Even this 25% rule can't save you from crooks

Jun 5, 2010

In this issue:
» Big PSU divestment coming - Achievable?
» Fuel price reforms: The possible outcomes
» Commodities set for bull run, says Jim Rogers
» As if PIIGS weren't enough...it's Hungary now!
» ...and more!!

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We recently heard HDFC's Chairman Deepak Parekh blame promoters' greed for poor response to IPOs. "Tell me one IPO that has succeeded. Our issuers (companies coming out with IPOs) don't want to leave money on the table. They want to maximise the price. You need to have a heart to give money and let others make money." Mr. Parekh then opined that 25% public stake in all listed companies was necessary to remove speculation from IPO pricing.

Well, the government has now obliged Mr. Parekh. It yesterday made it compulsory for listed companies to raise public shareholding to 25%, with at least 5% dilution a year. This move could however have some impact on the markets given that the amount of dilution is estimated as huge. As per the rating agency Crisil, at least 170 listed companies would have to comply by this rule and raise a combined sum of Rs 1,600 bn over the next 2-3 years. This is big money! But given that the dilution will happen over a period of 2-3 years, the impact will be evenly spread.

As is expected, this move will broad-base shareholding with a wider investor base and thus leave less chances of manipulation by promoters. But crooks will still manipulate! If a promoter has an intention of duping the company and other stakeholders, a 25% public shareholding won't stop him from doing so. Remember Ramalinga Raju who created such a big scam while holding less than 5% stake in Satyam?

Given such examples, buyers (investors) must still beware. No rule can save you against bad investing decisions! Staying away from crook managements and bad businesses is the ideal way to survive any future corporate and stock market scams.

What's your view? Do you think this rule of minimum 25% public shareholding in listed companies will protect your interest? Share your view

 Chart of the day
The minimum 25% public stake rule would mean divestment of Rs 1,260 bn (approx. US$ 28 bn) worth of shares in the open market by 35 PSUs. Considering the past track record of such PSU divestments, this amount seems big. As today's chart of the day suggests, the government could raise just US$ 3.1 bn in the five year period ended March 2009. And then in the good last year, the amount stood at US$ 5.4 bn. Thus the average annual amount of US$ 9.3 bn for the next three years seems a big deal for sure!

Data Source: Morgan Stanley, Govt. reports;
Note: The average figure for next 3 years has been arrived by evenly dividing over the next 3 years
the amount of Rs 1,260 bn expected to be raised to meet the 25% public stake requirement by PSUs.

It is something that good economics dictates. But the government has had a great deal of difficulty in accepting. We are talking about fuel price reforms. However that might change as an empowered group of ministers meets on Monday to decide on fuel price hikes. In doing so, they will have to take the following into account. A 15% hike in prices will worsen the inflation situation. It will affect the common man. It is likely to lead to political protests. But on the positive side, it will ease the fiscal deficit situation. It will help the public oil companies and encourage greater participation from the private sector.

Given the pros and cons, the government might partially lift control. It could free petrol prices but be more cautious about diesel. Only time will tell how far the government will go in rationalising the system! Whether politics will trump economics, again?

The Indian government unveiled stimulus packages and interest rate cuts at the height of the subprime crisis in 2008. However with the euro zone crisis still not showing any respite, it does not seem to be that worried. Finance minister Mr. Pranab Mukherjee has stated that the government will withdraw stimulus deployed earlier and the RBI will continue to raise interest rates. He plans a 100% exit by next year from the stimulus which equaled 3% of GDP.

We believe that loose fiscal and monetary policies to increase liquidity will only get you so far. Well-placed and timely banking regulations will help you go the distance. Our strictly regulated and well capitalized banking system saved us from trouble during the previous crisis. Hope it will also save us from the current one and future ones as well!

Noted global investor Jim Rogers has been bullish on commodities for a long time. He was among the first to predict the rise of commodities in the last decade. He continues to be bullish on them. And his favorite pick is 'sugar'.

Rogers believes sugar prices will reach their all time high in the coming decade. The reason he says, "...sugar is 75-80% below its all-time high in 1974." In fact, he believes agricultural commodities are currently at an unbelievably low price on a historical basis. Given the rising demand for food all over the world, it does seem the commodity guru will be proven right once again.

Here's a good news for the recovery enthusiasts! India's exports during the quarter ended March 2010 grew the fastest among the world's top 70 economies. The growth stood at 13% over the previous quarter (ended December 2009). Exports during the quarter stood at US$ 50 bn. As compared to India's growth figure, those for Japan and the US stood at 1% each. China in fact logged in a decline of 11% in exports during the quarter.

Data Source: WTO

Hungary may very well be the next country to walk the plank in Europe. And this is according to their own government. The newly elected government made a few controversial comments about 'skeletons in the closet' left by the last one. The new Prime Minister actually stated that the country may not be able to pay back almost US$ 27 bn in debt due this year or control its budget deficit.

Budget deficit after investigations may be as high as 7.5%, according to Bloomberg. This is compared with a 3.8% target set by the EU, IMF and the previous government. We need to still wait for check-up reports on the actual health of the economy. But, we feel that if the politicians are themselves publicly worried then Hungarian investors shouldn't be too confident.

