A bond issue raised more money than Coal India IPO!

Oct 29, 2011

In this issue:
» Impact of price revision on fuel under recoveries
» No property bubble despite high realty prices?
» Managerial remuneration sees new highs in UK
» Is Indian private sector getting complacent?
» ...and more!
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India's paradox of savings and investments is not just unique but also one that has takeaways for other emerging markets. Despite being an economy with high savings rate, the country is starved for funds when it comes to infrastructure or corporate investments. The steep interest rates not only reflect high inflation but also demand for funds from government and corporate sectors. The missing link here is that most of the saving is unbanked. Also there is very little coordination between a large part of the savers and the major investors. Result being that small and ignorant savers often get lured towards unsafe investments that neither benefit them nor the economy.

The latest case of the Sahara Group duping rural investors of a whopping Rs 240 bn (US$ 4.9 bn) is a case in point. Although everyone from the government to the central bank is harping about financial inclusion, the outcome leaves a lot to be desired. But the case highlights the fact that very large quantities of savings in rural India is looking for lucrative investment options. The catch here is that most of the savings is in cash and the investors are either illiterate or with very limited financial literacy. Most are therefore averse to documentation necessary for bank transactions. As a result schemes that offer high returns with little entry barriers lure the cash rich rural investors. No wonder, the Sahara Group's bond issue raised more money than the Coal India IPO - the country's largest public issue ever. Moreover, its 30 m investors exceed the total number of retail investors in India's entire universe of listed stocks! This by no means is a small feat for a fund that offers little transparency or safety of capital. Moreover, since the bond issue was not under the purview of Securities and Exchange Board of India (SEBI), the group may even escape the SAT (Securities Appellate Tribunal) verdict to repay the funds to investors. The SAT meanwhile retained its stand that the Sahara Group had collected the funds illegally from small investors. The RBI too ordered Sahara to wind down the deposit-taking operations of Sahara India Financial Corporation (SIFC), a residuary non-banking finance company. But the investors remain unsure of getting their money back.

Hence despite having a young and pro-savings population, India runs a substantial risk of losing out on investment opportunities. Unlike India other fast emerging economies may be able to access large pools of domestic savings through better financial literacy. Data from the National Council of Applied Economic Research (NCAER) shows that 81% of rural households save but only half keep their savings in bank deposits. In fact, 36% prefer to keep cash in hand. Also only 2% of households opt for any kind of insurance. With such kind of disarray in the financial system, India's economic future could remain in the shadow of its emerging market peers.

How do you think the government should accelerate financial inclusion in India? Let us know your comments or post them on our our Facebook page.

 Chart of the day
Fuel prices in India have been one of the key drivers of inflation. The price revision in recent times was necessary to curb the under recoveries for oil marketing companies. However, as seen in today's chart, the rise in international crude prices and the depreciation of the rupee against the US dollar have made the fuel price revision redundant. Under recoveries of fuel prices are once again inching back to the earlier levels.

Data source: RBI

While property sales have dried, property prices continue to remain high. Is this bubble destined to burst? According to Housing Development Finance Corporation (HDFC) vice-chairman and chief executive officer Keki Mistry believes that there is no risk of property bubble. The slowdown in sales could surely lead to some 5-15% price correction. But he is quite confident that chances of a major decline are negligible. The main reason being that the supply of real estate in India is limited. As such, these limited houses that are available for sale, carry a certain premium. Besides, about 96-97% of HDFC's borrower's are people who have taken loans for houses where they are residing. This means that property prices are not being pumped up by investors and speculators. However, what is true to HDFC may not be true for all other mortgage financers. Banks and housing finance companies are known to face NPA risks in the mortgage sector during high interest cycles. Thus, one needs to read into Mr Mistry's comments with some degree of caution.

