The biggest positive from 2G scam!

Nov 22, 2010

In this issue:
» US dollar headed for weakest currency status, says top investment bank
» Problems pile up for telecom companies
» Lessons from Michael Dell for Ben Bernanke
» QEs dangerous for emerging markets, says Mark Mobius
» ...and more!!

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The latest 2G scam is garnering so much bad press that it is difficult to imagine any good coming out of it. But wait, there could be one very big positive resulting from it. A leading daily reports that the Government is mulling one big change in the way companies present their annual reports. As per the daily, the Government is seeking greater transparency into its dealings with companies that are trying to influence decision making. This, the Government plans to do by asking companies to disclose the name of lobbyists employed by them. Not only this, the companies would also be asked to state their positions in clear terms on issues that are affecting their business.

Lobbying is nothing but a form of legalised corruption according to us. Just with all things economic, the US is perhaps the biggest beehive of lobbying in the world. Billions of dollars are spent every year by wealthy and powerful industries in order to swing a few important legislations in their favour or not let a few detrimental ones see the light of the day.

It is unfortunate that the lobbying scourge has also travelled to India. The 2G scam could be called as the biggest manifestation of it so far. And it is heartening to know that Government has finally woken up to the fact that something needs to be done about it. The decision to have a few pages in the annual report centered on lobbying is thus a small step in this direction. The disclosure of course could be voluntary but the companies will also have to provide an explanation if the information is missing from the annual report.

Lobbying works against the principles of a well functioning democracy. It encourages monetary gains to the powerful few at the expense of others. Hence, the only way to curb this menace is to make the smaller, less powerful group like the general public aware of the stand of influential corporates. It is only then that they can take steps to protect their own interests. Thus, while the Government's intentions are laudable, the execution part of it remains to be seen.

 Chart of the day
Today's chart of the day highlights the fact that over the years not only has India grown above ground but under it as well. In other words, it shows how the size of India's black economy has leapfrogged just as its real GDP growth. On a percentage of GDP basis, in 1980, the underground economy formed nearly 53% of the India's official economy. Nearly three decades later, there hasn't been a significant decline in the ratio with the unofficial economy forming 50% of India's white economy and amounting to a whopping US$ 640 bn. Little wonder, India is home to perhaps the largest number of people who evade taxes.

Source: LiveMint

Ben Bernanke's logic of making cheap money available to US companies at the pretext of creating more jobs has few believers. Even the likes of Alan Greenspan, equally responsible for the financial mess in the US, have not spared a chance to take potshots at the incumbent Fed chief. But the biggest proof of failure of the Fed recovery plan is the unwillingness of the US companies to invest in the US. An article in Bloomberg points out how US companies are using the cheap funds dished out by the Fed for overseas investments. It also points out that the investments by the companies, mostly in emerging markets, may not exactly do much favour to the latter. This is because it may be giving Asian governments the impression of being resilient to global crisis. At the same time, lack of growth in the biggest economies will mean that growth in emerging ones will get stagnant at some point. Some important warning signals for governments in the developed and developing markets.

In a recent interview Mark Mobius, Chairman, Templeton Emerging Market Group said that a significant amount of QE2 was flowing not only into emerging markets but also into ETFs and commodities. In addition they are finding way into all kinds of instruments that would pay or promise to pay a higher rate of return than what people were getting on US treasuries. He also said that though the creation of bubbles in emerging markets like India remained a possibility, the good news was that the inflows had been largely absorbed by new IPOs and secondary issues. However, if the same continued, then valuations could rise to unreasonable levels. Though he did not deny the possibility of a QE3, he reasoned that the criticisms on QE2 and also the lessons that had been learnt would compel the administration to change course and take measures that more directly impacted job creation i.e. helping small and medium size business, cutting down on government intervention, etc.

Things are not going too well for the dollar. After enjoying the undisputed status of the world's reserve currency for many decades, its reputation has now begun to erode. Infact, JP Morgan opines that the dollar will become the world's weakest currency. And this is all due to the US Fed's loose monetary policies. The US economy has failed to come out of a slump ever since the global financial crisis intensified. The US Fed since then has been on an overdrive, reducing interest rates to near zero and introducing massive stimulus packages all with the hope of reviving the economy. But sadly, these measures have not really taken off. With the unemployment rate hovering a tad below 10%, Americans are not willing to spend at the pace that the Fed has been envisaging. Meanwhile, US' deficit has swelled. This has then raised doubts over the sustainability of the dollar as the world's strongest currency.

Leaders in Japan were once highly revered for their strategies. 'Kaizen' or continuous improvement was one of their dominant business philosophies. However in a recent survey, Japanese employees seem to have lost faith in their leadership. After almost two decades of economic stagnation, this was warranted. Only 35% of the Japanese employees surveyed rated their seniors highly, versus a global average of 55%. The survey was on a set of five attributes. These included commitment to quality products, people management skills etc.

Not surprisingly, over 70% of the employees in India and China had faith in their corporate leadership. These high marks were in part due to reflected glory with rapid growth in these economies and companies. Aspiration to succeed and climb up the corporate ladder was another reason. We just hope these leaders live up to their high expectations. We certainly do not want another 'Satyam' type fiasco.

The CAG (Comptroller and Auditor General) report on telecoms has stirred the hornet's nest. The troubles for the telecom companies indicted in the report are increasing by the day. In the latest, the banks who have lent to these companies have started expressing their jitters. Banks have lent heavily to the telecom operators, especially to the new ones. Loans were given for rollout of networks as well as for acquiring the expensive 3G spectrum. These banks are now worried about the viability of these companies in light of the CAG report which demands for the cancellation of licenses issued to the most of the new operators.

The banks are looking at options that start from stopping further drawdown of loans by the new entrants to recalling the loans given out. Some banks are being cautious in their steps and are willing to wait till further action is decided by the government with regard to the new entrants. However, some others like State Bank of India are already cutting down their exposure to the new entrants.

Meanwhile, shrugging off the weakness of the past few sessions, the Indian benchmark BSE-Sensex opened strong today and was trading around 380 points higher at the time of writing. The gains were being driven by heavweights like Infosys and ICICI Bank. Most Asian markets closed strong today with Europe also opening on a positive note.

 Today's investing mantra
"Over the long term, it's hard for a stock to earn a much better return that the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you're not going to make much different than a six percent return - even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you'll end up with one hell of a result." - Charlie Munger

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3 Responses to "The biggest positive from 2G scam!"


Nov 25, 2010

I am gettin good info from dis site whic s useful.......... but can u send me updated current affairs pls.......... as it wud help me a lot


Murali P

Nov 23, 2010

Your rightly observed that the Lobbying is the legalised form of Corruption. Why should some one "Lobby" if the transactions is to be processed as per the tender norms of the Government. While the disclosure from Corporates is welcome, it may get colored, at the point of disclosure.
Fine, When is our Politicians' and Bureaucrats’ going to be "Transparent ".


Kannan V

Nov 23, 2010

I always wonder, where the money - so called kick backs that our corporates pay - gets reflected in the P&L statement that gets published every qtr. ? If the P&L of various corporates can hide the lobbying charges (sic, kick backs !!) effectively then what good the list of lobbiest can make to the public awareness. One more page in the anual report - nothing more !!

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