Can these excite Mr Foreign Investor?

Sep 24, 2012

In this issue:
» Why are banks not cutting loan rates?
» Is Rajiv Gandhi Equity Scheme worth the trouble?
» Idle staff hurting IT cos' profits
» Economic crisis hurts innovation
» ...and more!

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Last week was an eventful one for India. The UPA government finally announced some reforms. Something that the entire nation has been demanding for a pretty long time. Whether it was to clear up its scam tainted image or to win back voters' hearts? Difficult to say. Nevertheless the government did decide to take the giant leap in the right direction. Though calling the leap a giant one would be stretching the truth a bit too far. And here's why.

The government has announced foreign direct investment (FDI) in retail and aviation sectors. But with the reforms that have been announced, simply raising the FDI limit or allowing FDI to enter is not really sufficient. Investors have to be willing to enter the shores of India. For that they need much more than mere announcements.

They need the assurance that their investments in India would remain secure. The recent policy dillydallying by the government does not help matters at all. The government has been known for making policy announcements and then backtracking on them on political grounds. This time around too its key coalition partners have objected to the FDI announcements. They have already withdrawn support. Such moves may prompt the government to backtrack again. And even if it doesn't, the thing is that the announcement of FDI in retail is restricted to just 10 states. These are the Congress party ruled states. The other states would continue keeping their doors closed to foreign retailers. As a result the foreign retailers are expected to and naturally would adopt a cautious approach before they decide to open their purse strings.

Unfortunately things don't look any better for the airlines sector either. The opening up has come at a time when most airlines are bleeding away. High fuel prices combined with severe competition has led most of them to operate in the red. With things on the operations front not expected to get better anytime soon, it is doubtful that the foreign investors would want to pump money into the sector.

The government has made a bold move to announce policy reforms. Unfortunately it is too little in one case and has come too late for the other. Will these reforms find investors? Or does the government need to do much more? Obviously the answer is the latter.

Do you think the reforms announced by the government would help get foreign investments into the country? Do share your comments with us or post your views on our Facebook page / Google+ page

 Chart of the day
When a company goes through a rough phase its employees often face tough times. Salary freezes, pay cuts and layoffs become common words. But these words do not seem to be catching up with the companies' top executives. As per an article in Mint, Mr Navin Jindal has emerged as the highest paid executive in India. His pay this year has reportedly risen by 9% YoY while the profits of his company, Jindal Steel and Power, declined by 44% YoY. Other names on the highly paid list as shown in today's chart may not have witnessed an increase per se. In fact some of them have declined on a YoY basis. But nevertheless in absolute terms, the figures are astronomical. And it does throw up an important point. The pay of the top executives should be linked to the performance of their respective companies.

Source: LiveMint

In the prime lending rate (PLR) regime, at least 70% of the loans were given at below the prime rate. The base rate system was introduced in Indian banking to bring in transparency in loan pricing. Banks are no longer allowed to give any loan below the base rate. Hence logic says that with easing liquidity in the banking system, base rate must be lowered. However, despite the Reserve Bank of India (RBI) easing liquidity through CRR and SLR most Indian banks have not lowered their base rates. The reasons are not difficult to find. One, the banks do not want to let go of profitability through higher lending margins (net interest margins). This is because their other income portfolio is now hardly remunerative. Secondly they cannot afford to let go of the surplus because their provisioning requirements for bad assets. Besides, they are also setting aside money for the statutory dues of their employees, such as pension and gratuity. Thus even if the government and the RBI hope for softer interest rates, it may be a while before the banks oblige.

There is no escaping the fact that fixed income investments have barely managed to keep up with inflation in India. And things are even worse if one does not rely upon official estimates and instead goes with the assumption that he needs to earn at least 12%-15% per annum after tax. Anything lower and his purchasing power risks getting eroded. In light of this, it was heartening to see the policymakers offering tax incentives for retail investors to invest in equities. After all, it is easily one of the asset classes, which has a good long term track record of beating inflation.

But is the proposed incentive, called the Rajiv Gandhi Equity Savings Scheme, extremely easy to wrap one's head around? Certainly not. There are complications galore. The worst of which is a rule that requires the investor to have a three year lock-in. It is essentially a one year lock-in where the investor is allowed to sell shares after one year but has to reinvest the initial amount back. And that too buying from the same specified list of shares. In other words, if you invest Rs 50,000 and it becomes 75,000 after one year, you will have to invest Rs 50,000 back and maintain at least this value for a minimum of 270 days in years two and three.

Phew! Well, we won't be surprised if the scheme finds very few takers. After all, equity investing does not have to be this complicated. We hope better sense prevails and the policymakers come back with a much simpler scheme.

For most people, an ideal job situation would be to get paid a good salary for doing minimal work. If one is to go by a report of a leading business daily, that is what a good portion of the onsite IT engineers - located in the developed economies - of the Indian technology companies are going through at the moment. It is believed that their utilization rates have fallen to 90% from 97% at the start of the year. The effect of this on IT companies would be on their profitability levels.