Anyways, in a highly uncertain week for global markets, stocks in India saw some respite. The BSE-Sensex was among the few gainers globally. It closed with gains of 1.5%, only bettered by Russia (up 1.9%). Chinese and US markets performed the worst during the week, down 3.9% and 2% respectively. Within India, stocks from the auto, FMCG and PSU spaces saw the maximum buying interest. Metal and realty stocks however were the worst hit.

Note: Country names represent their respective stock market indices;
Data Source: Yahoo Finance, Kitco, CNNfn

 Weekend investing mantra
"All intelligent investing is value investing - acquiring more than you are paying for. You must value the business in order to value the stock." - Charlie Munger

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34 Responses to "Even this 25% rule can't save you from crooks"

mitesh kothari

Jun 11, 2010

in INDIA nothing can protect you from crooks. they are very smart and will find some way to do what they want to because there are lots of public servant waiting to help such fraudsters.



Jun 7, 2010

Yupp! It wud add to liquidity



Jun 7, 2010




Jun 7, 2010

No rule can save except ur vigil. Penta mediagraphics and silverline have 99.9 percent public holding. No body talks of them - forget the protection.



Jun 6, 2010

To make sure we have a sound financial system working well for us, we need to eliminate or deter the crooks from deceiving investors. Those wishing to do harm to the financial system in anyway should be imprisoned not for a year or two but for a reasonable duration and may be even their property(ies), wealth and any assets they may own be impounded and confiscated.
This would send a strong signal to criminal minded individuals that crime does not and will not pay.
We need 'power'ful laws and effective implementation (without the opportunity of corruption/bribing during implementation) for an effective financial market system.



Jun 6, 2010

No, in my opinion 25% minimum public share holding will not improve the retail share holders nor will it improve the valuations in any way. However the present debate should be not on how this 25% equity participation by general public, the discussion should be - how our system is going to absorb such a heavy disinvestment (when I say disinvestment, I mean both additional equity offered by companies to meet the 25% requirement or reduction in promoters holding, both). On one hand, we are soon going to stamp into a territory where money from banking system to get hugely evaporated due to 3G Auctioning of the Govt. (approximately Rs.70K crores of money will be sucked out of banking system due to this), further, advance tax of Rs.30K crores will also go to government exchequer. Any hike in the monitory policy to increase CRR will create a havoc in interest rate markets. In this scenario, if investors have to take the load of additional Rs. 1 lack crores,due to this new rule of minimum 25% retail participation, it is going to be very difficult for the markets to sustain its present valuations, as most of the investors will sell their existing holding to buy new stocks in the primary markets (in other words, we are going to witness money flow from one counter to another counter). This situation can be an imbroglio for many, think it deeply over.


GJ Bulsara.LLM,CAIIB,ACS,Retd Chief Legal Adviser, off a bank

Jun 6, 2010

Raju & Stayam stand hand in hand with Harshad Mehta, Ketan Parekh & the like,one can easily passing referance to them, But you have not enumerated or even hinted about even a couple of ways/loopholes to get around the minimmum 25% public holding as suggested by Mr.Parekh that has now been enacted, that will now affect more than 1700 listed companies


Vijaykumar R Swami

Jun 6, 2010

This 25% rule is absurd. This rule cannot guarantee the safety of investors money. The IPO's are priced inadvertantly through the rating firms who are guided ( or writing reports as advised by the wise promoters ) by promoters. The IPO ratings are ballooned and the common man ( the real middle class ) is kept out from investing. Look at the recent few years of IPO's and who get the IPO shares. To add to the views the common man left out to invest in mutual funds is also a bad looser there too. Thanks to our governing system because they have no remedy for the middle class investors. Any imporoper allotments in IPO's if at all detected ( not thru govt. systems but found because of mistakes by the benefitters) will take it's own course thru the rule of law and the IPO looser gets symphathatic pat from concened depts in govt. for loosing the IPO with word sorry. But the out of way allotted benefitter is left scotfree alongwith the IPO allotment managers. If at all one wants to improve the system make auditers & rating firms accountable with strict punishments to the guilty. If the guilty is not traceable make promoters responsible for losses. Now coming back to the 25% rule, I would like to state that if the IPO's are priced write so that the common middle class starts taking interest then we do not need the Foreign investors. Indian investors first always so that let the benefits be ourselves to reinvest again.


G K Agarwal

Jun 6, 2010

I am giving you name of one more such company in which investors have lost handsome money and God forbid it may so happen that future investors may also burn their fingers.
Financial Technologies India Limited having 2 rupees face value shot upto Rs. 2700 and has never seen light of the day. In the name of technology it has earned even Rs. 200 to 300 per share but given only Rs. 7 to 10 ad dividend-no bonus till date. Has invested hundreds of crores of rupees in Dubai Gold Exchange and many others without disclosing any project report to the investors. The company is earniong only for promotors. You may note down that I am fully confident that company has no good corporate governance and time will come when investors will repent. SEBI may also like to open investigation in this company as th how 100s of crores of rupees are being invested by promotors without sharing the information with the shareholders. You are right that crooks will make their ways howsoever strong may be the laws. Unless punishment is fast and severe, devil money mind will never mind.



Jun 6, 2010

step taken is in the right direction. crooks have devilish ideas.New steps will have to be taken to counter them. Gradually their ideas will be limited and can be eliminated by further ingress into their crookedness.

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