Does Corporate India too need one Anna Hazare?

In this issue:
» Warren Buffett hits a homerun with Bank of America
» Indian investors can now bet on US stock indices
» US interest rate policy may fuel inflation in India
» India, China corner lion's share of PE investments in emerging markets
» ...and more!

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00:00

It is no shocking news that a recent report rated India as one of the most corrupt countries in the world. The sheer number and size of scams witnessed in the last couple of years have shaken the faith of Indian people in the establishment. In just the same way, overseas investors too are skeptical of Corporate India. Given the fact that the corporate landscape is still mired with loads of corruption, they view India as a high risk-high return market.

So as not to lose their money with fraudulent and shady promoter, foreign investors and private equity funds have further fortified their due diligence procedures. They are now not just looking at financial and legal matters alone. They are doing thorough background checks on the companies and the promoters. They popular term for it is 'corporate espionage'. In simple words, foreign investors are now hiring surveillance agencies to carry out the due diligence on company promoters. Spies are assigned the task of doing the 'market due diligence' to check the integrity of promoters. They secretly investigate their lifestyle for any signs of deceit; seek information from competitors, vendors and so on.

Such kind of due diligence has gained huge momentum in recent times. Investors are now being very cautious even during the early stages of investment. According to certain espionage experts, such kind of spying is most prevalent in vulnerable sectors like infrastructure where fraudulent practices are rampant.

Another reason for this kind of caution is the fact that India has very few companies that have a long and tested legacy. In fact, in a recent survey that we conducted about the most trustworthy corporate house in India, the Tata Group emerged the unanimous winner.

India is witnessing a sea change in the way its people are looking at corruption. In recent times, the fight of the common people against corruption has assumed epic proportions. Their collective frustrations have found a powerful voice by the name of Anna Hazare. While Team Anna fights for a stronger Lokpal Bill, Corporate India too urgently needs to revamp its tarnished image.

Do you think Corporate India also needs one Anna Hazare? Share your comments with us or post your views our Facebook page.

01:11		Chart of the day

Today's chart of the day shows the growth in capital expenditure by the non-financial corporate sector. The rate at which Indian corporates have added gross fixed assets in the past few years has witnessed a steady rise. In fact, growth rate of capex peaked in 2008-09, the period that coincided with the global financial crisis. However, the same has slowed down in recent times. The slowdown in economic growth that we are witnessing now was due much earlier. But as a result of easy credit and the fiscal stimulus by the government, corporates kept up their expansion spree. Now that growth has slowed and interest rates are high, the businesses have slowed down on their capex as well. Hence, we're likely to witness a period of slower growth which is nothing but a part of the business cycle.

Data source: Mint Money

01:51

If you are looking to invest for a one year period, the safest investment in India will give you returns in the region of 8%. Now, imagine another investment promising you a one year return of a whopping 480% and that too nearly risk free. Sounds ludicrous, isn't it? However, when it comes to investing, nothing is impossible for a certain Mr Warren Buffett. At a time when one year US Government bond is yielding a paltry 0.1%, Buffett has managed to sew up a deal that will pay him 60 times more in interest than what the Government is offering! Buffett reached this agreement with Bank of America Corporation (BofA), one of the world's largest financial institutions. As per the deal, BofA will sell 50,000 shares of cumulative perpetual preferred stock in a private offering and having a dividend of 6% per annum. This is not all; Berkshire Hathaway will also receive warrants to purchase 700 m shares of the company at a certain exercise price. This deal is eerily similar to the ones Buffett signed into with companies like GE and Goldman Sachs at the peak of the subprime crisis. The only risk here we believe is of BofA running into financial problems and going bankrupt. However, it looks highly unlikely that the Government will let something like this happen. Thus, the Oracle of Omaha seems to have hit another one out of the park after waiting for that perfect ball.

02:33

The US markets have fallen quite a bit in recent times. This would get many investors excited about investing in them. So why should the opportunity not be available to Indian investors as well? A leading brokerage had come up with an ETF (Exchange Traded Fund) which was based on the Dow Jones Index. Not to be left behind, the National Stock Exchange (NSE) has decided to come up with another way in which Indian investors can look at the US indices. It has decided to introduce derivative contracts on Standard & Poor's (S&P's) 500 and Dow Jones Industrial Average (DJIA) indices. Through these contracts, the investors do have an option to trade in the US indices. Though these would be rupee based contracts, their values would be decided on the basis of the underlying indices. While this is more of a trading opportunity rather an investing opportunity, it is nevertheless an opportunity for the Indian investors to participate in the US markets.

03:02

Low interest rates are likely to keep the RBI on its toes for quite some more time to come. The US Fed has so far shown no remorse over the impact of cheap money flooded into emerging markets. The steep rise in commodity prices has brought inflation levels in emerging economies to a new 'normal'. However, the stubbornness to keep interest rates near zero until 2013 does away with any possibility of commodity prices falling in the near term. Further, another round of quantitative easing (QE3) can only make matters worse. The RBI, on the other hand, is determined to fight the inflation monster. More than 10 increases in interest rates in the last 14 months have barely started cooling price rises. The impact on economic growth rates has been far more brutal. India Inc. is already complaining about the rates being prohibitive to sustain growth rates. Companies that are already leveraged could come on the brink of debt default if the interest rates get steeper. With that, one can only hope that better sense prevails on the US central bank on managing its own precarious debt position a little more sensibly. Else, the RBI will have a tough time managing its affairs.

03:46

Despite various concerns, emerging markets have so far managed to grow at a healthy pace fueling various investments into these countries. And private equity funds have not been far behind either. But which emerging countries have seen a large chunk of private equity investments? The answer, not surprisingly, is China and India, who have cornered 68% of the total invested value according to a study by the Emerging Markets Private Equity Association. In the first six months of this year, private equity investments in emerging market economies totaled a little over US$ 14 bn with US$ 5.8 bn going into China and US$ 3.8 bn into India. Not just that, India and China even account for 54% of the total number of completed PE transactions during the same period.

Of course, both these countries in recent times have been facing headwinds in the form of high inflation and interest rates which is expected to slow down Gross Domestic Product (GDP) growth. But these are more medium term concerns and despite them, emerging countries have still been logging in better growth rates than their developed peers. What is more, the former are expected to have the edge in the longer term as well. So it comes as no surprise that private equity funds would want a share of the emerging market pie.

04:30

In the meanwhile, Indian stock markets have been witnessing a heavy sell-off despite having opened the day in the green. At the time of writing, the benchmark BSE Sensex was down by 254 points (1.6%). Realty, power and metal stocks were dragging the markets down while IT stocks were trading flat. All Asian stock markets closed weak except South Korea (up 0.8%), Taiwan (up 0.5%) and Japan (up 0.3%). European markets, too, have opened in the red.

04:45

Today's investing mantra

"I'm only rich because I know when I'm wrong...I basically have survived by recognizing my mistakes." -George Soros