Post the slowdown hitting the US and Europe, business (in the form of volumes) for IT companies has increased. Albeit, at a relatively slower pace as compared to earlier. IT companies continued to hire - not only to meet the requirements - but also in anticipation of future demand and an overall bounce back in the economy. However, the current situation has occurred on the back of the clients still going slow on their technology spends. It must however be noted that the overall increase in onsite engineers is also on account of the subcontracting work to local vendors/engineers - thereby adding to the overall headcount.

It may seem like common sense that technological advance and economic development go hand in hand. That's indeed very true. A study has revealed a strong correlation between the two. Secondly, there is a slightly weaker but yet firm correlation between research and development (R&D) and technological advancement. Joining the strings together makes it clear that investments in science and technology are important for the long-term economic growth prospects of an economy.

In its study, the Organisation of Economic Cooperation and Development (OECD) found that innovation had declined in 2009 in most of the member countries. However, there were some exceptions. For one, China has surpassed Japan to become the second biggest spender in R&D. The number one R&D spender is the US. India's investments have grown over the last five years. However, the pace has been slower than that of China. While China invests about 1.6% of its GDP in R&D, India's invests only 0.8%. India's share in the global R&D stands at about 2.9% against China's 14.2%.

In the meanwhile, after opening the day in the red, the Indian equity markets continued to trade below the dotted line. At the time of writing, Sensex was down by 24 points (0.1%). Among the stocks leading the losses were Hindustan Unilever and ITC Ltd. Other major Asian stock markets have closed the day on a mixed note with Japan and Malaysia closing in the red while markets in China and Korea closed in the green.

 Today's investment mantra
"To me, it's obvious that the winner has to bet very selectively. It's been obvious to me since very early in life. I don't know why it's not obvious to very many other people." - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'

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8 Responses to "Can these excite Mr Foreign Investor?"


Oct 2, 2012

The FDI is very important now. It is already too late. We might have taken this at least about 15 years back. Please make it now to help the people. Whoever opposes it is doing so only for political gains and not in the interest of the country. You people should see the the reasons from China which is famous Communist country. Are they are communist is another question. Almost all Asian countries are doing it now for quite some time. The small traders are not affected by Tatas, Birlas, Ambanis etc when they opened up malls etc. Then how they are going to get affected with Foreign Companies etc. For our small traders all Ambanie, Tatas, Birla or foreign firms are one and same. The foreign people can not do much harms than the indian top rich people. It will only help the small traders to understand the importance of their customers and make them to behave in a proper manner to serve the people.



Sep 25, 2012

The equity master asks, "Can these excite Mr Foreign Investor?". Can the scenario prevails over India excite domestic investors (not traders)? Satayam showed how audited Balance Sheet was cooked ! Coalgate showed how without fulfilling the criteria needed for geeting coalblock, the industralist close to Honest P.M was allocated coal block. All these have shaken, the confidence of domestic investor (not traders). FII will come with the Indian Black Money along with even terrorist money and will suddenly vanish. Can a country, especially stock market sustain with such foreign money. It is our experience in recent years and it is truth, this does not need Honest P.M's assurance and reference to 1991,when the market was opened and termed as reform, the buzz word of a section of people.


B Kumar

Sep 25, 2012

What a funny and baseless statistic data by Equitymaster that whole country is waiting for FDI. Only few corrupt Politician and industrtialist are putting personal interest rather than National interest for law formation. Opening of retail in India will make the country poorer. After some years , Farmers will become serfs and traders will become servant in their retail business. The Government will become puppet of FDI because most of the Gov revenue will be funded by FDI. Normal people of India will feel cheated and snatched their freedom.



Sep 25, 2012




Sep 24, 2012

FDI into retail, where are we heading to, how long you can run your house on borrowed money? The development of every country has to be from internal accruals and not from the hot money from overseas, who benefits from FDI in RETAIL..1) China,m whose goods will flood the Indian Market through WALMART/COSCO/METRO, the dooms day for the Indian Industry will not be far away. In the past there have many instances when FII brought in 400 Crores and took away 4000 Crores, from the Indian stock markets with their so called clever tactics. When, will our Govt. wake up see that we DO NOT NEED foreign investment either from FII or FDI; all we need is to allow our own people having ill gotten wealth in Forex abroad to repatriate the same with no tax and no questions asked. This would bring crores and crores of US Dollars back into our economy. Furthermore, the individual housing in another area wherein, if our Govt allows investment with NO QUESTIONS asked and no requirements for completion certificates; the entire black money within n from outside India would be back in system, giving not merely a boost to one or two but the entire Industrial sector.. as housing absorbs every stuff.. VANDE MATRAM... GOD BLESS INDIA


S Prasad

Sep 24, 2012

A good number of public is opposing FDI. I doubt FDI will put their money in India in so much FDI against environment. They will fear for their capital to be safe after deployment in India.



Sep 24, 2012

Why equitymaster says the whole nation was waiting for these reforms? May be some industrialists, politicians and the stock market, but don't generalize that to whole nation. What nation needs is a good effective governance where the hard working, risk taking people are rewarded and not the connected, corrupt. The system is fair and square for all and not benefits only the insiders. The mega corruptions are exposed and the guilty punished and not the crony capitalism is rewarded. That is the real reform, not bending over for foreign investors.


Vijay Rastogi

Sep 24, 2012

Govt announcements are for purpose of diverting voter attention from scams.FDI also understand this and voters also know this.UPA is wasting public money and we all know it.

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