixty years of getting independence, we're nowhere near the goal of a minimum standard of living for our billion-plus population! Moreover, where was our government when a handful of terrorists, like rabid dogs, audaciously kept on planting bombs and attacking innocent civilians in different parts of the country? While not a day goes without blaming the rabid terrorists and the nation which harbours them, what firm action has been taken to rout them? Again, where was the govt when hundreds of farmers committed suicide due to mounting debt? Apart from destroying the 'debt-repayment culture', what did the much-publicised farm debt waiver scheme achieve? Given that 2009 is an election year, will we finally elect a government that performs well? Or, are we destined to get one more lame-duck ministry?

Economy

Everything was honky-dory till the US economy sneezed and ours caught pneumonia! Pray, how long can we keep blaming the global economy for our woes? When the fruits of globalization took time to reach the masses due to inefficiencies in our system, globalization was blamed; it is being blamed again when the economy is facing a downturn. In 2008, the RBI tightened the strings too much and too early, thus jacking up interest rates; it's doing the same thing in reverse now – too much and too fast. By releasing an estimated Rs.300000 Crores within a short span, ignoring the money multiplier effect, and relaxing many rules together – e.g., special finance facilities for NBFCs etc – is the stage being set for the enactment of a desi version of the sub-prime drama? How much of the currently perceived slowdown in our economy is due to our own creation? And, any news about investments for improving our infrastructure?

Corporate Governance, Financial Markets

No, it's not about the Satyam imbroglio; it's about credit rating agencies [CRAs] and mutual funds [MFs]. It's time a new system is put in place to ensure independence of CRAs' job – rating the public issue of debt / equity capital. From the 'issuer-pays' model, we should move to 'regulator-pays' model, ensuring at the same time that there is no patronising of any particular CRA. As for MFs, one cannot fathom why listed companies [are allowed to] invest in them. Two reasons why they should be kept out: one, the companies, especially the listed ones, [can afford to] have professionals to manage their fund flows and to optimise cash flows and two, MFs were conceived as a mechanism to allow retail investors who aren't finance-savvy to reap the benefits of participating in equity markets. One feels that the kind of redemption pressures Indian MFs faced in Oct 2008 could have been avoided, to a great extent, had companies been kept out.

The bottomline is that, instead of being garrulous, our so-called leaders should now take firm action to help India emerge stronger from crises; and the people, too, should take an active and renewed interest in nation-building. Jaago re!!

Musings on new FY

A new financial year (FY 2008-09) dawned today, in India. There are hopes as well as fears about the same. How will the new FY pan itself out? Even if one goes by the trend as in previous years, this time around, the scene is a bit confounding and confusing for all stakeholders. The beginning of an FY is important to me on a personal front too, given my job.

 

The thing that is foremost on everyone's mind is inflation. The WPI-based inflation rate is far above RBI's (as well as common man's) comfort levels. And, it is a politician's nightmare, especially when elections are round the corner. For the time being, let us not think about the response - it is most likely to be a rate hike. What could have led to this sort of an inflation?

 

Basically, it's the primary food articles including wheat, rice and pulses whose prices have risen. As a World Bank study put it, the price rise is a global phenomenon and is due to a variety of factors, including higher demand from India and China...

 

What is ailing India's agri-sector? Everyone knows it and it has been very well-documented too.....but no action has been forthcoming from any quarter to reform India's 'core business'. The latest example of inept handling of agri-sector issues is the banning of exports of rice, except the basmati variety. Yes, to rein in domestic inflation, such a measure would be necessary, only as a last resort. Think for a moment about the farmer as a businessman. Would it be fair to dictate to a businessman not to sell his produce at a price it commands, wherever it is?

 

Even more ridiculous happenings are unfolding in Kerala. There is a bumper crop, but there are not enough farm workers available to harvest the same. The CPI-M- affiliated farm workers' union is opposing and resisting usage of harvesting machines. An unexpected and heavy summer rain came and the crop is literally in the water!! Bumper crop is now 'no crop'!!! A few farmers have taken their lives, but again, there are only empty promises. Blaming the summer rain, all ministers are happily attending the CPI-M party congress in Coimbatore and are proudly showing off to the media their latest member - director Mani Ratnam's son!! These are the real Neros of today........

 

The measures announced by the government, ostensibly to combat inflation, seem more like knee-jerk reactions. More concrete measures to set the supply side alright, or rather, to ease the supply-side constraints need to be there - till then, the problem of inflation will surely not go away.

 

When you look at the monetary policy response that is going to be out soon, as I said before, it may be a rate hike and some associated measures; whether it is going to solve it all, one needs to wait and watch. A rate hike will widen the interest-rate arbitrage and put more pressure on the INR. The problem may be compounded due to lack of a developed bond market. More curbs on ECBs are likely and it will affect the corporates adversely. Though the 'India Growth Story' is intact, it may drive down the stock prices.

 

As for financial reforms, it is best forgotten in the new FY. Those opposing reforms now have a 'point' - the reckless lending, complex financial engineering stuff and the consequent slowdown / crisis in the US are now a potent weapon in their hands. Also, elections are coming up and so, reforms, RIP for a year!!

 

The bottom-line is that strong fiscal measures are needed to avert a real slowdown in Indian economy; will they be forthcoming in an election year?

Budget 08-09 - What's the big !dea?

And, Finance Minister P Chidambaram has presented the budget for the year 2008-09. Lots of bouquets and brickbats......yes, but what is the bottom-line?

 

The two things that dominated all discussions seem to be the farm debt waiver plan and the substantial relief for the salaried class..And, therein lies the big idea, at least to me.

 

Almost all people know that even as growth rates are moving up, agriculture continues to be the laggard. Yes, farmers are in distress, the farm sector employs more than 60% of our workforce and with each passing day the farmers are finding it more and more difficult to continue with farming. But, debt waiver is a patently wrong idea in that it sends out a wrong message to the borrowers - "do not repay; the government will waive it" - as well as the lenders (mostly banks) - "Give them loans; we will give it back to you". It may be OK with public sector banks, but what about the private banks? How can the government dictate to them how to lend and waive debts? What happens to the net worth of the banks and ultimately the country?

