The regulator is not going to save you

Jan 6, 2012

In this issue:
» India's education spending 10th highest in the world
» Sweden has an important lesson for the world
» Will Govt issue dollar bonds as in the late 1990s?
» Does this mean food inflation is over?
» ...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.


Just yesterday we had written about how the recent bankruptcy of MF Global, a hitherto leading global brokerage house, was not just a case of bad business bets but a scandal involving regulators that looted customers of their money.

More often than not, common people are treated just like sacrificial goats. Politicians will go out of their way to appease voters before the elections. But once elections are over, need we say what conspires then? Even the finance industry does not differ in this aspect. They, too, turn their backs once the customers buy their products or services. This cycle of deceit keeps repeating all the time.

How much ever the policymakers and regulators trumpet about how they exist to protect the investor, more often than not, the investors' interests are sacrificed to salvage big entities. And what is the reason that they give to justify this? They say that allowing big firms to fail may pose a systemic risk. This is what seems to be happening - the interests of the people are sacrificed to save large firms, which in turn, is in the larger interest of the people. We don't know what to make of this. But one thing is certain, the big firms benefit out of this scheme.

Take the 'Occupy Wall Street' campaign for instance. It's a protest against policymakers who have bailed out too-big-to-fail entities without caring about the masses. The campaign has failed to bring about any positive change. Ditto was the case of Anna Hazare's movement against corruption. Despite the massive public support, the Lokpal Bill remains in a state of limbo.

Investors in India have been treated just the same way. For example, the market regulator Securities and Exchange Board of India (SEBI) recently responded to some IPO (initial public offering) scams by banning certain promoters and merchant bankers. But what about the money that innocent investors have lost? There is no way they are going to be compensated for the losses. In the past, many investors were connived into buying mutual funds and insurance schemes by paying rich commissions to distributors. Though the regulator has banned such practices now, the investors have no way to recover the money that has gone down the drain.

The moral of the story is this - Investors have to really drill it into their minds that no regulatory agency, no policymakers are really going to protect them. You have to be your own saviour.

Do you think regulators really care about investors? Share your views or you can also comment on our Facebook page / Google+ page.

 Chart of the day
Today's chart of the day shows that India ranks 10th in terms of total spending on education. And that is despite the fact that it offers the lowest cost of educational services which is less than one sixth of the global average. If measured as per global average prices, India would stand taller than the US. With the largest population of school going children, the education sector offers huge opportunity and potential to grow. However, the system has its own flaws in the current setting. With 60% contribution from public spending, the existing infrastructure for education caters to just a fraction of the needy.

Data source: Firstpost

Can you think of a real life example where a problem of excess debt has been solved by still more debt? The idea seems so illogical that you will be hard pressed to find even one such incidence. Furthermore, even if such a problem did stand solved, it would have led to an even bigger problem down the road in our opinion. Now how about the opposite case? Can an example be found where reducing spending as well as debt has led to a recovery and a sustainable one at that? There are examples galore we believe. The most recent one being that of Sweden. Bloomberg reports how the Scandinavian economy is one of the better placed in Europe to cope with a difficult year. And how did this miracle come about? Through fiscal conservatism and through reduction in Government spending, observes the report. The fact that unlike the Euro nations, the country has its own currency has also helped matters. Thus, the article concludes that it is high time countries like Greece, Portugal, Italy and Spain take some lessons from Sweden. We are in complete agreement with such a line of thought. In fact, why just these nations? Even the US and the UK and our very own India have a good deal to learn from Sweden.

The Indian government seems to be going all out to attract foreign capital. It is taking every possible measure available in the books to do so. Earlier this month, it allowed qualified foreign investors to invest in Indian stock markets. Earlier the Reserve Bank of India (RBI) had relaxed the norms for External Commercial Borrowings (ECBs). At the same time, it decided to come out with attractive interest rates for NRIs with the hope that such moves would help mop up more funds. The latest in this string of moves is to offer US dollar denominated bonds. These would be similar to the Millennium Deposits or Resurgent India Bonds that were offered in the 1990s. While such moves are expected to help control the volatility in the Indian currency, the main aim is to attract foreign capital. Such moves are definitely welcome.

