»5 Minute Wrap Up by Equitymaster

On This Day - 1 APRIL 2013
LIC is the government's ATM

In this issue:
» Small savings to see a big rate cut
» PSUs can buy a credit rating for Rs 1?
» To trim the current account, boost exports
» 'Depositors globally should run for the hills': Jim Rogers
» and more....

---------------------------------- Now Do A Lot More With Equitymaster On The Go! ----------------------------------

The Equitymaster Mobile Website just got a lot better!

Now you can view our Research Reports, get Live Quotes, read all the Views and Opinions, and of course, Track Your Portfolio as well on our mobile website!

Don't wait. Try it today! Visit http://m.equitymaster.com

Already visited our mobile website? Help us make it better!


When you need cash you rush over to the nearest ATM and withdraw some. So it is but natural that the government would want to do the same too. But what if we were to tell you that the government's ATM is not funded by taxpayer money? Instead by an institution that claims to insure the lives of millions of Indians and offers life-long investment options to as many! As most would have guessed, it goes by the name of Life Insurance Corporation of India or LIC. As per an article in the Economic Times, the government has been relying on LIC every time it is in need of funds. Be it bond sale or equity, LIC has helped it through all.

The insurance company has a huge corpus built by insurance premiums and ULIP funds. The government has been digging into these funds at its discretion to make its asset sales (public sector IPOs, FPOs and bond sales) a success. LIC was the single-largest buyer of government bonds this year. It was also the largest investor for the equity stake sales by the government. Of the total Rs 4,670 bn raised by the government this year, LIC has provided Rs 1,100 bn or 21.4% of the total figure.

The problem is that some of the issues in which the LIC has invested were shunned by the retail investors. Rather than picking up investments on a prudent basis, it was acting more like a knight in shining armor saving the issues of the government. In many cases like the stake sales of Oil and Natural Gas Corporation (ONGC), Steel Authority of India (SAIL), etc, the issues would have not been successful had LIC not stepped in.

This is a matter of concern for the policyholders. The government PSUs do not have the best track records when it comes to functioning. The cashless ones continue to bleed. And the cash rich ones are milked by the government on and off. Therefore acting as the savior and ATM for the government could hurt the investment corpus of LIC. And if that happens it spells danger for the policy holders.

The government has an eerily long history of milking its cash rich PSUs. Remember the US-64 disaster? The country's first mutual fund had collapsed after Unit Trust of India (UTI), took heavy losses on its investments. The era of the 1990s was marked with many incidents of the government milking its cash rich PSUs. We are not saying that LIC would head the US-64 way. But if the riskiness of its investment portfolio keeps increasing at the current rate then the US-64 days cannot be written off.

Do you think that the government is misusing LIC to serve its own interests? Please share your comments or post them on our Facebook page / Google+ page

 Chart of the day
The telecom sector's woes have been deepening in the recent past. The excessive competition, cancellation of spectrum, high spectrum costs, are just some reasons for this. The situation was not helped by the announcement of penalties by the regulator. It has recently announced steep penalties on outstanding spectrum usage by the operators. Most operators were hit with this penalty. Even those, whose licenses were cancelled last year, were brought into the net of these penalties. The penalties would further hurt the margins and balance sheets of the operators. They would have little choice but to further burden themselves with more debt if penalties like these keep coming their way. Interestingly the highest incidence of the penalty falls on the government owned Bharat Sanchar Nigam Ltd (BSNL). The PSU has to pay the regulator almost Rs 9.5 bn. On one hand the government is strict with the penalties but on the other hand it has always had a soft heart towards bailing out the cash stripped PSUs. Given this attitude we wonder if the tax payers would be made liable for paying this fine.