 

Again, who are going to benefit from the scheme as is proposed? Farmers' miseries are caused, inter alia, due to their borrowals from the informal sector, at usurious rates of interest. But, the waiver announced now does not cover these borrowings. Add to that, there are several "Conditions Apply" tags - you have to be small farmer, having the specified area of land, borrowals upto the specified date, and so on. Doesn't misery / drought strike uniformly? Why these restrictions, then? There is also the news that the bulk of the amount will go to the co-operative banks! We all know the set-up in co-operative banks - it's the petty politicians' goldmine. Rather than letting the money go down the drain, the Rs 60000 Cr estimated as the waiver amount (how did he arrive at that 'magical' figure, by the way?) could be better deployed in developing agri-infrastructure.

 

Again, surprisingly, no resources have been allocated for this plan. The Finance Minister says he is intelligent and that he will soon spell these out. One hopes he does it soon! What about raising the money through disinvestment in public sector undertakings? Go and list PSUs like BSNL, MTNL, LIC and further stake sale of other listed PSUs? After all, Economic Survey also suggests it. Left too will not oppose it! "Disinvestment for farmers' welfare" - this is the 'big idea' for me!!!

 

The income tax incentives, in my view, were long overdue. But, the FM could have hiked the savings limit u/s 80C to something like 1.5 lac. But, the FM seems to have an ace up his sleeve - he may be believing that what he gives away by way of raising the exemption limit and change of slabs, he is going to get it all back (and may be more) once the 6th Pay Commission submits its report and it is implemented!! Another 'big idea'!!

Organised Retail - Again

Yours truly had written about the sunrise sector of organized retail twice before (here and here). It wasn't a complete account in any case, but what has prompted this entry is the discussion on the same on the Management Accountant Blog and the strike on June 27 by the organization of small traders (the Vyapari-Vyavasayi Ekopana Samiti) in Kerala against the entry of retail giants [Interestingly, the processions by striking traders in Kochi were led by the same {leftist} politicians who inaugurated the new Reliance Fresh stores in Kochi; so much for commitment to a cause!!].

 

The grouse of small traders against organized retail, as outlined before, is this: the small traders will be forced to close shop due to low prices and once that happens, the big malls will start fleecing the customers by charging exorbitant sums. That the small traders will feel the heat of competition is a fait accompli; some of them will have to exit, as has been the experience around the world. The question is, is that a reason enough to resist the biggies. Let's look at it this way: the malls are not manned by robots; they too will be creating a lot of jobs for the burgeoning young population of India. And, more importantly, they will be working in a better environment. Why is everyone talking only of job losses and not about job creation?

 

Again, it is not that there is no way out for small traders - they can come together, form a single brand and put up a fight against the biggies [It has been outlined here and, therefore, is not repeated]. There were reports, some months back, about how some kirana-wallahs in Gujarat /Maharashtra were going about doing just the same. [How long will it take for all to realize that trade unions are not for confrontations with the government / people, but to serve each other for mutual benefit keeping in view the larger interests of the society?]

 

A pertinent point raised here relates to the low scope for tax evasion by organized retailers. Everyone knows that not many traders issue invoices and can well imagine the loss  - of both indirect (sales tax)and direct taxes (income tax) - the government incurs due to this. Thus, the government too will be a big beneficiary of organized retail taking root. Also, since almost all big retailers will be - and can be only - corporate entities, there is scope for ensuring compliance with different regulations aimed at preventing defrauding the consumers. The pet peeve of critics - higher prices due to cartelization once the small players exit - can be addressed effectively through mandatory Cost Audit.

 

Forget the low costs to consumers, forget the benefits that will accrue to the agri-sector; one aspect sorely missed by all seems to be this: the unorganized retail sure provides a lot of employment opportunities, but at the end of the day, it is just that - unorganized. Remember, the trade unions cover just about 10 per cent of the total workforce in India. The rest  - mostly in retail sector - are unorganized; not for them, the employee protection / welfare schemes like PF, Bonus, Insurance, etc. Don't we need to offer them these? Do they not deserve to receive such benefits? In a way, by opposing organized retail, the traders' unions and the politicians who support them are preventing the coming together of the unorganized workers (By aligning with the shop owners, isn't the Left betraying its own cause?). With organized retail, better employee treatment will result and this will help in covering an important step towards a social security cover - at least a semblance of the same, the kind which exists in India now - for all.

 

Finally, the kind of opposition seen now in Kerala carries with it a deep sense of deja vu. It was the same leftist politicians who waged a sort of war against computerization in the late 80s and early 90s, resulting in other southern states prosper in IT business; just a few months back, a bullet was seized from the laptop bag of CPI(M) state secretary - my point is not about the bullet, but the 'laptop'! The same vitriolic spirit was in full display when the previous government sought a loan from ADB; soon after coming to power, the present LDF government silently signed the dotted lines the ADB showed them! They opposed the 'Smart City' project when in opposition and a year later signed the agreement with the same people. Who knows, a few years later, we Keralites may even see a mall owned by CPI(M)!!!!

It Happens only in India

I found a few of the recent happenings to be really amusing....In my view, these kind of things can happen only in India......Read on...

 

The Prime Minister Dr Manmohan Singh, in a speech made at a CII function, asked India Inc to have a check on CEO & promoter salaries. He feels that they are paid in excess of what they deserve! He also came down on conspicuous consumption. More importantly, he said that corporates should show moderation in their pursuit of profits. Really interesting and amusing views, coming as they do from the architect of reforms - L, P and G -  which has made India achieve nearly 10 per cent GDP growth [9.4% in 2006-07], far far above the Nehru rate of growth of 3 per cent! The strong growth India is witnessing now was made possible only because of doing away with the licence-permit raj that was in vogue prior to 1990s. As an economist, the PM should well know that salaries in the corporate sector are a function of demand and supply. Money is a good motivator for most people and higher salaries are to be paid if the companies need to retain people. What is wrong with it? Then again, the message about profit maximization is clearly in line with those 1960s' ideology which totally screwed up India's growth and the ill-effects of which continue to haunt us even now.