When you buy something new, you are usually excited about your purchase for the first few days. But as time passes the excitement fades away. Familiarity is drab! According to Mark Mobius, investments in emerging markets in the 1980s which were once considered niche and exotic are now becoming too common. Many global money managers are frequently using these markets to diversify their portfolios. But, not all emerging markets are created alike. Frontier markets are the next big thing. These are relatively unexplored countries in Asia, Africa, Europe and South America. They have only recently opened to foreign investing and are at an early state of economic development.

These markets are now in the same place where India, China and Brazil used to be 20 years ago. These countries seem to have it all, strong growth potential, attractive valuations and low correlation with other emerging markets and developed nations. How does this affect India? Well, our financial markets are still heavily dependent on the mood of Foreign Institutional Investors (FIIs). If their mood shifts to frontier markets, we may just be left in the dust. Thus, increasing the depth of our financial markets is certainly the need of the hour.

Those shopping for groceries have failed to figure out how the food inflation number has stuck to single digits or low double digits over the past year. This is when the actual household budget has seen food costs nearly doubling over the past year. Thus the food inflation number has come to be a mere statistical representation of year-on-year movement in prices of select items. That too, ones that may not be very relevant in the consumption pattern of a contemporary urban or rural household.

Hence, the fact that the food inflation number dipped into the negative after a very long time enthused neither policymakers nor markets yesterday. The RBI, too, believes that the drop in food prices is due to a high base effect and may not be sustainable. Hence, it may not easily yield to the pressure of easing interest rates. Having said that, fuel prices (especially LPG) that materially impact household consumption budgets, remain a contentious issue. Hence, it is too early to celebrate the decline in food inflation numbers.

The Indian government is planning to spend US dollar 1 trillion on infrastructure in the 12th five year plan which is double of what it planned in the 11th plan. In order to finance this ambitious target, the government might face a shortfall of US dollar 300 bn. As per estimate, there may be a gap of 30% in debt financing in 12th plan. The government is hoping that new and innovative instruments like IIFCL's credit rating enhancement scheme which would provide opportunity to infrastructure projects to obtain long term fund from insurance and pension companies will help fund the shortfall. But for introduction of innovative financial products to take place, the government must create a suitable climate by introducing financial reforms which will help in development of infrastructure bond market.

In the meanwhile, Indian stock markets have recovered partially and are off the day's low. At the time of writing this, the benchmark BSE Sensex was down by 98 points (-0.62%). Capital Goods and Power stocks were trading weak while Oil and Gas stocks were trading strong. Asian stocks were trading mixed with Japan and Hong Kong stock markets trading in red while Chinese stock markets were trading in the green. The European markets opened on a firm note.

 Today's Investing Mantra
"If the job has been correctly done when a common stock is purchased, the time to sell it is almost never." - Philip Fisher

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12 Responses to "The regulator is not going to save you"


Jan 7, 2012

Well the miscreants promoters have many avenues to raise money. Barring them from capital market is not the solution. SEBI should file a criminal complaint against such promoters who collude with merchant bankers to dupe the naive investors. Such cases being treated as criminal conspiracy can be the only deterrence for such miscreants.



Jan 7, 2012

Regulators by and large fall to the lobbying of big business. Some regulators even pretend to be helping the common investor whereas they may be acting in the advice of interested parties being regulated.



Jan 6, 2012

The management of the regulators have the people only and not god or someone who cannot be influenced by any source. RBI and SEBI are taking their steps after the fraud is committed either in finace or securities. Further the management of the regualtors is highly influenced by the Govt which is group of people who are again a group of different level of morale. The 3 PMs as I remember of Japan had to resign on corruption. Every body cannot be expert in taking all decisions. Do you feel the MF are caring interest of the investor? I am of the opinion, "CERTAINLY NOT". They are ALSO PLAYING WITH THE MONEY OF THE INVETOR. Then to whom to believe, to whome to approach, to whom from to seek guidance, appears nop body. Is it is not a lack of confidence in all sector of society. RAM NAM KI LOOT HAI, LUTI JAYE TO LOOT, ANT KAL PACHHTAYEGA, JAB PRAN JAYENGEY CHHOOT.So frineds, this is going on every where in the world. And india is also not an exception. We have no alternate except to be cheated if we are lured to be multimillionare overnight. Ghotal of Jaipur, Madhaya pradesh, Punjab in respect of small investor on the greed of high return, shows that we are coommitted to be defrauded despite guidelines from any regulators. Frauds are happending, KYC norms are not being followed in letter and spirit in the financial industry which will result in such scams always.



Jan 6, 2012

"Regulators care about investors"?


