The prequel to the 2G telecom scam?

May 30, 2012

In this issue:
» Are China and Japan moving closer to End of America?
» The impact of Greece's exit from Eurozone
» Cash rich Japan shopping for assets abroad
» Puny penalty for fraud promoters!
» ...and more!

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Psychologists often resort to 'heuristics' to solve problems that otherwise seem to be offering no meaningful solution. The methods used could include using a rule of thumb, trial and error, an educated guess, an intuitive judgment, or common sense. These often throw up results that otherwise seem inconsequential. However, when applied to the correct problems one could come across feasible solutions. Nevertheless, it seems that that our government is taking these tactics too seriously. That too in an effort to cry over spilt milk. And in the process camouflage its own ineptitude.

Prosecutors in the 2G telecom scam have yet not been able to correctly establish the loss to the exchequer. The lack of transparency in the 2G auctions has certainly caused losses to the exchequer that go into trillions. However instead of wasting all waking hours trying to establish the magnitude of problems that existed a decade back, the CAG could use its skills more prudently. The Comptroller and Auditor General has used plenty of heuristics in calculating the 2G losses. In a more recent effort it has cited the possibility of losses emanating of spectrum theft prior to the 2G scam. Several telecom companies are being held responsible for the fraudulent practices. However, the fact that most of these misdoings were due to untransperant policies remains concealed.

Prudent allocation of critical and scarce resources is the government's foremost duty. After all, being the representatives of a democracy, they are trustees of public wealth. Failing in such duty, the government can seek no pardon. Whether it is the ruling political party or the erstwhile ones, responsibility must be taken for destruction of public wealth. But more importantly steps must be taken to ensure that in future there is no such frivolous distribution of scarce resources. That too at the cost of the nation's economic wellbeing. Hence the government has done enough in terms of digging past wrongs and playing the blame game. Instead it could do well in urgently framing transparent policies for allocation of resources like mines, spectrums, land and water bodies. Without that, the list of prequels and sequels to 2G scam will be endless.

Given the increasing fear, heightening confusion and unreliability of financial statements, participate in our India's Most Trustworthy Corporate Group 2012 poll and let us know which corporate group you trust the most.

 Chart of the day
While loan growth and accretion of deposits dropped in FY12, the government's borrowing appetite led banks, especially PSUs to increase their G-Sec investments almost 99% YoY. Also G-Secs still comprised relatively smaller proportion of banks' balance sheet. A disproportionate increase in such investments in FY13 could hurt banks' net interest margins.

Data source: RBI

It was way back in 1920 that the US dollar first emerged as the reserve currency of the world. Thus, the dollar has gone more than 90 years without its dominance coming under any significant threat. But will the trend last forever? May be not. Firstly, in the past few centuries, no single currency has seen its supremacy last forever. Secondly, with the US economy positioned as it is right now, it won't be long before US dollar too loses its stronghold. In fact, the trend seems to have already started.

As per reports, China and Japan, two of the biggest economies in the world, are all set to launch direct currency trading. This would, in effect, completely bypass the dollar and also the associated benefits and risks. With dollar exchange rates becoming too volatile, this mechanism is likely to help businesses in these two countries to reduce risk associated with rate fluctuations.

Although dollar has been bypassed in quite a few other agreements as well, this will be the first time that two major economies have done it. This does mark an important turning point in the global currency market we believe. Is this the beginning of the end of 92 year reign of dollar as the world's reserve currency Well, only time will tell.

Will Greece exit the euro zone? Or will it not? The former event seems more plausible now. But do you have any clue what will happen if Greece quits the euro zone Let' see what Greece's biggest lender National Bank has to say about this. As per its special report, Greece's exit from the euro will have catastrophic effect on the standard of living of its citizens. The bank estimates that such an event would cause of whopping 55% drop in per capita income. Even worse, the drop in the nominal value of the new currency would be to the tune of 65%. Unemployment in Greece is already sky-high at 21%. The euro exit would make it even worse, taking unemployment to about 34%. Add to this an initial inflation rate of about 30% which would then keep on rising. If this really happens, the consequences for Greece and the rest of the world will be far-reaching. So while the world may not end in 2012, Greece is likely to face something that would be nothing short of doom.