 

The PM's message may be borne out of the realization that the 'trickle-down' theory is taking time to work in India. But, take a hard look and it will be clear that development has bypassed only those sectors where reforms were not initiated, most notably agriculture, which employs more than 60 per cent of India's workforce. In fact, no reforms have been undertaken where they are needed the most. And, this inability to call the spade a spade comes with a cost - that of losing elections - as people who are yet to get a taste of what reforms entail, will definitely be wary of them. Add to this the continuous barking by the Commies and their allies who believe in the equal distribution of poverty and it's no wonder that the reformer himself has to take a stance like this. In which other country can you see the PM putting forth such views? It is all the more ironic, since (I believe) the PM himself does not hold such a view!! It is also a pointer to the fact that even after three years in office, he has still not been able to assert himself (Just the other day, I saw on TV a clipping of some public function and you can clearly see that the PM sits down only after Sonia Gandhi is seated. Shameful!!). It's indeed sad to see a fine economist being made to dance to the tunes of petty Leftists and miserable scums like Arjun Singh and TN CM MK.

 

The second development is the Gujjar unrest in Rajasthan which held almost all North Indian states to ransom for 7 days. There were violent protests and it left many people dead. The Gujjar community - which is classified as OBC in Gujarat - wants themselves to be reclassified as STs, since they feel that recently-included-in-OBC-list Jats (who have more members than the Gujjars) will take away a good chunk of reservation benefits. But the Meena community - classified as STs - opposes any such move, as they are afraid they will lose out in the race. Even without going into the causes of this agitation or the merits of the arguments of both parties, it can be seen that this unenviable situation amply demonstrates the pernicious nature of reservation as is being implemented in India. As I have outlined before, 'Caste' is being equated with 'Class'. From Gandhiji's non-violence we have reached the other extreme of indulging in violence to prove a point. When one more caste is considered to be eligible for reservation (on the basis of their political power, what else?), those already in the list will face competition; it is perfectly 'logical', given the way reservations operate in India. Why should there be a hue and cry over that? When will people start appreciating the fact that it is in fact 'economic power' that is important these days and therefore, if at all reservations have to be there, it should be based on objective economic criteria? India will probably be the only country where people fight with each other to be called 'backward'!!

 

Then there is the curious case of a person becoming implicated and later being let off when there is a change in the government. The latest such instance is the one in the Taj corridor case. The case was registered on the directions of the Supreme Court which found there was a prima facie case against the accused. Look what has happened now: UP Governor has refused to grant permission to the CBI to prosecute Mayavati, since he believes there is not enough evidence against her! It is clearly a politically-motivated action, and it becomes even more evident when we read it together with Mayavati's statement about presidential elections. Presumably, to get her support in the race to Raisina Hills, the Congress has soft-pedalled her involvement in the case. Unfortunately, the Governor has again proved that he is just a pawn!!

 

All these happen only in one place in the whole world. It's our India, sadly!!!

Reflections on the Rising Rupee

The Indian Rupee (INR) has appreciated vis-a-vis the US Dollar considerably in the recent period. It has gained almost 13 per cent since July-Aug last year. Even as recently as a month ago, it was moving in the range of Rs 44-45 per Dollar; now it is between Rs 40-41. Who all are happy and who all are worried?

 

The government is obviously happy, for two reasons. One, politically speaking, it gets some bragging brownie points. Though Finance Minister P Chidambaram said, "The government has no view on exchange rates", the ruling class can afford to say that the stronger INR is all due to their 'efforts', especially when elections are on in the all-too-crucial UP. May be, just may be, the guilt of mismanaging the economy in the late 80s and early 90s and having had to devalue INR is still there in the minds of Congress people (Oh, yeah?! You sure?!!!) and the gains made by INR may help assuage such feelings! Second, the government has been able to tame inflation at least a bit: WPI based headline inflation has come down to 6.09% from 6.72%, but is still far too above RBI's comfort levels.

 

Besides all these, a Credit Suisse report released recently has said that the rally in INR has made India a Trillion Dollar GDP economy. India's GDP has been put at Rs 41,00,000 Crore, which at Rs 40.72/$ translates to a little over $1 trillion. With this, India becomes the 12th member of the Trillion Dollar Club, the others being the US, Japan, Germany, China, the UK, France, Italy, Spain, Canada, Brazil and Russia. According to the same report, the Indian stock market capitalization too is closing fast on the trillion dollar level. Music to stock brokers' ears!

 

Another set of people who are rejoicing are the importers, in general and oil companies, in particular. Rising Rupee will help improve their margins. It remains to be seen whether they will pass on the benefits to the consumers.

 

In this context, the role of the RBI is surely worthy of a mention. Though our exchange rate mechanism is said to be market-determined, it was an open secret that RBI discreetly controlled it. All along, RBI used to buy up all dollars coming into the economy and this used to get added to our forex reserves, which recently crossed the $2 billion mark; the Rupee that were issued instead were mopped up by what was called 'sterilization' using government bonds under the Market Stabilization Scheme (MSS). However, many questioned this intervention of RBI and the effectiveness of its sterilization operations. The recent bout of high inflation was at least partly due to this, it was alleged. What has happened now? Though the RBI maintains that there has not been any change in its external sector management policy, the RBI has been conspicuous by its absence from the market in recent times. Is it because it has not enough MSS bonds or is there an ace up its sleeve? No one knows. Also, the RBI has concerns about the quality of the money coming into the country. It is now acknowledged that at least part of the dollar inflows is speculative in nature, called by different names like 'carry trade', 'private equity', 'hedge funds', etc. In a recent interview, the RBI Governor Dr YV Reddy hinted at RBI's helplessness in controlling such inflows which arise from policy flaws.

