Should we be greedy for these 10 bn US dollars?

May 7, 2012

In this issue:
» Will this solve India's energy problems for the next 200 years?
» Chinese consumers shying away from 'Made in China'
» Why India Inc. is holding on to its cash surpluses?
» Rural growth brings in competition from fake goods!
» ...and more!

------------------- "Please continue this good work for the entire community at large" -------------------

Here's what one reader had to say about Jawahir Mulraj's weekly e-letter, Straight From The Hip:

"Please continue this good work for the entire community at large as the saying goes: well informed readers are better citizens and we desperately need better informed decision making amongst our polity."

Now you too can be a part of this well-informed group of readers.

Just sign up for this Free e-letter and enjoy J Mulraj's simple analysis on complex issues.------------------------------------------------------------------------------------------------------

The combined assets under management of the Indian mutual fund industry stood at Rs 5.8 trillion at the end of March 2012.This was the lowest since June 2009. The flight of foreign money from Indian stock markets has been held as the main culprit. Over the past few months the Indian economy has offered very little reason to cheer. Policy inaction, slower GDP growth and inflation have made India's wealth creating prospects seem dimmer to the foreign institutional investors (FIIs). Further, the uncertainty in global economy has caused flight of funds to safety. After all, that is the nature of 'hot money'. The FIIs being fair weather friends do not have the appetite for even short term risks in Indian stock markets. But it seems that a new legislation is set to turn away a lot of illegal FII money for good. The funds could be upto US$ 10 bn!

India's new tax policy, the General Anti-Avoidance Rule (GAAR), seeks to bring investors misusing tax havens to book. As it is, those entering Indian stock markets via P-Notes are notorious for causing havoc. But this time, the fear of heavy taxes is daunting. For it will be levied not just on investments through P-Notes but also on funds coming through tax friendly places like Mauritius.

P-Notes or participatory notes were once known as the visa for unscrupulous FII investments into Indian stock markets. However the market regulator Securities And Exchange Board Of India (SEBI) clamped down on them in late 2007. This tightened the issue of these instruments. So much so that both SEBI and the RBI count the considerable fall in P-Note investments among their achievements. As per SEBI, P-Notes as a percentage of FII AUM comprise just 15% in 2012 as against a peak of 51% in 2007. Important to note that the drop in P-Notes' popularity came in primarily after the SEBI issued stricter KYC guidelines for them. Therefore it is easy to conclude that the so called FII investors wished to keep their identity unknown.

However, the restriction on P-Notes did not mean that FII interest in Indian stocks waned. Despite the absence of such opaque instruments, number of FIIs registered with SEBI is up 53% since 2007. Also, the total value of P-Notes is estimated to have reached near Rs 2 trillion (US$ 40 bn) by March 2012. Hence there is no reason why the government should not plug further loopholes even if the same is by way of higher taxes. Ensuring that the money coming into India is legal and long term will have its own benefits. For that the temporary loss of US$ 10 bn is a small compromise we believe.

Do you think the General Anti-Avoidance Rule will have long term benefits for Indian stock markets? Let us know your comments or post them on our our Facebook page / Google+ page.

 Chart of the day
Any speculations about commodity prices cooling off with slower world GDP growth can be put to rest. As per the World Bank estimates, prices of energy, agricultural and metal commodities are set to remain nearly double of 2005 prices in 2013. While the prices of energy and agricultural commodities may cool off a bit after peaking in 2011, metal prices would continue to remain hot. No wonder commodity investors are far from calling it a day.

Data source: World Bank

Remember India's IT revolution? It will not be wrong to call it entirely a result of a giant leap in computing power technology. We can't imagine what would have happened to the millions of IT graduates that India churns out each year had it not been for this. Of course, they would have gotten absorbed elsewhere. But we doubt they would have received the same salaries as is available to them in the IT space. Not to forget the enormous wealth that has been created in India as a result of the IT revolution.

Now, nearly two decades later, courtesy yet another leap in technology, India stands at the cusp of another giant revolution. And on this occasion, the benefits could well be many times more than brought about by the IT revolution. We are talking about India's potential to commercially exploit its enormous shale gas reserves. As per reports, scientists in India have identified 28 sedimentary basins of shale gas, holding an estimated 527 trillion cubic feet of shale gas! Even if 50% of this were recoverable, it could potentially satisfy India's energy needs for the next 200 years!

Imagine the kind of forex that we will save as a result of reduced dependence on energy imports. But we still have a long way to go? India is yet to evolve a clear policy framework. Then there is the problem of extracting the gas without affecting the livelihood of the local population as most of the gas is situated onshore. The good news though is that these problems are not insurmountable. We can hence start having at least partial dreams of energy self-sufficiency in India.

For quite some time, consumers around the globe have been skeptical of the label 'Made in China'. They assume that this label is synonymous with lower quality. And in many cases, the assumption has actually been proven right. Now this label and its associated bad press are causing problems for China's domestic companies. Chinese consumers too are shying away from buying China made goods. This would cause troubles for the country which is relying heavily on domestic consumption to drive future growth. If Chinese consumer product companies do not rev up their image quickly, they would lose out in this wave. But this does bode well for the multinational companies that have been eyeing China's growth pie. It gives them the perfect opportunity to move right in and steal the consumers from right under the noses of the Chinese companies.