Data Souce: Financial Express

Interest rates are like double edged swords. A rise in rate suggests higher cost of borrowings. For households this may mean higher equated monthly installments (EMIs) on loans. For investors in stocks this may mean risky exposure to high leverage companies. In times of high inflation, steep interest rates are therefore an additional burden. But a cut in interest rate by the Reserve Bank of India (RBI) is not reason enough to rejoice either! Investors in saving schemes like Senior Citizen Saving Scheme (SCSS), National Saving Certificate (NSC) and Public Provident Fund (PPF) have recently learned it the hard way. Interest rates on each of these saving schemes were cut by 0.1%. Since the rates are linked to the yields of government securities in the previous calendar year, there is room for more cuts. This is even if the central bank pauses rate cuts for some time. As per Economic Times, without any further policy action during the year, investors should brace for rate cuts of 0.3% on NSC and 0.45% on PPFs in coming months. Time to review your asset allocation.

The one worry that is on every Indian's mind is the rising cost of living. Don't you parents and grandparents often recall the times when things were cheap. So much could be bought even with a few paise. And one rupee was worth a lot. But the times have changed. And the value of the rupee has fallen drastically. One rupee has become almost worthless.

But we read something interesting in the financial journal Livemint. It says that a very large public sector undertaking (PSU) recently awarded the mandate for rating its debt instrument to a rating agency. The deal was done for a paltry sum of Re 1. Yes, one rupee! You read it right.

This is not really a new trend. In the recent past, investment bankers too have wooed PSUs for similar offers. And now, it seems the rating agencies have also jumped the bandwagon. What could be the reason? Intense competition it seems. India boasts of six rating agencies. The only other country that has so many is Bangladesh.

Though it is fine to woo clients with big discounts, we believe the quality of the rating should not be compromised at any cost. The 2008 financial crisis and many such other troubles that the world economy is facing could have been averted had international rating agencies been more vigilant and honest.

India's current account deficit (CAD) was expected to be big in the last quarter of 2012. But not this big. The deficit reached US$ $32.6 bn in the third quarter of the fiscal year, equal to 6.7% of GDP - a record. That's up significantly from 5.4% of GDP in the previous quarter and 4.4% in the same quarter a year earlier. India's inability to revive its manufacturing sector, coupled with the global economic downturn, has led to a steady decline in export of manufactured goods. As long as foreign flows continue towards India, the capital account will aid in offsetting the CAD. Any change in this equation will hit overall balance of payments once again. As the Finance Minister mentioned, India will have to keep looking for US$ $75 bn every year to fund its CAD. Imports remain a structural issue and the decision to raise diesel prices is a much-required, even if late, step in the right direction. On the exports side, a boost to manufactured goods by encouraging investments in India is a must. It would also help in creating jobs. Till then, India will have to live with depending on foreign money to fund its domestic demand.

Imagine your bank balance being reduced by 6.75%. And that too, just for depositing money in a bank that has not been very prudent at decision making. Now, despite the bank's fault, the 6.75% tax is levied upon your account to save the bank from shutting down! As ridiculous as it may sound, this is exactly what is happening in Cyprus. The Cyprus government has planned to levy a tax on depositors' bank accounts. The tax rates would be 9.9% for deposits in excess of Euro 100,000 and 6.75% on lower amounts. These taxes are towards raising the necessary bailout funds. This plan has obviously received a lot of flak from people across. So much so that it has even termed as an act of 'corruption'! With this development, legendary inventor Jim Rogers believes that there is nothing else left to do. And that everyone should pretty much 'run for the hills'. He fears the above mentioned development to possibly become a precedent. With bodies such as the European Union and the International Monetary Fund approving such a move, it would not be surprising if other crisis facing nations followed suit. Thankfully, the situation in India is not as bad. Nevertheless, this development can provide us with a basic investment lesson. That of not putting too many eggs in one basket!

In the meanwhile after opening the day on a positive note, Indian equity markets continue to trade in the positive zone. At the time of writing, the Sensex was up by 17 points (0.1%). The other major Asian stock markets have closed the day in the mixed with Japan and Hong Kong leading the losses in the region. However, markets in Taiwan and Korea have closed in the green.

Today's investing mantra
"If you can remember that stocks aren't pieces of paper that gyrate all the time --they are fractional interests in businesses - it all makes sense."- Seth Klarman

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407