 

Rising Rupee has implications for India's Balance of Trade (BoT) position too. Unlike most other Emerging Market Economies (EMEs), India has a significant deficit in its Current Account. Coupled with a surplus in the Capital Account, a substantial portion of which is a mere mouse click away from flying out, it presents a tricky situation. The need for export competitiveness cannot be overemphasized. Appreciating INR will make it difficult to achieve the export target of $160 billion laid down in the recently released Annual Supplement to Foreign Trade Policy. Naturally, the exporters are a worried lot. If INR gains, it will eat into their wafer-thin margins and many will be forced to down their shutters. Then again, the sunrise IT sector feels threatened as most of their clients are US-based. Bigger firms which have the professional competence and access to hedging tools are better off, but it is the smaller firms that will be hit hard the most. In this context, the RBI's move to allow companies categorized as SMEs to book forward contracts without any past records of forex trade or any underlying exposure, is commendable. The RBI has also taken measures to ease Rupee outflows. All these have to be supplemented with activities to educate the small and medium exporting units on using hedging tools effectively.

 

Finally, amidst all this is a report (by JP Morgan? I'm not sure) that the INR is overvalued by about 11 per cent at current levels. This complicates the situation. Is the appreciation temporary? Will the Rupee plunge below the 50/$ mark? Only time will tell. Another aspect that calls for immediate attention is the need for cost reduction in all sectors of the economy. Though cost control and cost reduction are essential ingredients for the success of any organization, its significance becomes manifold for export-oriented enterprises, especially in the context of a rising Rupee. It is both an opportunity and a challenge for Cost and Management Accounting professionals. There is this dire need to instill cost consciousness in our economy and the rising rupee is the perfect excuse to initiate a cost reduction drive in all industries and sectors. Cost reductions and innovations are necessary to stave off the challenge posed by other low cost destinations like Philippines.

Misinterpreting Indian Constitution

'Yours truly' is not an expert in the complexities of Indian Constitution. However, that should not prevent him or anyone for that matter from airing one's views on the same. On the basis of this belief, the following is a take on the tendency on the part of some of the stakeholders of Indian polity to interpret the constitution to suit their vested interests.

 

First is about the controversial topic of reservation. The Constitution, of course, provides for reservations for the disadvantaged and backward sections. Take a closer look: does the word 'caste' appear anywhere in the Constitution? No! It speaks of only 'class'. Then who is the 'erudite a*****e' who decided that reservations should be based on caste? Some people say that 'Class = Caste' if caste excludes the well-off within. However, that is a mistaken notion. If the objective is to keep out the well-off, then why is not reservation given on the basis of economic status alone? Even after some 57 years of independence, the quota system appears nowhere close to being phased out. It is to be remembered that even the SC/ST reservations were supposed to last for just 10 years. It was intended that this practice will be reviewed and measures taken to set it in tune with the changing times. Every ten years, the Parliament decides that SC/ST reservations be continued for another decade. When will this stop? True, caste-based atrocities are reported even today from different parts of the country. But that signals the existence of a malaise entrenched far deeper in the psyche of some people. Does reservation remove it? Again, no.

 

It is time we scrapped caste-based reservations and came out with an objective mechanism that takes cognizance of one's social, economic and physical weaknesses to help them realize their true potential. A targeted 'Help & Nurture System' for such people should be put in place. To make use of an analogy, in a 100 m race, the weak people need not be given the option to run just 70 m; they have to be given extra training to run the full distance. More than anything else, it will do wonders to their own sense of self-respect.

 

Second issue is another hot potato, 'minority rights'. The term 'minority right' itself is wrong; it is 'minority protection'. The controversy over this issue has two aspects. First is the lack of a precise definition of the term 'minority'. It is generally agreed that minority-ism is of two types: linguistic and religious. However, the problem is with the level at which we are to assess it - at the state level or at the national level? A minority in a state may be a majority in another. Therefore, logic states that minority status should be assessed at the state level. Another aspect of the controversy stems from Article 30 of our Constitution which provides that minorities will be free to run and promote their own educational institutions, etc. This provision is made to ensure that minorities do not suffer any discrimination in running such institutions and are thus able to protect and promote their unique culture, practices and customs. It is to be remembered that this provision does not give them any special privilege which is not available to others, the majority; in other words, the intention behind the provision is to have the minorities treated at par - not above or below others. However, this Article has now been sought to be interpreted as giving some special rights to the minorities, as if they are free from all rules and regulations. This hots up as a big issue especially when the minorities are perceived to be economically and politically strong, as is happening in Kerala.

 

The bottom-line is that all special provisions made in the Constitution to benefit any group of individuals are ultimately aimed at their economic and social upliftment and preventing / ending discriminations against them. Once this objective is achieved, these are to be scrapped. Again, if the mechanisms to ensure this have not produced the desired results or are proving to be the divisive forces in the country, it is time we revisited them and made them work the way they are expected to. Unfortunately the courage / willingness to do so is terribly lacking in India's political class.

The Supreme Court strikes again

The Supreme Court of India, in its interim order, has stayed the implementation of the reservation of 27% of seats in central government-run educational institutions including the IITs and IIMs. Basically, the SC has agreed to two of the points raised by the petitioners: One, how was the figure of 27% arrived at? In other words, what scientifically-gathered data is there which puts the figure of OBCs at 27% of India's population? Definitely not a 1930 census! Second, why should the 'creamy layer' be given the benefit of reservation? It has also made the caustic observation that the Central Government should not use votebank politics to divide the country. The Government has been given time to come up with supportive documents by August.

 

This interim order is sure to hog the headlines in the coming days. The HRD minister Arjun Singh, who was the man behind this Act, has expressed 'hope' that the final order will be in government's favour. The 'Mandal' man VP Singh has called for a referendum on reservations.

 

Now, a lot of questions remain unanswered. As the Left says, how can the SC which upheld reservation of 27% to government jobs now trounce this? Then again, as one student representative said on one of the TV channels, caste in isolation is not a criterion for determining backwardness. There are other barriers also, like the gender divide, the rural-urban gap, the inter- and intra-regional imbalances which all cumulatively determine backwardness. Just the reason that someone is born into a particular caste does not automatically entitle him to work less than others!