That the developed world is going through one of the worst crisis in history is not really news. The region has been screaming blue murder for quite some time. Zero to tepid growth combined with the problems related to high debt has led to serious troubles for these countries. Nevertheless, despite the troubles, the corporates in these regions appear to have done well. Even though they have not really rewarded their shareholders on account of the 'global crisis'. And they have also enacted wage cuts on account of the crisis and tougher business conditions. But that has not stopped them from rewarding themselves. The latest evidence of this came in the form of the 49% pay hike offered to the directors in companies of United Kingdom. The companies that form the FTSE 100 index have seen the remuneration to directors rise by 49% taking the average pay to GBP 2.7 m. While UK's business secretary plans to 'clamp down' all pay hikes, it remains to be seen whether companies actually follow this rule or not.

The statement that India's economy has grown despite the Government and not because of it has become somewhat of a slogan for ardent believers in the India growth story. However, the Economist has tried to give a new spin to this issue. In a recent article, it has highlighted that Indian firms need to make sure they do not turn this weakness of the Government to their own advantage. In other words, they should watch out for setting in of any sort of complacency and instead, should support reforms and improve their own governance. Otherwise, there is a strong possibility that these large Indian private sector firms could turn slothful.

Quite an interesting observation we should say. India does need new entrepreneurs and also reforms on a very large scale. But the evidence so far has anything but impressive. Not only has it been unable to churn entrepreneurs on a large scale but the issue of corruption also has been getting out of hand. This no doubt runs against the basic philosophy of India's masses who want the country to be a land of opportunity. As of now, the anger has been directed towards politicians. But if the large Indian corporate fails to clean up its act, it could also get sucked into the whirlpool.

The government is well on its way to missing its disinvestment and deficit targets. However the banks, in which it is a majority shareholder, are desperately in need of cash. It is estimated that the public sector banks need a fresh capital infusion of Rs 180 bn to 200 bn. Rising bad assets are forcing banks to keep more capital aside. But this year's budget only allocates Rs 60 bn for the same. This indicates a huge shortfall.

However, the finance ministry has recently come up with an innovative solution to this dilemma. It has taken an 'in principle' decision to form a holding company. The holding company will raise funds and infuse fresh capital in government banks. A few options are available for the ownership pattern of these PSU banks. Firstly, the holding company can hold part of the government's equity in the banks. Or the government can transfer all its equity in favor of the holding company, of which it will have 100% ownership. With banks in need of bolstering their capital bases, we hope the government doesn't dilly dally on this crucial decision.

The world markets heaved a sigh of relief this week post the European Union summit. The series of measures announced by European leaders regarding how to contain the Greece crisis and minimize its impact on other nations provided some hope to the fearful investors. The US markets were up by 3.6% during the week.

Indian stock markets were up by 6% during the week. Diwali celebrations continued on the Dalal Street till the end of the week. The week also saw the Indian markets nearing their 3 month high. Indications from (RBI) about the end of monetary tightening cycle along with global cues uplifted investor mood. Amongst the other world markets, Hong Kong was the biggest gainer (up by 11%) followed closely by Brazil and Singapore.

Data source: Yahoo finance, Kitco

 Weekend investing mantra
"Here's one truth that perhaps your typical investment counselor would disagree with: if you're comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what?! Someone will always be getting richer faster than you. This is not a tragedy." - Charlie Munger

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12 Responses to "A bond issue raised more money than Coal India IPO!"

satheesh babu s

Nov 11, 2011

- the number of subscribers - they would have forged it to make sure that the few big investors who put the black money can't be traced.
- most of the money should be black.



Nov 9, 2011

well done


Turab dedanwala

Oct 31, 2011

This is the result of excellent marketing and media promotion. The SAHARA name makes people belive in it -- all cricket crazy lovers. Seriously it is a big fraud without SEBI's involvement and control. Will it be possible to know the breakup of the investors!!!, to know the effect of media marketing.