To have too much cash or not; that is a million dollar question for employers. When the global crisis intensified in 2009, companies the world over struggled to keep head over water. Sales declined, profitability was hit and debt mounted. In such a scenario, those companies having adequate cash on their books caught the attention of investors. After all during times of uncertainty, cash certainly is king. Three years on, many Indian companies are still sitting on piles of cash. For instance, 10 Indian companies including Reliance Industries, Infosys, Coal India, Oil and Natural Gas Corporation Limited (ONGC) among others are holding as much as Rs 2.34 lakh crore. This has now begun to raise eyebrows. There are some who opine that having too much cash reduces the return on equity for shareholders. This is a valid concern.

Indeed, if the company is not investing back into the business or acquiring assets and companies, then it makes sense for it to give the cash back to the shareholders. This could be in the form of buybacks or dividends. Having said that, this is tricky. Especially when it comes to acquisitions, it would be unwise for a company to make an acquisition at an inflated price simply because it has ample cash. Companies for their part are also wary of giving back cash to shareholders at a time when the global economic environment remains uncertain. Ideally, the key here is to strike a balance between both the scenarios. And companies managing that would have the edge over others in the months to come.

There is no denying that the Indian rural markets have become major drivers of consumption. Moreover, they are set to grow at a rapid pace going forward as well. Because of rising income levels, their purchasing power has been on the rise. And they are also becoming increasingly brand conscious. But while it may seem like a ready cake for companies in the consumer goods space, all is not as rosy as it looks. One very major problem that companies like Colgate, Hindustan Unilever (HUL), Proctor & Gamble, etc face is the slew of fake products flooded into these markets. Their names and packages are very similar to the original products. Add to this the poor literacy rate in rural areas. The result is that consumers end up paying high prices for such fakes believing they are buying genuine products.

To counter such malpractices, major consumer goods players do initiate several measures. For instance in 2011, HUL helped authorities in seizing fake goods worth US$ 11 m. However, a lot more needs to be done to educate and empower consumers so that they do not fall prey to buying fake products.

The Indian government is in a financial mess. Yet, infrastructure needs to be taken care of in the country, and this requires a lot of money. For this purpose, the government has written to the Reserve Bank Of India (RBI) to create a separate category of state-owned NBFCs facing less stringent capital requirements. The current capital adequacy norm for NBFCs stands at 15%. This figure is a ratio of capital to risk weighted assets. As a financier's loans (assets) increase, it needs to set aside more capital to cover the increased risk. State owned, India Infrastructure Finance Co. Ltd (IIFCL) disbursed Rs 220 bn in loans in FY12 and has a target of Rs 400 bn in FY13. For the company to grow, it would need more capital funds from the government. The finance ministry has thus asked the RBI to reduce the capital norms to around 5-6% for IIFCL. But having adequate capital to cover risk is a measure of prudence. There is a possibility of default in the infra space and not having adequate capital may just be the straw that breaks the camel's back.

Taking cues from their peers across Asian markets, the indices in Indian stock markets opened lower and continued to languish in the negative territory for the rest of the session. At the time of writing, the BSE Sensex was trading 141 points below the dotted line. The indices in most other Asian markets closed lower in today's trade. Those in Europe have also opened in the red.

 Today's Investing mantra
"The idea that something coming out... that's being offered with significant commissions, all kinds of publicity, the seller electing the time to sell, is going to be the best single investment that I can make in the world among thousands of choices mathematically impossible." - Warren Buffett on Facebook IPO

  • Test Your Warren Buffett Quotient Now!

  • Today's Premium Edition.

    Recent Articles

    All Good Things Come to an End... April 8, 2020
    Why your favourite e-letter won't reach you every week day.
    A Safe Stock to Lockdown Now April 2, 2020
    The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
    One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
    A stock with strong moat is currently trading near 5-year lows.
    Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
    This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

    Equitymaster requests your view! Post a comment on "Should we be greedy for these 10 bn US dollars?". Click here!

    4 Responses to "Should we be greedy for these 10 bn US dollars?"

    uday menon

    May 7, 2012

    As to understand what unbridled inflow of FII money can do all you have to do is look back at what happened to ASEAN economies, especially Indonesia, in 1997. Moreover, too much inflow of speculative money skews the valuations of most companies. I don't see how this could be beneficial to the markets or to the economy in the long run. The reason de tere for the existence of the stock market is to allow companies to raise relatively cheaper capital and to provide investors an avenue for investment which, ideally, provide the investor better returns than bonds or money market instruments in the long run. But, steady appreciation of capital is not possible in a scenario where speculative money is solicited and even desired. The stock market is not a gambling joint. We have had our share of Harshad Mehtas, Parekhs etc..etc..Do we need to import them. When it comes to valuations do we need donkeys in the skin Arabian Horses. Does the poor retail investor be duped into believing that he is betting on a race horse when he would actually be investing on a jack ass.

    Like (1)

    V V Deshpande

    May 7, 2012

    Finance minister need to take a firm stand on policy matters
    keeping long term ethical interest of the country in mind and not to dance to populist tune of fair weather friends!

    Like (1)

    Ganapathy Sastri

    May 7, 2012

    There is no need to exempt from tax just because the money came from certain countries like Mauritius or Singapore. Our government need to fear none and favour none. That should be the policty.
    As far GAAR being postponed, we can now sing "Ghar aya mera pardesi pyaas bhuji akhiyanaki".

    Like (1)


    May 7, 2012

    Our Babus are, apparently, smart. They know fully well that the markets are going to crash anyway. This is no time to play the 'ol "Growth" trumpet. No one will buy it. However, it is time to plug in some major loop holes, make the base more solid.

    Like (1)
    Equitymaster requests your view! Post a comment on "Should we be greedy for these 10 bn US dollars?". Click here!