Apares Chaudhuri

Jan 6, 2012

There are only two classes in any type of society. RULERS & RULED. Ruled are termed as "MASSES", in the backyard as "ASSESS" by the rulers. So "LOOTLO", is the mantra of the Rulers. In name of protection they have become "BIBHISION" of "RAMAYANA". How do you believe these BIBHISIONS. In every sphere of life we experience how they are making our life miserable,so regulators or no-regulators scams will go on.


Surya Narayan Sharma

Jan 6, 2012

"We have to save ourselves"
"Let the investors beware"



Jan 6, 2012

If it is your hard earned money it is your responsibilty to invest safely.SEBI has many limitations but with these whatever they could do they try to do;When the whole system including Government is corrupt what really SEBI could do?We people invariably elect corrupt politicians and we expect ramraj;how this is possible.As long as people are waiting in ques to be looted, looters will be there and no amount of regulations can take care of that.See Satyam episode; raju was the hero and made to represent AP to receive BIll Gates!!!


K.Vittal Shetty

Jan 6, 2012

RBI definitely can be called one of the best regulators in the world and in our country it is THE REGULATOR,but for whom we too would have been with the global financial crisis.However,the same cannot be said of other regulators like SEBI,TRAI.IRDA & PFRDA.
After the departure of GV Ramakrishna we have not seen any Chairman of SEBI taken any concrete steps to protect the interest of the investors.At present the SEBI is more interested to protect the intermediaries and promoters than the investors.It has abdicated its statutory responsibility of protecting the investors.
In my opinion the SEBI can take the following steps:
1.The net worth of both Merchant Bankers, Registrars to the issue must be increased substantially up to minimum of Rs.500 crores.Their net worth must have certain percentage to the issue managed by them to ensure that in case of loss to the investors they must be made to compensate.
2.Issue price must have linkages to the book value and no one should be allowed to issue IPOs above book value or at least the minimum band must be lower than book value to avoid the Merchant Bankers to price it higher.
3.The promoters along with merchant bankers and Registrars to the issue must buy back or return the amount to the investors if the listing price comes down below its issue price within a period of 18 months of listing.
4.The earlier practice of pricing at below the average price at the stock exchange or book value must be reintroduced to rigging of prices.
5.If the listed price comes down below its issue price within a period of 18 months both the Merchant Bankers and Registrars and other intermediaries must be barred from entering the capital market for a minimum of 7 years.Both the firms and its concerned officials too.



Jan 6, 2012

Corruption is so rampant in India that to find an honest person is like searching a needle in the haystack. There is nothing wrong in system and policies are very very good on paper. But the implementation is bad. All those who are involved in implementing the schemes are corrupt to the core and that is because it starts from the top. There is an atmosphere of utter disgust as far as the common man is concerned. They can not get their simple rightful things done without bribing. Govt spends a lot of money for expectent mothers but the entire supplies finds its way to either market or as cattle feed. Items of food supplied is relatively unknown and hence they do not find the proper market. Therefore it goes to animals. Free food supplies are sold in market and the benificiaries are either denied or are given substandard ration and that too inadeqate. Govt of UP spends max money for the education but all the money are eaten away by the managers of the aided schools and colleges. Ther is no quality teachers or teaaching. They all depend, by far, on copying in examinations. Why? It is because of rampent corruption at all levels of control. Have you heard of the Govt teachers sending their proxy to teach for a nominal fee and the trained teachers take the pay without going to school. Ofcourse he has to pay part of it to the school inspector also.

Then who the will regulate whom. Have any number of regulators in any department. In fact the common man detests multilevel of control as he has to pay at additional levels so created.

Election is equally bad. What ever be the rule of law, the money, muscle and liquor decides it. Itis rightly said 'you get the Govt that you deserve.'

Only mass awareness and proper electoral reform can do something which will take time. with the present set of the politicians neither the Lok Pal nor the Electoral Reforms will see the light of the day.

Appointing regulator means fecilitating some more people to generate black money.



Jan 6, 2012

This is a very naive belive that autority will protect your (invester's)money.

This from ages we see that people who are on power whether they are politician or religiou leader have always made law, "pap and punya" theory to protect their own back. So donot complain only act keep you eye and ear open. Keep yourself infromed. learn to read between the line by doing mistakes.

But keep investing that is the only option. Alway there are good people in the world and honest people have trust on them.

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