Oct 30, 2011

Dear Sir,

As I have just written on your other article of J Mulraj, if Sahara can raise such funds why not the GOI. My suggestion is Finance Minster Pranab babu, should take a very very bold decision. Some of the PSU holdings may be sold to Individual investor, with a cap of 1000 shares per individual. PAN No. is compulsory.
This Equity shares would be at a substantial discount, in order to ensure participation of rural/ or any individual investor (III- Indian Indiviual Investor). No Institution /Company/ Firm would be allowed to participate in the initial issue. They can buy these shares only after 5 yrs of listing. The shares would be listed in Trade to trade segment for the first 2/3 yrs. No F& O, no derivative trades, no Options, no intra day speculation. Plain and simple Trade to trade. If bought you HAVE to make the payment and if sold, you HAVE to give delivery. Heavy 20% minimum penalty for any default.During this time individuals, if they want to accumalate they may do so as it would be at market rates. Based on profitability, for the first 5 yrs, the dividend amount would NOT be more than10%. If profits are more than they would be paid to GOI, which has sold its share at a discount to the III in the first place.Here again, govt. greed is to be controlled and not excess profits are trfd, which would hamper the growth of the Co. III would be able to gain due to price appericiation. In all likelyhood, the price would double in 5 yrs, which is very good return than any FD or Saving account.
At present SBI is facing the max. problem. Above policy could be applied to it also. First stop its derivative trade. Out of F&O. Trf to Trade to trade. Institutions/Cos./Firms cannot sell more than 100 shares per day. Market makers should be appointed to mop up any huze sale. If LIC can invest in a cigarette selling Co. (morally wrong - but financially good decision as ITC is doing well and is likely to do well in future - its a good buy at present time) it can easily be allowed to be a buyer of SBI shares. Its initial issue price was Rs. 250 way back in 90s. Today price is hovering around Rs. 1800/- 52 wk high is 3400. Safely GOI can sell fresh shares with 5 yrs. lock in at Rs. 1200/ to IIIs only. Major problems of GOI could be solved.
At least it is better than Coal India buy back. Instead of buy back of its shares, theycan be asked to mop the shares from the market. They are cash rich some 35000crs. on the books, till the FPO for III is opened.

Think about it. Feed back is most welcome.
Thanks Damani



Oct 30, 2011

At least now a days politicians are being arrested but the ill gotten money should go to Govt.These politicians have looted TAXPAYERS money and tax limit should be raised to rs.10,00,000/00 (no tax should be levied.)
They are enjoying all the ROYAL facilities in the so called Jail.



Oct 30, 2011

True.Recently ex-rbi-guv-y v reddy told that Banks are increasing but not BANKING.Govt funding to poor is not
being used properly and supply to be effectively managed,
Savings rate must be meaningfully increased for due growth/investment.


Nerkuppai thumbi

Oct 30, 2011

The write-up puts the point straight. Rural and semi-urban population still prefer keeping savings in cash or any instrument with least documentation. KYC of nationalised banks is not really difficult to comply with; an identity proof (say voter-id) and residence proof (house-tax receipt, electricity bill, telephone bill, etc) should not be difficult. Moreover, RBI;s insistence on KYC is US/UN goading of AML rigour, etc are premature, till banking habit becomes more popular. Moreover, Government and RBI should do something to educate the ground level people and not give targets and lectures to banks and their chairmen.


shome suvra

Oct 29, 2011

The rural India needs broadband internet connection or mobile broadband facilities to know about the Government and non Government development programmes, employment opportunities and other social and economic facilities(like banking for financial inclusion). High speed internet can open BPO for rural India and garner employment opportunities.


Gopal Kalpathi

Oct 29, 2011

It is no wonder that this is the situation as far as the rural folks are concerned. Since independence, the largest number of MPs have been from the biggest and most populated states of UP, Bihar and MP. Alas, precious little was done by all those MPs (and current MPs) for these states' development other than looting the public money and grabbing the land in the name of development. It is, but, a grand design to keep the rural populace as illiterate as possible because these politicians know that education by any means is like writing their own epitaphs. Even though our constitution has laid down all the fundamental rights of all our citizens, we have to have Acts like RTI and RTEs (many more to come) to see the Politician-Babus-Businessmen nexus starts to share some of the spoils of the development with general population. Under these circumstances it may take a while before the rural folks are made financially literate. I believe the SB interest rate deregulation may help, if properly publicised to mitigate the threat of the sharks like Sahara group.



Oct 29, 2011

At long last an article that has at least mentioned the SAHARA name as a highly-suspect financial organization. A little more insight into the firm's financial status would be appeciated.

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