 

A crucial question that everyone conveniently skirts around is this: How effective is reservation / quotas as a tool for the amelioration of the sufferings of millions? Agreed, we need to have an inclusive growth. But, is reservation the only mechanism? No!! Reservation can at best be cosmetic. It does not treat the underlying disease. An analogy comes up in my mind. If two athletes are competing and if one belongs to a backward caste, do we say that he needs to run less distance? No, but we need to give the right kind of nurture and equip him to put up a better performance. One hopes that the SC will give due consideration to all these in its final verdict.

 

The world around us is marching ahead. Also, there are growing inter-linkages between the global affairs and what happens in India. We're no longer an island that we once were under the likes of Nehru and Indira Gandhi. The world does not tolerate mediocrity. It needs fighters. Need proof? Look at India's ignominious exit from the World Cup Cricket. We should not be resting on past laurels, but we need to keep achieving more, small or big.

 

Finally, why did I say that the 'SC has struck again'? Yes, the first time was when it ruled that all laws put under the 9th schedule of the constitution after the verdict in the Kesavananda Bharathi case (1973) are open to judicial review. The said schedule was being used as a mechanism to dodge uncomfortable questions in the form of judicial review. By asserting that all laws are open to question in the court, the SC only reiterated the 'basic structure doctrine'.

Budget 07 - A short note!

A long distance travel followed by a bout of serious illness and a pre-occupation with an exam result saw to it that there was a break in my posts, extended to more than a month. In this intervening period, there were some significant developments on the economic front. Inflation is soaring, Economic Survey and the biggie, Budget 07 were presented, EASIEST was introduced, CRR was hiked, etc. Surely, my blog missed out on all the heat and action!!

 

It's been close to three weeks since the presentation of Budget 07. I'm still not ready for a full-fledged reflection on it; still two points are worthy of immediate mention.

 

First is the proposal to formulate a scheme of 'Reverse Mortgage'. "In the scheme, being conceptualized, a senior citizen of 62 years or more, who owns a house, can be given loan up to a fixed amount worked out on the percentage basis of the market value of the house owned and given on mortgage. They can, if they so desire, opt for receiving the amount in monthly installments also. In such a case, the amount admissible will be spread over in 15 years in the form of annuity....The loan amount need not be repaid in the lifetime of person / spouse.....In the event of their death, the institution will realize the amount through selling the property or their progeny can take it back paying the necessary amount." It surely does look good, theoretically, I hasten to add. The reason is simple: it's the Indian psyche! Our customs and mindset are against taking up a liability as we age. Moreover, the scheme applies only to self-acquired property and not ancestral property (that's as I understand it). Besides, the children of the loanees may be against foisting another liability upon them.

 

Second, "Finance Act section 83 made an amendment in Service Tax and now Central Excise Section 14AA is also made applicable to service tax provisions for the purpose of Audit. Now the Cost Accountants empowered to conduct audit in service tax also as referred in section 14AA Central Excise Act." This is music to the ears of Cost Accountants in practice, given the growing scope of service tax. This amendment is all the more heartening since the amendment (I was told) was made despite strong lobbying by ICAI. The crucial question, as raised by a member of the Chapter in my home town, is about how many Cost Accountants would be ready to rise to this. Hope there will be many....

 

More in next....

 

 

Three burning problems..

As I see now, there are three problems that require the immediate attention (and action) on the part of the Govt of India. If there is failure to act on these, the economic growth of the kind we witness now in India will surely lose its steam. And that, is bad news!

 

First of course is the rising inflation. The WPI based inflation rate is high and so are the CPIs too. The government has tried to bring it down by reducing the import duty on food items and the RBI has, in its Q3 Review of Monetary Policy, tried to strike at the demand side of inflation. The measures taken by the RBI officials especially are to be appreciated, as they have tried to target specific segments which, in their view, are fueling the inflationary pressures - like increasing the provisioning for segments like credit card outstandings, capital market exposures, real estate financing and personal loans. As Governor YV Reddy pointed out, inflation is always harmful to growth as it leads to volatility in the economy.

 

Second problem is the inadequate infrastructure. As correctly identified in the Mid-Year Review of the Economy by the Ministry of Finance, if infrastructure problems are not addressed properly and in time, it can prove to be the Achilles' Heel in our economic growth. So, what all comes under the generic term 'infrastructure'? It includes roads (highways), ports, airports, uninterrupted supply of power and water, housing facilities and telecommunication facilities. In the post-reforms era, we have seen tremendous improvement in telecommunication facilities and, to some extent, transportation facilities. It can easily be seen that whichever sector was opened up to private participation, with commensurate and competent regulatory mechanism, has shown good results. In fact, the single biggest factor behind the growth of IT & ITES sector, in my view, is the unprecedented improvement in telecom facilities resulting in the lowest charges in the world. It is mostly in the power sector that we have ended up laggards. And, that is the area where there have not much reforms and opening up. In recent times, there seems to be some improvement, what with the bidding for some mega power projects resulting in very competitive tariffs.

 

In PM Manmohan Singh's view, we need a whopping US$ 350 billion as investment to spruce up our infrastructure. Where will it come from? Of course, partnering with the private sector is the solution. For this, appropriate homework needs to be done and it may also be necessary that user charges may have to be imposed. A good way to raise at least a part of the funds is to revive the debt market segment. One hopes some concrete measures will be undertaken in this connection.

 

What is the third problem?  It is agriculture. Agri-sector contributes around 22 per cent to India's GDP but employs more than 60 per cent of our population. But look at the growth rate: just about 3 per cent. And, farmer suicides are going on at an alarming rate. It naturally means that for growth to be more equitable, the fruits of reforms should reach the millions of farmers in our country. Only then will our dear politicians be able to 'sell' reforms to their constituencies. [More on agri-sector in a separate post, coming soon!]

 

 

Indian Stock Markets - Who is the Fool?

