A big wake up call for unscrupulous promoters!

Mar 17, 2012

In this issue:
» The biggest sovereign default in history is here...
» Are the long term fundamentals of gold still intact?
» Is the global economy recovering?
» Does India affect price of crude oil?
» ...and more!

---------------------------- Raise your voice before this turns into yet another scam! ----------------------------

When millions don't even have food to eat, our government is thinking about bailing out multi-millionaire CEOs!

Is this government really made up of our representatives or is it on the payroll of those corporate giants?

We at Equitymaster feel strongly about this cause, and thus have started an Urgent Poll where you can read all about this and cast your vote to make your voice be heard!

We strongly recommend every Indian, who wants to make a change, to take a look at this.

Click Here to read more and cast your Vote... Before it's too late!


Indians have a tendency to not rebel too much. More often than not, we just complain to ourselves and succumb to our circumstances. Centuries of exploitation by foreign rulers has programmed our minds to endure exploitation. Even in our role as minority investors we carry the same mindset. Quite often, we are used to being abused by deceitful promoters. But is this about to change?

A recent move by The Children's Investment (TCI) Fund, a London-based hedge fund has set a new precedent that could mark the beginning of shareholder activism in India. Just a few days back, it lashed out a public attack against state-owned Coal India, the single largest coal producer in the world. The hedge fund has accused the company of being "reckless and lacking integrity" in its attitudes to minority investors. It blamed directors of Coal India for submitting to government interference in coal pricing and such other issues. TCI has also threatened to take legal action against individual directors if they fail to address concerns that it has raised. It must be noted that TCI is the second largest shareholder of Coal India. But while the government controls 90% stake in the company, TCI holds just 1.01%.

Will TCI's revolt be successful? Given our government's reputation, it is best not to be very hopeful. But this effort will certainly not be wasted. TCI's move has surely created a stir, not just in India but even in the international financial community. Especially, at a time when the government may seek foreign funds for tackling the worsening budgetary deficit. It has also raised some very pertinent questions for both government-controlled entities as well as unscrupulous private company promoters. How long will the government use companies like Coal India for its own political ends? And how long will promoters take minority shareholders for granted? It is high time they get their act together.

Do you think India is ready for shareholder activism yet? Let us know your comments or post them on our Facebook page / Google+ page.

 Chart of the day
The energy sector in India has been suffering on account of detrimental government policies. The Union Budget 2012-13, instead of offering any respite, has raised further hurdles for the sector. The decision to increase oil cess on domestic crude production by 80% has made things harder for upstream oil companies like Oil and Natural Gas Corporation (ONGC), Cairn India and Oil India.

And it's not just the upstream companies. The budget has not even hinted towards any pricing reforms in key petroleum product categories despite the boiling crude prices. The heat will be felt by downstream companies for which the under-recoveries are going to increase even further. The year financial year 2010-11 (FY11) saw under recoveries rising by 70% on a year-on-year (YoY) basis. For FY12, the under-recoveries are estimated to cross Rs 1,400 bn. This means a whopping rise of over 79%. With crude prices expected to remain high and Indian energy demand rising, the financial health of oil marketing companies is only set to worsen further.

Data source: Mint, The Economic Times

This default is a long impending one. Just like our very own Kingfisher Airlines and Air India. However, unlike the latter, Greece's bailout now seems to have unanimous naysayers. Holders of Greek government bonds, including powerful banks and pension funds had to swallow losses. They had to swap the debt papers with those half the face value and much lesser interest yield. The biggest sovereign-debt restructuring in history allowed Greece to wipe some €100 billion (US$ 130 bn) from its debts of around €350 bn.

There is nothing here to suggest that such default and government austerity programmes end the economy's fiscal blues. But a sovereign default of this kind certainly drives home some important points. That healthy economies and entities should not pay for the profligacy of others. Greece did get several rounds of bailout from its eurozone neighbours. But none of that averted its eventual default. It only made the relatively healthier nations poorer. However, our government seems to be taking no lessons from this. It continues to frame policies to benefit loss making entities. If you feel the same way as we do, then raise your voice to Ban Bailouts. Remember, every vote counts!

Gold has lost its sheen in recent months. The prices of gold have corrected considerably leading many investors to question whether the yellow metal should be a part of one's investment portfolio or not. The only way to determine this is to do what we do for each investment. Go back to the fundamentals. Figure out whether the fundamentals of gold make sense or not.

