|»5 Minute Wrap Up by Equitymaster|
On This Day - 17 MARCH 2012
A big wake up call for unscrupulous promoters!
In this issue:
When millions don't even have food to eat, our government is thinking about bailing out multi-millionaire CEOs!
Is this government really made up of our representatives or is it on the payroll of those corporate giants?
We at Equitymaster feel strongly about this cause, and thus have started an Urgent Poll where you can read all about this and cast your vote to make your voice be heard!
We strongly recommend every Indian, who wants to make a change, to take a look at this.
A recent move by The Children's Investment (TCI) Fund, a London-based hedge fund has set a new precedent that could mark the beginning of shareholder activism in India. Just a few days back, it lashed out a public attack against state-owned Coal India, the single largest coal producer in the world. The hedge fund has accused the company of being "reckless and lacking integrity" in its attitudes to minority investors. It blamed directors of Coal India for submitting to government interference in coal pricing and such other issues. TCI has also threatened to take legal action against individual directors if they fail to address concerns that it has raised. It must be noted that TCI is the second largest shareholder of Coal India. But while the government controls 90% stake in the company, TCI holds just 1.01%.
Will TCI's revolt be successful? Given our government's reputation, it is best not to be very hopeful. But this effort will certainly not be wasted. TCI's move has surely created a stir, not just in India but even in the international financial community. Especially, at a time when the government may seek foreign funds for tackling the worsening budgetary deficit. It has also raised some very pertinent questions for both government-controlled entities as well as unscrupulous private company promoters. How long will the government use companies like Coal India for its own political ends? And how long will promoters take minority shareholders for granted? It is high time they get their act together.
And it's not just the upstream companies. The budget has not even hinted towards any pricing reforms in key petroleum product categories despite the boiling crude prices. The heat will be felt by downstream companies for which the under-recoveries are going to increase even further. The year financial year 2010-11 (FY11) saw under recoveries rising by 70% on a year-on-year (YoY) basis. For FY12, the under-recoveries are estimated to cross Rs 1,400 bn. This means a whopping rise of over 79%. With crude prices expected to remain high and Indian energy demand rising, the financial health of oil marketing companies is only set to worsen further.
There is nothing here to suggest that such default and government austerity programmes end the economy's fiscal blues. But a sovereign default of this kind certainly drives home some important points. That healthy economies and entities should not pay for the profligacy of others. Greece did get several rounds of bailout from its eurozone neighbours. But none of that averted its eventual default. It only made the relatively healthier nations poorer. However, our government seems to be taking no lessons from this. It continues to frame policies to benefit loss making entities. If you feel the same way as we do, then raise your voice to Ban Bailouts. Remember, every vote counts!
As you would be aware, gold is perceived to be an asset that provides strong returns when other assets falter. In other words, gold has taken the role as a safe haven, especially throughout the global financial crisis. Besides the fundamentals of demand and supply, gold prices are affected by three major things - the strength of the world reserve currency, which in this case is the US dollar; the health of the global economy; and finally, the economic growth and price stability. Interestingly, there has been hardly any progress on any of these fronts. The US dollar has seen some stability in recent times. But, the reason for the same is the fear in other regions of the world and not the positive policies of the US. The global macro economy has seen some recovery. However, it is still tepid and cumbersome. And till the time there is no long term sustainable solution for the Euro crisis, it is doubtful that we will see growth and price stability for some time. All in all, the three factors suggest that gold prices should be headed northwards. While the gains may not be as spectacular as what we have seen in the past, we believe investing some money in the yellow metal should bode well for investors.
The Indian stock markets traded positive for most part of the week. However, budget anxiety and then later on a lacklustre Budget from the Finance Minister resulted in the markets ending on a lower note. The Indian markets were down by 0.2% for the week ended March 16, 2012.
Amongst the other world markets, China (down by 1.4%) was the only stock market to close the week in the red. European markets in particular showed positive performance led by Germany (up by 4%) and France (up by 3.1%).
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