Stock exchanges are one among the various financial intermediaries. A stock exchange may be defined as a place or market where securities (ownership or debt) of joint stock companies and of government or semi-government bodies are dealt in. It is an essential concomitant of the capitalist system of economy. It is indispensable for the proper functioning of corporate enterprise. It brings together large amounts of capital necessary for the economic progress of a country. It provides necessary mobility to capital and directs the flow of capital into profitable and successful enterprises. It acts as the barometer of general economic progress in a country and exerts a powerful and significant influence as a depressant or stimulant of business activity. It is often the platform where one can obtain an accurate or near-accurate valuation of corporate enterprises.

For many years since independence, the Indian financial system was caught in the vice of narrow, inflexible regulations that made it tough to maneuver. Real change started when the then RBI Governor RN Malhotra kicked off a gradual deregulation in 1988. Matters came to a head on September 23, 1991 when India’s foreign exchange reserves touched rock-bottom levels of US$ 0.93 billion – barely enough to cover even 14 days’ oil imports. The nation suffered the ignominy of pledging 65 tons of gold with the Bank of England to raise US$ 445 million which helped it tide over the worst-ever forex crisis in its history. Eventually, the agreement signed with the IMF ushered in a wave of reforms and the winds of liberalization, privatization and globalization blew through the length and breadth of Indian economy and its financial system. Indeed, the financial system in India at present is a far cry from the regulated system in vogue in the 1960s and 1970s.

It needs to be highlighted that stock markets were in operation in India for a long time prior to the reforms. Stock trading began in India on July 9, 1875 when native brokers formed The Native Share and Stock-Brokers’ Association in the then Bombay. In fact, it was the first such exchange in the whole of Asia. However, it was only in the post-reforms era that stock markets began to get their rightful share of limelight. Today, the Indian stock market ranks among the best in the world in all respects – be it market capitalization, number of companies listed, regulatory framework or transparency. Again, India has the only-one-of-its-kind T+2 settlement system and steps are underway to move to real-time settlements. The Bombay Stock Exchange Ltd (BSE) and the National Stock Exchange of India Ltd (NSE) are the two primary stock exchanges in India. In addition, there are 22 Regional Stock Exchanges. However, the BSE and the NSE have established themselves as the two leading exchanges and account for about 80 per cent of the equity volume traded in India. Due to the existence of the Futures and Options (F&O) segment in the NSE, it tops in terms of the volume of transactions, though it is the BSE which has the largest number of listed companies. The two key stock indices are the BSE Sensex - for Sensitive Index, as coined by Deepak Mohoni - comprising 30 top stocks and the NSE's S&P CNX Nifty - for NSE Fifty - comprising 50 top stocks.

With the opening up of the economy and aided by stellar performance of the economy, the stock markets have wrested their rightful share of limelight, so to speak. The stock markets have set a scorching pace of growth. Also, there were the series of reforms unleashed, starting with giving teeth to SEBI, allowing foreign institutional investors to invest in India, introduction of rolling settlement, banning the badla system, moving to screen-based trading, introduction of new instruments, internet trading, and finally, demutualization of the exchanges. That today Indian stock markets are on solid grounds is borne out by the fact that within just two weeks of RBI allowing FDI & FII in stock exchanges, NYSE have acquired a stake - of 5 per cent, the maximum allowed for any single investor - in NSE. LSE and NASDAQ are in talks to acquire a similar stake in BSE. Even on the basis of stocks traded, there has been tremendous improvement. From around 1000 points or whereabouts in July 1991, the BSE Sensex is now at levels of 14000+. Then again, the market cap (of BSE stocks) is now more than Rs 35 Lakh Crore; but the P/E ratio has actually come down from 40 in 1991 to between 19 and 23 today.

That brings us to the issue of stock prices. What drives stock prices? Fortunately or not, and like everything else in this world, there is no crystal ball that can show the future price of any stock. Theories on stock price movements are galore and studies on the same can be grouped under three broad headings, viz. fundamental, technical and efficient market hypothesis. All the three together are able to explain away most of the price movements, but uncertainties still remain. It is now accepted that stock prices are a reflection of expectations of investors and changes in the same lead to changes in the prices. And, these expectations are based not just on a particular company's or even domestic economic fortunes, but also on global events. In a way, it can be said that the uncertainty surrounding stock prices is the charm of the game! However, too much of uncertainties is harmful and leads to violent fluctuations in prices. Here, Indian markets score badly - it is leader with respect to volatilities! And, that is the inadequacy of Indian markets...What is the cause for this volatility?

Unarguably, the Indian stock market saga is built on institutional funds. It is a show run by financial institutions. Foreign Institutional Investments in the Indian capital market, which commenced in January 1993, have shown significant increase over the subsequent years. Cumulative net FII investments increased from US$ 827 million at end-December 1993 to US$ 45.3 billion at end-March 2006 and further to US$ 46.9 billion as at end-September 2006 (Source: RBI). On a year-on-year basis, in the year-ended December 2006, FIIs pumped in US$ 8 billion on top of the US$ 10 billion brought in, in 2005. Domestic institutions are also not far behind. Domestic mutual funds, led by UTI and banks have been aggressive buyers all along. However, they have not been of great help when foreign funds are withdrawn, as has been demonstrated quite a few times in the past. A word also needs to be said about the role of Participatory Notes - freely transferable instruments issued by FIIs to its clients who are otherwise not eligible to enter Indian markets (like Hedge Funds) or who wish to remain anonymous. Many a time, RBI and SEBI have expressed their concerns over them and Tarapore-II Committee even recommended its phase-out. The fears expressed by these agencies about PNs - that it helps money-laundering and round-tripping of capital - cannot be dismissed lightly.

