Will the best regulator please stand up?

May 2, 2012

In this issue:
» Dr Greenspan finds US stocks 'very cheap'!
» Jim Rogers' piece of advice to commodity investors
» Yet more govt bailout candidates in the making
» Is tax avoidance rule a long term policy disaster?
» ...and more!

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"Practice what you preach" seems to be an adage that the Indian regulators are unaware of. For the likes of IRDA, SEBI and RBI may have earned reasonable degree of respect in framing policies for transparency. But the selective application of the same questions their own ethical standards.

The Indian financial sector has had the good fortune of not facing any major setbacks so far. That too despite operating in a globalised economy and suffering from the turmoil in the West. But it seems that our regulators have done only a half baked job of putting things in order. More so, because the government's interest weigh over their policy making.

Plenty of instances can be cited to back our claim. But nothing proves the case more than LIC's gross negligence of its duty towards policy holders. The insurance behemoth has been acting as the government's bailout fund in recent times. It is not new for PSUs to become financially sick. But buying large stakes at unaffordable rates in government owned companies clearly negates the interest of lacs of LIC's policy holders. Understandably, insurance regulator IRDA had prescribed a 10% limit on equity holding for all life insurance companies. However, it turned a blind eye to LIC's big ticket holdings in Mahanagar Telephone Nigam Limited (MTNL), Shipping Corporation Of India (SCI) and Corporation Bank.

Mutual fund regulator Securities And Exchange Board Of India (SEBI) can be held equally responsible for the flip flops in policy making. Particularly, for foreign Institutional Investors (FIIs) and large corporate. It has continued to allow hot money into Indian stock markets. Moreover, it has done little to bring fraudulent promoters to book. In most cases, minority shareholders continue to become victims of fly-by-night small cap companies depriving investors of their hard earned money. Even after plenty of committees voicing their opinions, the regulator pays very little attention to unfair trading practices.

The Reserve Bank Of India (RBI), without doubt, takes the maximum accolades for managing risks in Indian banking system. However, its prudence does not extend to micro issues concerning individual banks. For instance, the implementation of shareholding pattern is not uniform. The inconsistency in promoter shareholding has not just hurt capital starved old private sector banks. But Nedungadi Bank and Global Trust Bank have also been cases where transparency took a back seat.

At the end of the day, it takes one rotten apple to spoil the basket. Hence, however good the regulators, imbalanced policy making, can multiply risks in the financial system. And probably that is something the Indian economy can ill afford at this stage.

Which is the best financial sector regulator in India according to you? Share your views with us or post them on our Facebook page / Google+ page.

 Chart of the day
The quarterly results of Indian pharma majors may not be accurately indicative of their long term future. But data regarding the demand for generic drugs clearly puts all speculations to rest. Notwithstanding regulatory hurdles in the West, Indian drug makers have a lot to benefit from the rising share of generic drugs in India too. The increasing spend on generic drugs can by itself bring in healthy revenue stream to domestic pharma majors.

Data source: Mint

If picking low price-to-earnings stocks is all there is to the business of investing, we wouldn't have had such huge discrepancies in performance. The fact remains that the quality of the business and the earnings it generates is as important a factor if not more. But a certain Dr Alan Greenspan seems to be oblivious to this fact. The former Fed Chairman, under whose watch the subprime crisis is believed to have taken root, believes that US stocks offer good value and are likely to rise over time. Citing very low price-to-earnings ratio, he opined that stocks are very cheap.

Is this true? We do not think so. We believe that the high earnings are a result of low interest rates and low wages. Thus, when the economy improves, these two figures could edge up higher, taking the sheen off the earnings. Besides, the US economy is highly leveraged, making revenue growth and thus the profit growth that much more difficult in the future. In light of this, it would be dangerous to take Mr Greenspan's comment on face value. Like it did with the subprime crisis, his optimism does not seem to be allowing him to see the harsh reality of the low P/E ratio in the US.

Commodities are an asset class that many investors consider investing in. Obviously like any other asset class, this too has its own set of pros and cons. As an investor you may ask if there is anything different that you may need to look at while investing in commodities. Legendary investor Jim Rogers has a piece of advice for such investors. His advice is simple - understand the commodity and its demand and supply in the world.

He states that the price of any commodity is nothing but a function of its demand supply. If demand goes higher than the supply, prices go up and vice versa. It is a simple but difficult concept to implement. The difficulty lies in the data involved in understanding the demand and supply side of the commodity. Nevertheless it is the only way to look at investing in the same. So if you have the data and understand it then go ahead and invest in the commodity of your choice.

A striking feature of the 21st century economic and financial crises is the sheer pace at which financial disasters fly uninhibitedly across continents. Another unique trait of the current era is the utter magnitude of the ongoing turmoil. The debt crisis that the developed world is facing is not just pertaining to a particular sector of the economy. The malaise is a lot deeper and bigger, engulfing finances of entire economies. But the problems haven't just appeared suddenly out of the blue. They are the result of years of recklessness and petty politics. The US and the Eurozone have no choice but to suffer the consequences. These economies are dying under the weight of poor economic growth and high indebtedness. A slew of austerity measures are further killing all possibilities of economic revival.

