Why are managements so irresponsible?

Oct 13, 2010

In this issue:
» How have India's biggest IPOs performed?
» Darker side of India's feel good factor
» Pain to be felt for a long time, says Buffett
» Rising fears of bubbles in emerging markets
» ...and more!!

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The festive season seems to have already begun for the Indian stock markets, or so it seems. With India's largest IPO - Coal India Ltd. - just round the corner, predictions have started flowing in as to the extent of listing gains the stock can provide. And joining the party is none other than the company's chairman himself.

A leading business daily has quoted the chairman of Coal India Ltd. (CIL) as saying that 'the listing gains from CIL will be big'. We believe that getting carried away in the rising tide of bull markets is a normal human behaviour. But the managements trying to talk up their stock prices, or attract investors to their stocks by making such statements, is irresponsible behaviour. We last heard such reckless statements in January 2008, at the time of floatation of the previous biggest IPO of Reliance Power. And that coincided with the peak of the Indian markets.

What business do managements have to perk up interest in their companies' stocks? Why do they publicly comment on the future of their stock prices? Isn't this irresponsible behaviour?

What do you say? Do you believe company managements act irresponsibly in talking up their stock prices? Share with us, or post your comments on our Facebook page.

 Chart of the day
Big doesn't always mean better. And today's chart of the day is a proof. The chart shows the performance of India's five biggest IPOs, since their listing. And it brings out a mixed picture. So while the biggest IPO so far - Reliance Power - has been the worst performer among these, the smallest of the lot - TCS - had generated the highest returns for investors. Now with Coal India IPO upon us, and it being even bigger than Reliance Power, investors would do well to note that its size doesn't guarantee a good return in the long term, whatever be the listing gains your brokers might be promising.

Source: Equitymaster Research

Indian markets had a strong day today. The BSE-Sensex was trading with gains of around 385 points (1.9%) at the time of writing this. IT and realty stocks were leading the gainers' pack. India was in fact the best performer among key Asian markets. Stocks in China and Japan closed with gains of around 0.7% and 0.2% respectively.

Currency options are generally considered to be one of the best ways for companies and individuals to hedge against adverse movements in exchange rates. So this would come as good news that India's latest stock exchange, the United Stock Exchange (USE) has received approval from the stock market regulator SEBI to start trading in currency options. The USE currently offers trading only in currency futures.

Globally, the currency derivatives market is much bigger than the equities market. Thus there is a growing belief that there are good prospects for growth in the currency segment in India as well, given that this market is just a fraction of the size of the Indian stock markets. But again, like with all financial instruments, the buyer/investor needs to be aware of the risks he is assuming.

Each and every data point of the US economy gets relentless coverage. Experts opine about the direction the data indicate. The US policymakers on their part wonder why the economy isn't responding any better to all the stimuli. The issue seems to be with expectations. People are expecting just too much, too soon.

In a recent conference, Warren Buffett has said, "The worst is behind us, but the pain will be felt for a long time from what happened. We're inching forward, we're not galloping forward." Over the long term though, the fundamentals of the US remain strong, Buffett believes. The reason is the political and economic system of the country which unleashes human talent. Interestingly, the stock markets have rallied strongly after the crash following the global credit crisis. To the extent that this was in anticipation of rapid economic recovery, the optimism is likely to fade out eventually.

The ongoing recession in the US and Europe has made global investors jittery. And so in their quest for richer returns, many of them have made a beeline for the emerging market shores. But the flood of cash pouring into these markets has been so huge, that fears have started emanating of a bubble being formed in the emerging markets.

For instance, the Institute of International Finance has projected that around US$ 825 bn will flow into emerging economies this year. This is up 30% from the 2009 levels. This has given rise to two problems. One is that of appreciating currencies which is making the exports of emerging countries less competitive. This is a kind of a double whammy as demand for their goods from the US and Europe has already been weak over the past two years.

The other is the fear that a lot of this money is short term in nature. This means that as soon as the US and Europe start to recover, the outflow of money will be equally huge. One needs look no further than the current global financial crisis to understand the impact of such an event. When Lehman collapsed, emerging markets saw their stock markets crash as investors withdrew money in droves. Indeed, we believe that the fears of a bubble in these markets are pretty well founded.

History has a strange way of getting back at us. Take the example of US Fed Chairman Ben Bernanke. He is scheduled to give a very important policy speech coming Friday. And it is here that he will most likely discuss the US Fed's next steps of the monetary policy. Now here comes the interesting part. The Wall Street Journal tells us the irony of Bernanke's upcoming presentation. It is happening at the same place where the Fed Chairman took the Japanese officials to task for failing to take adequate steps to revive the Japanese economy.