As you would be aware, gold is perceived to be an asset that provides strong returns when other assets falter. In other words, gold has taken the role as a safe haven, especially throughout the global financial crisis. Besides the fundamentals of demand and supply, gold prices are affected by three major things - the strength of the world reserve currency, which in this case is the US dollar; the health of the global economy; and finally, the economic growth and price stability. Interestingly, there has been hardly any progress on any of these fronts. The US dollar has seen some stability in recent times. But, the reason for the same is the fear in other regions of the world and not the positive policies of the US. The global macro economy has seen some recovery. However, it is still tepid and cumbersome. And till the time there is no long term sustainable solution for the Euro crisis, it is doubtful that we will see growth and price stability for some time. All in all, the three factors suggest that gold prices should be headed northwards. While the gains may not be as spectacular as what we have seen in the past, we believe investing some money in the yellow metal should bode well for investors.

The global economy is recovering! The global economy is not recovering! Both the viewpoints are published on a daily basis. When the US comes up with their "better than last time" economic numbers, everyone is gung ho about the recovery. But when China comes out with their depressed numbers, the air of gloom is back again. So which is it? Well, the truth is that the global economy is still struggling to get back on the path of recovery. This is suggested by the composite leading indicators (CLI) published by OECD (Organisation for Economic Cooperation and Development). The numbers suggest that the global economic recovery is certainly under way. But the progress is slow and timid. The Euro zone's figures have continued to weaken. The growth momentum is also weak in most of the ASEAN (Association of Southeast Asian Nations) economies and even in China. On the other hand, the numbers for US have turned positive in recent times. This suggests that there is some overall improvement from the dismal levels seen during the peak of the crisis. However, whether the momentum remains or not is something that we will have to wait and see.

Volatility in crude oil prices have often been blamed on speculation overriding fundamentals. India is the fourth largest global energy consumer and has the largest refining complex. On the top of it, about three-fourth of its crude needs are taken care of through imports No wonder it has been one of the worst hit victims of the volatility in the oil prices. However, this time, the equation may work the other way. With the rise of the upper middle class in India and mass urbanisation, the energy needs are rising rapidly. And so is the demand for oil. This means that India's demand for crude oil is also emerging as a factor affecting oil prices.

Major global stock markets except China closed the week on a positive note. The European markets in particular showed a very positive performance after investor focus shifted from Greece to global growth. In the US too, markets posted their biggest gains of the year during the course of the week. The US Federal Reserve's announcement regarding improvement in economic indicators along with continued fall in unemployment triggered positive investor sentiments.

The Indian stock markets traded positive for most part of the week. However, budget anxiety and then later on a lacklustre Budget from the Finance Minister resulted in the markets ending on a lower note. The Indian markets were down by 0.2% for the week ended March 16, 2012.

Amongst the other world markets, China (down by 1.4%) was the only stock market to close the week in the red. European markets in particular showed positive performance led by Germany (up by 4%) and France (up by 3.1%).

Data Source: Yahoo Finance

 Weekend Investing Mantra
"The first question I ask is: Does the owner love the business or does he/she love the money? It's very easy to tell the difference." - Warren Buffett

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    3 Responses to "A big wake up call for unscrupulous promoters!"

    Harsha N P

    Mar 19, 2012

    I guess this is very common practice, promoters of companies both listed and unlisted chasing self interests than those of shareholders. I am not at all surprised by TCI's action against CIL. Though I hold significant amount of shares of CIL, we never contemplate any action as 1. We do not know our rights as shareholders 2. Even if we know, we are not used to taking legal action as our legal system is corrupt and inefficient 3. The legal recourse is very expensive and time consuming. Not sure where our country is heading to!!!


    Prashant Kalantri

    Mar 18, 2012

    A very common practice adopted by companies into manufacturing & supply of capital equipments of over invoicing to public limited companies and under invoicing to private limited companies is going unnoticed and unchallenged in India. The directors of public limited companies buying these capital equipments take cash in return and owners of private limited companies pay cash for the under invoiced part.

    The lack of integrity is the sole reason one must avoid investing in small cap stocks.


    Suresh Kumar

    Mar 17, 2012

    If challenged by one minority shareholder, TCI, the government, the majority shareholder, could change the mission statement suitably in national interests. Its simpler than Vodafone related income tax amendment or ONGC FPO at a premium to market price.
    Major shareholder activism has been rare in India except for Satyam, which also was initiated from US ADR holders. Laws in US are favourable to minority shareholders and the lawsuits take much less time to settle, as compared to India.

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