The sort of big ticket buying and selling by institutions keep retail investors away from the stock markets. Not that there is anything wrong in institutional investments, but the sheer enormity of the funds at their disposal makes retail investors jittery and gives them sleepless nights! Though the late Dhirubhai Ambani (now immortalized on the celluloid by Mani Ratnam's Guru, aided in no small measure by the riveting performance of Junior B, Abhishek Bachchan) is often credited - rightly or mistakenly - with encouraging the growth of equity cult in India in a big way, the fact remains that the retail investor base has not grown to attain that 'critical mass', the over 9.9 million demat accounts (as at end-Dec 06) notwithstanding. After all, according to the 61st round of NSS, 64.75 per cent of Indians are still illiterate and 52 per cent are unemployed. Low retail participation may partly be attributed to lack of awareness about the stock markets as an investment alternative. The tendency on the part of even educated Indians to derisively dismiss stock markets as 'gambling centres' is strange indeed! It points to the terrible gap in investor education and financial counseling in India. Then again, the cause of equity is not helped in any way by the tendency of some retail investors to enter and exit the stock markets at the wrong times and burn their fingers. Also, there are some too-ignorant-to-be-fit-as-MPs who raise a hue and cry whenever there is a stock market crash. The real fools are the ones who think they can make some quick bucks from the stock market! Add to that the scams - remember Harshad Mehta and Ketan Parekh - and it can be seen that low retail investor participation is both a cause and an effect of volatility in Indian stock markets.

What can be done to boost retail participation? One solution that seems likely to materialize soon is the spread and reach of internet trading. Since its introduction in February 2000, internet trading has grown by leaps and bounds. Data till November 2006 show that trading over the Net formed about 14 per cent of the total turnover. It's still small change when compared to South Korea's 75 per cent, but shows its potential.

Another solution lies in revitalizing the moribund debt market. It will address the concerns over regular returns. It can also, at least partially, meet the requirements of infrastructure funding. SEBI can simplify the trading rules further and at the same time needs to guard against the actions of vested interests. It also needs to take a final view on the fate of regional stock exchanges, which as of now do not seem to have any way forward.

If all these are done, there will be no stopping the Indian stock market zoom! Vrooooom!!!!

Orgnaised retail - Challenges for the players

Well, I have already given my take on the prospects of organised retail in India. Taking it a bit further, today let me look into the challenges for all the players involved.

 

For any serious player in the organized retail space - regardless of it being an Indian or foreign one - space is a serious issue. Yes, the kind of space that is required for setting up a mall is a premium in India, especially now as the realty sector is witnessing an unprecedented boom, amidst fears of a 'bubble in the housing sector'. Land prices are shooting through the roof, not only in Tier I cities, but also in Tier II and, to some extent, Tier III cities. Increased prices mean that the players will have to invest a lot more in land (if they want to own the space) or fork out more as lease rentals.

 

Then there are the much-talked-about supply chain deficiencies in the Indian agri-sector. Procuring all the necessary agri-products, grading them, and transporting them to the various cities can all be logistical nightmares for the players. Rural connectivity in India is, at best, literally a bumpy ride and at worst, non-existent. The players will have to invest heavily in all these support structures.

 

All these inadequacies can be reasonably assumed to find a reflection in the costs of operations of all players. Thus, higher costs to the end-consumer seems inevitable at least in the short-run, unless the retailer - with deep pockets - decides to bear it all (Highly unlikely, let me add!).

 

Next comes the biggest challenge of all - winning over the Indian consumer. Wal-Mart or Reliance or anybody else, will find this the most daunting task. Understanding the consumer psychographics and acting on them is a must to succeed. Indians are a discerning lot and cannot be taken for a ride. The footfalls have to be translated into sales. To assume that it is a cake-walk will be like lulling oneself into complacency. It is not to be forgotten that Wal-Mart had bit the dust in countries like Germany and Korea. Biggies like Reliance need to take caution, because this is a new business for them. Players like Shoppers' Stop and the Futures Group too need to tread carefully as they expand into new locations.

 

As outlined in an earlier post, local mom-and-pop shops are already feeling threatened by organized retailing. News reports suggest that some kirana-wallahs are up in arms against a Reliance store in Ahmedabad. There are also reports that prices of some grocery items are rising as the biggies are doing bulk purchases (As an aside, if that is indeed the case, it calls the bluff of all those who said India is self-sufficient as regards food; is the supply so short as to get exhausted on bulk purchases by someone?).

 

In my view, organized retail will have the immediate effect on a consumer state like Keralam. Here, very little production takes place and people will be ever-ready to switch over to a lower-cost alternative. What can the kirana-wallah do? A lot, if you ask me.

 

As with everything else, there is already a trade union for small traders in Keralam, viz. Kerala Vyapari Vyavasayi Ekopana Samiti. It is a cash-rich organisation. It can bring together all its members' shops and give them a new brand identity. With the cash available, it can contribute to sprucing up all the shops and endow them all with some distinctive features. It should try to replicate the operations of organized retailers in procuring materials and thus exploit the scale efficiencies. Quality has to be ensured and a new brand shop can be created. With the right ideas and will, sky is the limit and they can pose a veritable challenge to organized retailers. The office-bearers of the Samiti should realise that unionism is to be used for activities like these and not for downing shutters on every hartal day and on silly grounds!

 

If this succeeds, it can be replicated in other states too, right?

What a [cruel] way to end 2006!!!

Yes, I'm talking about the too-cruel-to-be-true-yet-true hanging of Saddam Hussain, former President of Iraq. Well, he may have committed inhuman crimes on his own countrymen, been tyrannical.....yes, yes all charges stand. Yet, the way he has been dealt with - making a mockery of all internationally accepted judicial processes - just doesn't fit with the image the US is trying to project of itself. Alas, 2006 has to end on such a note - where the law of the jungle, an eye for an eye kind of retribution, has taken centrestage! Too sad!!

 

Hope 2007 will see more of good times......

The retail juggernaut and the hackneyed oppositions

Finally, Wal-Mart is on its way to India thanks to their tie-up with Bharti. And, so soon after the announcement was made, there have been sporadic verbal protests from the usual cynics, the Left parties, against the 'back-door' entry of Wal-Mart even as they are yet to formally announce their model. Pray, what is the 'back-door' entry these Left are talking about? At present, FDI is allowed in logistics and wholesale business and logically speaking, it's only here that Wal-Mart will focus on. OK, for the sake of argument, we can assume that it will bent the rules once they enter. Is it so easy? Even if it's so, let's cross the bridge when we come to it. Isn't that the right attitude?