Even as developed countries continue to reel under recession, the availability of skilled workforce remains scarce. This paradox was the highlight of the survey conducted by Milwaukee-based Manpower Group (MAN). As per the survey conducted in 38,000 companies across 41 countries, 33% of the companies were unable to find workers with the right skill set. This is high considering that only 29% of companies had reported shortage of skilled workers during the global financial crisis in 2009.

Region wise, Asia leads in scarcity quotient, with 45% of employers not finding the right people to hire. Despite high unemployment in recession-hit America, a huge 41% of companies there face skilled labour shortage. However in Europe, Middle East and African countries, only 25% of companies reported lack of skilled force pointing towards fundamental weakness in the economy.

Stringent hiring standards by companies worldwide have given rise to the dearth of skilled manpower. As long as emphasis is not laid on vocational and technical courses in the education system, companies will continue to be hit by the talent crunch.

When it comes to mergers & acquisitions (M&A), Japanese firms have been known to bag pricier deals. In many cases, quite a few Japanese companies are struggling to make the acquisitions work. In India, Daiichi Sankyo's stake acquisition in Ranbaxy is one such example. However, this has not deterred Japanese firms from M&As. Quite the opposite. The pace has now only increased. There are a few reasons for this. For one, companies there are flush with cash. Decades of frugality and debt-slashing following the crash of the 1980s asset bubble left Japanese companies sitting on US$ 2.6 trillion in cash. Appreciation in the yen in that sense has also helped matters as the yen now buys around 10% more dollars than it did 2 years ago. Thus, with more than US$ 34 bn in foreign investments so far this year, Japan is on pace to equal last year's record US$ 84 bn. However, it is not all about cash. Fear is also a reason that has propelled Japan to go scouting for assets abroad. The devastating earthquake and tsunami resulted in damage to various resources and supply constraints. An aging and falling population means that demand has weakened. This has forced companies to look overseas to bolster their fortunes. However, whether this slew of acquisitions provide a shot in the arm depends a lot on what price Japanese firms pay. If it stays too high, the overseas assets will only pile on the pressure rather than make any meaningful contribution.

Instances of corporate fraud have been all over headlines in the recent times. The pace at which such frauds are coming in light has left us stumped. The country's image has been tarnished. Overseas investors are turning cold shoulder to India. For a country whose growth plans depend on infrastructure growth and funds, the image needs a makeover. In this regard, Securities And Exchange Board Of India (SEBI), the stock market regulator has come up with some plan of action against the promoters and entities involved in frauds and unfair trade practices. In the revised consent order, the regulator has fixed a minimum penalty of Rs 10 m to settle charges against Promoters involved in fraud. This may come along with further penalty worth 0.5% of highest market value of their holdings in their companies and can even go up depending upon other factors like prior actions and extent of proceedings.

These days when scandals run in hundreds of crores of rupees, fixing such paltry penalties seem to be mocking the situation. No wonder the move has failed to strike a chord with the investors. Corporate fraud is a serious crime. Considering the stakes involved, a soft approach is no way to deal with it. It's time that the regulator rules with an iron fist and comes up with severe laws so as to prevent such frauds in the first place.

Taking cues from their peers across Asian markets, the indices in Indian equity 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 51 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
"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." - John Templeton

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1 Responses to "The prequel to the 2G telecom scam?"

Suresh Kumar

May 30, 2012

Allocation of critical and scarce resources and licenses is the government's prerogative. Should these be distributed through auction method or given away free ? The government would naturally like to give it away for free, as this indirectly helps the "co(mmo)n man". Yet, the auction method helps directly the common man. The government could ask if necessities like water, healthcare and education should also be auctioned to private agencies. The guideline could be the international prices, availability, affordability and value addition percentage. In case of 2G spectrum, the value addition percentage was a bit too high based on the license fee.

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