Just last week, credit ratings agency Standard & Poor's cut India's rating outlook to negative from stable. The main reason for this is our large fiscal deficit and the slow reform engine, which is facing several political roadblocks. Well, this is India's wake up call. Unlike the developed economies, India is not facing any immediate systemic crisis. Moreover, India has favourable long term growth prospects. With some discipline, the country's finances can be made leaner. By learning from the mistakes of developed economies, India can leapfrog into a better future. But unfortunately, our political establishment does not have the vision, will and courage to take bold steps. Unless we reach the brink of a major crisis, no major changes or reforms are likely to happen. We hope the government proves us wrong.

The instance of government companies requiring a bailout seems to be increasing at an alarming rate. The latest such company that may require intervention is public broadcaster Prasar Bharati. The firm is likely to run out of money for operations and salaries in two months. And accounting irregularities in the company's balance sheet for FY10 seems to be the bone of contention. Too many issues such as court proceedings, difficulty in interpreting complex accounting norms and allegations of corruption meant that one board member objected to the same. As a result, accounts for that year were not approved. As the company does not appear to have much headway in resolving the issue, it faces the prospect of not being accorded any funds.

Indeed, the information & broadcasting ministry, which has administrative responsibility for the autonomous Prasar Bharati, has told the broadcaster that it will not release new funds for the fiscal year 2012-13. This does not bode well for the broadcaster as more than two-thirds of its annual budget comes from government grants. Does that mean that the government will once again have to come to the rescue of this company? We hope not. Clearly, Prasar Bharati's problems stem from internal inconsistencies in accounting. And this is not something that the government should rectify by bailing it out. If you feel the same way as we do, then raise your voice to Ban Bailouts. Remember, every vote counts!

India has always been one of the top investment destinations as far as attracting foreign money is concerned. However, if Mark Mobius is to be believed, India might soon lose its coveted status. That's because he feels that the Indian government is making some huge policy mistakes. And these are on the taxation front. First relates to the power of retroactively taxing the indirect transfer of assets. And second pertains to General Anti Avoidance Rule (GAAR) which is aimed at targeting tax evaders. Now, it is true that tightening of the screws by taxmen has hurt the foreign investor sentiment to a great extent. However, we believe that this is just a temporary phenomenon. Non-beneficiaries are likely to voice their dissent on unfavorable policy decisions. Further, one also needs to look at the broader context of improvement in tax collections from the said decision. Also, as far as slowdown in foreign flows due to these taxation issues is concerned, it should be remembered that at the end of the day capital chases growth. And India's long term growth prospects are still intact. Thus, tax avoidance rules, which strengthen fiscal policies, can't be a long term policy disaster.

Despite opening in the positive, the indices in Indian stock markets gave in to selling pressure in auto, commodity and power stocks. At the time of writing, the BSE Sensex was trading barely 6 points above the dotted line after shedding most of the early gains. The indices in most other Asian markets closed higher in today's trade. Those in Europe have also opened flat to positive.

 Today's Investing mantra
"You are neither right nor wrong because people agree with you. You are right because your facts and reasoning are right." - Benjamin Graham

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4 Responses to "Will the best regulator please stand up?"

swapan lodh

May 2, 2012

all regulators as being siblings of finance ministry,our economy remains bare for being molested by the monitors of our administration.a few days before i read an article in TOI the real intention of bailing out indian airlines.it is horrifying story how our mps and govt`s blue eyed ones enjoy free of cost ia`s journey along with entourage,and cause draining of ia`s income.writer chetan bhagat had been offered such benefit by a friend who was one in entourage in a flight of an mp of ia flight.he asked if such free bees could be offered by a private air line? information given in this edition is even more frightening and spine shivering.now most wealthy psu like lic has been targeted to sink it soon.is it not a horrible? how long it take to face the situation of greece,itally,germany etc.,?


Big Indie 99

May 2, 2012

Why - and how can you forget the latest Flip Flop of IRDA?

First they (IRDA) say Single Premium is no good. Says it harms the industry as there isn't a regular flow of premium income. And then they go FLIP n Flop! Oh no it is good! Did we say it was wrong - we probably said it was no good!! That was all.

Tell me if the industry pushes Single Premium products down the throats of the customers will they get good intermediaries? Why should any one want to sell insurance when there is no regular flow of income for the agent?

The industry terms it good because of "Seasonality of Income" of the customer. Really fail; to understand that term. The industry continues to shoot itself in the foot so much so that they have no stub left to even wear a prosthesis too - and they crib about the regulatory constraints.

However, as we can see the Regulator is also throwing caution to the winds and playing the same ghostly tune that the industry wants to hear - before it is DEAD!!!!!!

Like (1)


May 2, 2012

every time when the revenue department loses in a court of law one can expect for an amendment in the respective taxation laws with retrospective effect. otherwise how can we not have so many amendments in our taxation laws. every time when the law is framed you will find logical errors and they remain for our department and our professionals to play with. anyway it is another cat and mouse story which aam admi of India to bear with and also the price for being part of the largest democracy.

Like (1)


May 2, 2012

all our regulators are government agencies totally controlled by our finance ministry. in such a situation what can one expect from such regulators. to a great extent our bureaucracy is spineless our general public is either ignorant or apathetic. therefore we can expect only such sloppy decisions and actions.

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