Will this hurt minority shareholder rights?

Jan 4, 2012

In this issue:
» Consolidation in Indian media on the anvil?
» Indian B-school graduates find few takers
» Passenger car makers face fierce competition
» Geo-political tensions to fire up oil prices?
» ...and more!
---------------------------------------- Did you miss the Webinar? ----------------------------------------

Equitymaster's Webinar on the Future Prospects for the Indian Economy with Mr Ajit Dayal was broadcasted on 30th of December, 2011.

The webinar answered questions that could be troubling any Indian Investor today. Where is the Indian Economy headed in 2012? Is Gold still a good investment? Could the Stock Market touch the 21000 figure in 2012?

If you missed watching the webinar, here is your chance to access the same.

Click Here to watch: Indian Economy - From Darling to Damned (Rebroadcast)

And let's understand what lies ahead for India and how could this impact your investments.


Government's fund raising agents! We could not think of a better term for job description of regulatory heavyweights like the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). Both entities have been working overtime to ensure that the government coffers are full. Or at least that is what the government is coercing them to.

The RBI has been busy buying government bonds at a time when liquidity is tight. With the government exceeding its borrowing limit, private corporate are getting crowded out in the debt market.

At least when it came to equities, the government had to earlier compete with the private sector in raising capital. But the latest SEBI guideline gives a head up to the government on that too. We are referring to the announcement allowing promoters to sell shares through an auction on the stock exchanges (institutional placement programme, IPP).

Prima facie, the approval seems to enable the government to milk its cash cows at a time when it is badly strapped for funds and markets do not facilitate easy share sale options. Thanks to the muted sentiments in Indian markets, the government's ambitious Rs 400 bn disinvestment plan is on the verge of getting junked. Hence the only way to sell share in PSUs at attractive prices is through auction on the exchanges. Also, through the IPP route, all listed companies would be able to comply with minimum of 25% public shareholding.

However, we fail to understand why SEBI chose to come out with this kind of a regulation when there are enough means available for promoters to part sell their stake and liquidate their holdings. Also, the fact that in case of stocks with low liquidity, the auction price may come in at a good premium than market price will be akin to enjoying a preferential status over minority investors. Perhaps this has to do with the fact that the Government is extremely concerned about its ballooning fiscal deficit and has therefore forced SEBI to bring out this regulation. If this is indeed the case then it is not a good sign as regulators ought to protect the interests of minority shareholders and not act as an agent of rich promoters and majority shareholders like the Government of India.

Do you think minority shareholders should reject the share auction proposal being applicable to promoters of private sector companies? Share with us or post your comments on Facebook page / Google+ page.

 Chart of the day
Infrastructure stocks have been the most hammered during the stock market collapse in 2011. Besides the muted outlook in near term earnings growth and profitability, there is another reason why investors have chosen to dump the stocks. As today's chart shows, infrastructure firms carry significant balance sheet risks. The net debt to operating profit (EBIDTA) ratio for these firms was nearly at a decade high at the end of FY11.

Data source: Economist

The media has been abuzz with stories on large corporate houses buying stakes in media channels. As per a leading daily, such deals indicate the imminent consolidation in the much cluttered media industry of India. There are too many companies operating too many channels. In fact there are almost 700 channels currently in operation and only a few of these make money. One reason for this is that most of these channels rely heavily on advertising as a source of revenue. In this area, the regional channels end up getting an upper hand. Lower penetration of digitization translates to lower subscription revenues. As a result, most channels end up vying for the advertising pie. Consolidation either through stake sales or clubbing together of channels is something that the industry has been waiting for. Probably these deals would trigger the same. The trend should gather momentum once digitization kicks in as smaller channels would start looking at tie ups with the bigger players to get into the prime time area. This consolidation is something that the industry has been waiting for quite some time. Many investors and experts think this would be the value unlocking event for the industry. Picking up good stocks at this time may be a profitable opportunity. But like any other investment it would be important to adopt a cautious approach and only pick up those that have sound fundamentals and are attractively priced.