However, more than 10 years have passed and a lot has changed. Bernanke will not be talking about theory anymore. Instead, it will be all flesh and blood. The US economy of today has a lot in common to the Japanese economy of the time when Bernanke rebuked the Japanese central bank. Thus, it will be interesting to see if Bernanke talks of the same medicine that he prescribed to Japan. Or he will give in to the mounting pressure and go slow on further quantitative easing. We bet the Japanese would be the ones most eagerly awaiting Bernanke's upcoming speech.

Every day we read reports on India's fast growing economy, our rampant stock markets and our high rankings in the global power index. It all adds to the 'feel good' factor. It feels good to be a part of a growing nation. But we wonder how good it feels to rank high even in the 'Global Hunger Index'.

India has actually dropped two ranks to the 67th position in the International Food Policy Research Institute's 'Global Hunger Index' for 2010. Even countries like Sudan rank higher than India. This is an indication of the fact that in India, the proportion of hungry people has increased significantly in the recent times. This is alarming for a country that is striving hard to be a major global power. How can we advance economically if we cannot even assure basic food security to all our citizens? It's a thought definitely worth pondering over.

 Today's investing mantra
"Investors should be very wary of purchasing today's hot issue. Most initial public offerings underperform the stock market as a whole. The managers of the companies themselves try to time their sales to coincide with a peak in the prosperity of their companies." - Burton Malkiel

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29 Responses to "Why are managements so irresponsible?"


Oct 20, 2010

Public sector executives can get away with any infringement of law.SEBI would have hauled up the guy if it is a private company.This issue is not even to raise fresh capital of the company but only the largest shareholder, the govt is offloading its share on the gullible investors and the chairman is making a little sales talk for the govt.He will be protected.



Oct 15, 2010

Most investors want to jump on the disinvestment bandwagon. Again, Coal India has a virtual monopoly on the product.That itself will ensure a good listing price for the company. SEBI, which is the regulator of the Stock Market should have immediately issued a warning to the company for making statements intended to rig up the price of the share on listing.


Abdul Sathar

Oct 15, 2010

This is clear cut cheating of small investors and concerned authorities should do their job without fear of political bigwigs. CIL has been priced at the higher side and I dont think long term investors will gain and should avoid this IPO


Murali Krishnan K

Oct 14, 2010

Yes, it is totally unwarranted and that too from the top management


K.G. Rao

Oct 14, 2010

Irresponsible by any standard, and typical of loud-mouthed Indian braggadocio in many, many fields. We have a genius for counting our chickens before they are hatched


S.N. Rama Gopal

Oct 14, 2010

Coal India being a govt co, if its Chairman says that there will be huge gains in price on listing we may have to conclude, he has underpriced the stock with full knowledge and is distributing taxpayers money to a few individuals. If he is making this statement only to attract a few gullibles, he is trying to cheat. Either way it is highly unbecoming of a high office he is hold.



Oct 13, 2010

It is really understandable if a promoter of a private company talks so but head of a PSU must have only one reason to talk like this- pressure on him to see the issue through from the coal/finance ministry.
Everyone knows about the quality of coal CIL supplies and how power generation in india is suffering because of it. I ve seen big stone boulders being supplied in the name of coal and PSU's like NTPC are forced to tolerate this.



Oct 13, 2010

I would add that Vallabh Bansali (ENAM)is back again with the highly priced IPO of CIL. Old timers will remember that he was very confident while ENAM acted as lead manager to Reliance Power IPO. Though I agree fundamentals of Coal India are better than Reliance Power which was a piece of crap, CIL issue does not leave much for long-term investors.


dr shivappa d hunashikatti

Oct 13, 2010

i agree with you, it reflects badly on management. Sei should takenote of this and stop such nonsencs.


sunilkumar tejwani

Oct 13, 2010

certianly it is irresponsible behaviour of CIL chairman, but being a PSU I presume he has the backing of political bigwigs so no action will be taken by SEBI. But all the investors beware!! mega IPO doesnt mean mega returns. The issue has been priced on the higher side i.e. high PE multiple around 15 if I am not mistaken. A commodity company at a PE of 15 is quite expensive. Take the case of NMDC issued at a PE of over 30+ is languishing below IPO price of 305 despite LIC subscribing more than 75% of the total IPO.
To put the things in a right perspective, the FPO of NMDC was preceded by manipulative price swings in the secondary market for the obvious reasons. And no prizes for guessing who was manipulating it. (LIC itself in league with other PSU insurers)
But million $ question? do the valuations of CIL pass the muster? To my mind a big NO.

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