Is this promoter group acting prudent?
In this issue:
» The Big Four auditors under fire
» The evils of Chinese stock markets
» 'Buffett rule' fiscal solution for India too?
» Will the UIDAI project be rendered worthless?
» ...and more!
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The central government has not had much success so far this year with its disinvestment plans. The aim to garner Rs 400 bn by divesting stakes in PSUs has fallen flat with markets playing truant. The follow on offering of Power Finance Corp managed to raise just Rs 11 bn. Meanwhile, the growth in advance tax payments of the top 100 companies has been just 10% against an estimate of 18%. Rising oil subsidy bill and under recoveries of the oil marketing companies threaten to toss the fiscal balance out of gear. Meanwhile inflation and interest rates continue to impact corporate profitability and investor sentiments.
Given this scenario, the Finance Ministry has proposed the cash rich PSUs to pump up the value of their stock by buying back shares. This will not just offer some immediate funds to the government but also enable it to dilute stake at higher prices at a later date. Whether or not the buyback will be open to minority shareholders as well is not known. While all of this is in order with the law book, it may not be in the best interests of minority shareholders.
For one, losing out cash surpluses at a time when liquidity is both tight and expensive is not a great option for the blue chip companies. Especially ones like ONGC, NTPC, BHEL and SAIL which are looking to add capacities without excessive leveraging. What is more, given the relatively low liquidity in most PSUs, the buyback may further put strain on the same.
Despite some brilliant prospects and solid fundamentals of some Indian PSUs, quite a few of them pale against their private sector counterparts in terms of valuations. We wonder whether the scenario will ever change if such biased treatment is meted out to minority shareholders every now and then.
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01:15 | Chart of the day | |
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The evils of Chinese stock markets are not only limited to insider trading but go as far as falsifying numbers of listing prospectuses. It is not uncommon to find IPO prospectuses in China with false figures for revenue and other data. In fact, the list of illicit stock market practices is very long. The effect of the same is evident on the growth of the mutual fund industry. The fund industry's assets under management have fallen steadily over the last few years. As a result, the performance of Chinese stock markets has been lacklustre despite the rapid economic growth.
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The country's ex Finance Minister who presented the dream budget by slashing tax rates has come up with a solution. Taking cues from Europe where the rich have volunteered to pay higher taxes, Mr. P Chidambaram has dared to go against popular support by stressing for the need to tax rich people at higher rates in India. This is pretty much in line with the 'Buffett rule' that the Obama government is looking to implement. And we couldn't agree more. An all inclusive growth does need an all inclusive participation of the stakeholders. We have blamed the Government enough; it's time to do our bit.
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If we look at this issue in the right spirit, Reserve Bank of India (RBI) must have reasons for issuing such a directive. Other agencies may also follow suit. So it is high time to discuss the reasons for non-acceptance in the beginning itself. That would help make systems and procedures of issuing Aadhar robust and increase the acceptance. Else, Aadhar would just be an addition to the stack of already existing documents such as voter ID card, driving license, telephone bill, ration card, passport. None, alone serving the purpose of foolproof ID, the way Social Security number does in the US.
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04:50 | Today's investing mantra |
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3 Responses to "Is this promoter group acting prudent?"
Ramanand
Sep 29, 2011If I were a shareholder in the PSU companies, it would not be in my interest that the companies take debt to buyback shares, hence I would oppose it. Otherwise its a good idea floated by Govt to raise cash for its expenditure.
On PChidu raising tax rate, wasn't the idea that there should be less layers of taxation and simplification of the whole process a few years ago? Maybe equitymaster should support that instead of Indira Gandhi style of ever increasing tax brackets. Is the intent to make rich people poor or poor people rich by increasing tax on Rich people?
A Chopra
Sep 29, 2011Mr Chidambaram wants to increase tax rate so that they can bungle more, and surprisingly you agree.
N.M.R.Shreedhar
Sep 29, 2011The meaning of "buy-back" is not very clear --these PSU's are planning to buyback shares from the stockmarket OR from the government? I think there is a difference between the two. If from the stockmarket, they are effectively reducing the "free float" which will definitely increase the market price. However if the PSU's are buying back from the govt with the intent of offering them later to the public in the form of disinvestment, then may be good in the long-term. I am not very clear on this -- is ownership by the PSU and ownership by the Govt meaning the same-- can somebody clarify? regds