What is the best and the simplest way of finding out whether supply of a particular good or a service exceeds the demand? Of course, by way of the price. Thus, when a leading daily points out that management graduates in India will find it tough to get themselves recruited this year, one is made to conclude that the supply of these grads seem to be certainly exceeding demand. And even if most of these grads do get placed, they will have to make do with lower salaries as compared to the boom years of the past. All this makes us wonder whether these people, barring of course few of the top B-School graduates, do add value to the firms or the corporate world can still carry on as usual without the help of their services. We don't know for sure. What we do know is that these grads are coming out in ever increasing numbers from B-schools and the job market is unable to absorb them all. In view of this, the need of the hour for India could well be more doctors, scientists and engineers rather than B-school grads.

As per a recent Crisil report, Indian banks will need up to Rs 2.7 trillion in fresh capital. That is if the Basel III guidelines are implemented in accordance with the deadline set by the Reserve Bank of India (RBI). As of now, it seems the domestic banks are pretty much in a position to switch to the new guidelines by March 2013. What will be the effect of this shift on the Indian banking system? One thing is certain. Given the fact that the new prudential norms will require banks to increase their capital significantly, going up to 8% of their loan portfolio, it will immensely strengthen the domestic banking system. That is indeed a good thing for the well-being and stability of the overall economy. At the same time, the increased equity and the higher cost of non-equity capital could have some negative impact on the return on equity (ROE) of banks in the long run.

It is comforting that at a time when the world economy is going through a rough patch thanks to the misdoings of the central banks of the developed economies, the Indian central bank retains its conservative stance. In fact, the RBI norms are stricter than those proposed by the BCBS (Basel Committee on Banking Supervision). For instance, the stipulated capital and leverage ratios are higher by 1% and 2% respectively, while the implementation period is shorter by two years.

The auto industry may be facing a slowdown now on account of rising interest rates and fuel prices both of which has dampened demand to some extent. But that has not deterred the industry from investing in new models and launches in the longer term. The latest Auto Expo is testimonial to the fact. This Expo is set to have 50 global automobile brands showcasing their wares, including eight global launches. Given that recession continues to haunt the US and European markets, most of the growth in car sales has been witnessed in emerging countries such as India and China. According to Deloitte, car sales in Brazil, Russia, India and China (BRIC) grew at a compounded annual growth rate (CAGR) of 8.8%, 5.7%, 14.5% and 34.3% between 2001 and 2010 respectively, against the global average of 4%. Within these, the share of India has more than doubled in the last 10 years and that of China has grown 12 times.

So while Indian players will be focusing on launching new models in the market themselves, they are likely to face more competition from foreign players as well as more of them line up launches for the Indian market. Currently, the passenger car space has been seeing fierce competition from foreign brands and this trend is set to extend to utility vehicles and multipurpose vehicles too. Emphasis will also be on fuel efficiency and alternate fuels, although the transition of the Indian auto industry from the traditional fuel based one to alternative fuels is most likely to take quite a long time.

Predicting oil prices is quite a slippery terrain. The latest agreement of OPEC nations to raise oil output led many to believe that oil prices would soften now on account of better supplies. But the recent tension between Iran, the world's fourth largest oil exporter and the US could lead to disruption of supplies making us witness another crisis. Iran has threatened to shut down a critical shipping lane that accounts for one sixth of global oil production and 20% of the oil traded globally. The impact is hard to ignore as oil prices have reacted by surging by 4.2%. If Iran chooses to act on it, it won't be long before the things spin out of control.

Such a development will be highly negative for India. While we have managed to bring down the extent of damage on the supply front by cutting our reliance from 12% to 8% on Iranian oil supplies, India will not be spared from the overall increase in the oil prices. This will not just raise the inflation level but widen the fiscal deficit as well as impact the overall economic growth.

The Indian stock markets remained choppy throughout the session today. While banking and auto stocks continued to find some favour, selling pressure in commodity and telecom stocks pushed the indices into the negative territory. At the time of writing, the BSE Sensex was trading lower by 112 points (down 0.7%). Indices across other key Asian markets closed a mixed bag while those in Europe have started on a negative note

 Today's Investing Mantra
"Get inside information from the president and you will probably lose half your money. If you get it from the chairman of the board, you will lose all of your money." - Jim Rogers

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1 Responses to "Will this hurt minority shareholder rights?"

Md Ashfaque

Jan 4, 2012

By reading these articles it spurs u to do some sensior thinking before taking any investment decision in fact the whole article is highly knowlagable and it seems great effort has been put to compile these articles together thanks for this pretty article

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