 

Retail industry in India is estimated to be worth Rs 1350000 Crore and organized retail forms just 3 per cent of this figure. Now, any level-headed businessman will be only too keen to make himself present there and this is exactly what people like Mukesh Ambani and Kishore Biyani have done. And, in today's globalised economy, it's not possible to keep out foreigners for a long time, where our home-grown businessmen operate.

 

One of the arguments against FDI in retail is that it'll spell the death knell to the local kirana (or mom-and-pop) shops. What about home-grown ventures like Reliance Fresh and Spencer's then? This point of argument against FDI would hold equally good for Indian biggies too. It can easily be seen that this argument is simply a manifestation of xenophobia on the part of these people.

 

OK, what then is the point against organized retail as such? It's the same - that of loss to the local small shops. It's sometime said that local small shops are a form of disguised unemployment. Even if this is true, it's still not a strong point against organized retail.

 

AFAIK, the shopping malls of today cater only to the upper class and the crème de la crème of the middle class. Shopping in these is a costly affair for those with not-so-deep pockets. As competition intensifies, it will lead to lowering of prices. Lower prices will also result from scale efficiencies and better supply chain management. So, a new set of people will move to these shops. But by then, with the trickle-down effect, those who were hitherto BPL will become the patrons of the local kirana.

 

In my view, organized retail will prove to be the deliverance for the beleaguered Indian farmer, helping him get a better price for his produce. No longer will Minimum Support Price distort cropping patterns. However, for real benefit to accrue to the farmer, it should be ensured there is no monopoly in the organized retail sector; we need some 9-10 national-level players. Transactions should be between a willing buyer and willing seller.

 

Local kirana shop's advantages, inter alia, are the one-to-one interaction between the customer and shopkeeper and the credit facility given to regular customers. Big shops will lose out on this count.

 

Another interesting point (as noted in the Swati CA column of The Hindu BusinessLine of Dec 4, 06) to be taken care of is that, with the lower prices in malls, a sort of arbitrage opportunity will arise, whereby goods bought from there can be taken to nearby villages to be sold at higher prices. Retail markets at the village-level, in the form of 'haats' - probably with government support - should be able to solve this problem. 

 

In my view, even if there are chains of retail shops in Tier I, II and III cities, it will not be a problem for the local small shops. The Indian retail scene is big enough for all.

Does India need an ADB loan now?

Just the other day came across this piece of news that ADB is going to grant a loan to India, to the tune of around Rs 4500 Cr. It is to help out with the agri-distress and will be disbursed through the co-operative banks. India will have to repay it in 15 years....

 

Now, I wonder whether this loan is indeed needed. We now have forex reserves in excess of $ 160 bn and our economy too, is clocking good growth rates (9.1% for the first half of 06-07 - news just trickling in), albeit agriculture being the laggard. I believe that we have enough domestic resources to meet all the needs of our poor farmers who are the victims of short-sighted and restrictive policies of the government (More on that in a later post). What we need is an efficient credit delivery system, along with policies that free agri-trade. Here, the problem, as I see it, is the involvement of co-operative banks. Anyone who has some idea of their functioning will testify that it's the place for the cronies and chamchas of corrupt politicians. All the money that will come from the ADB will simply vanish into their pockets! The intended beneficiaries will be left high and dry.

 

Any reform of agriculture will / should necessarily involve de-politicising the co-operative banks and bringing them under the direct control of the RBI. The dual control of urban co-op banks (1853 of them) - by Registrar of Co-op Societies and the RBI - in vogue today is doing no good.

Pre-IPO private placements

Just some two days back read a report that Cairn Energy's Indian arm which is planning an IPO soon, has got a portion of its to-be-issued shares placed privately, for a disclosed, of course, amount. A similar pre-IPO private placement was also there for the shares of Reliance Petroleum Ltd, with Chevron. Following this, there was also an update published in newspapers.....My doubt is, is this a really healthy trend? Coz, the price at which these placements are done is known to all (it should be) and doesn't it serve as a signal to the primary market players for the bid price in the book-building process? In other words, isn't the issuer indirectly signaling the price it wants?

SEZs - A new dimension

A totally new perspective on SEZs can be found in the Nov 13, 06 issue of BusinessWorld.

Save Vizhinjam Port!

Today, let me call your attention to the one infrastructure project that can change the face of Keralam and India - Vizhinjam Port.

 

Vizhinjam is a coastal village near Thiruvananthapuram district. It's a place that has no parallels in the world. Why, you may wonder. Because:

• It's the only harbour with a natural depth of 24 m - far in excess of the needs of today's biggest tankers!
• It's an all-weather port
• It does not need any dredging anytime during its life.
• It's as near as near can be to international shipping channels.

Thus, you can see that the Vizhinjam port has a competitive advantage over all other ports in India and the world. If it is commissioned, it will dwarf ports like Dubai, Singapore and Colombo. And, this is the reason, in my reckoning, why this project has been hanging fire for so long! Then there are the parochialist politicians of neighbouring states (read: Tamil Nadu) who will go to any end to scuttle any project that will benefit Keralam. Just a few months ago, the project seemed all set to be implemented with a consortium involving a Chinese company being awarded the contract and then the Central Govt raised the bogey of 'security concerns' and have withheld green signal for the project.

 

What next? The spineless, self-serving politicians of Keralam came out with some 'empty talk' and now everyone seems to have forgotten it. Now FRAT (Federation of Residents' Associations in Trivandrum) is running a signature campaign to get the project moving. Last heard, businessmen like Anil Ambani and Rajeev Chadrashekhar have evinced interest in the project. It's now up to the State Govt to come out with an alternative plan to get this implemented. In my view, the PPP model a la the Cochin International Airports Ltd. is the way out. The SEZ option should also be checked out.

 

I hope some action will unfold in the coming days......I hope.....and pray.