»5 Minute Wrap Up by Equitymaster

On This Day - 16 DECEMBER 2011
Despite gloom, small investors have a cause for cheer

In this issue:
» Exporters may not gain despite rupee fall
» We need second-generation reforms, says Raghuram Rajan
» Here's the outcome of RBI's latest monetary policy meet
» Food inflation at 4-year low!
» ...and more!
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For so many months we have been hearing news and headlines filled with gloom and doom. The Indian stock markets have received a severe beating on the back of several global and domestic adversities. Investors have been losing not just money, but also faith. Retail or minority investors are growing increasingly skeptical about putting their hard-earned money into stocks. This crisis of confidence is not only because of the turmoil in the stock markets. A poor set of regulations to protect the interest of minority shareholders also share the blame. There are ample cases where promoters have bulldozed over the interests of minority shareholders. Many will recall corporates that have suddenly ventured into new businesses, demerged profitable entities, changed the 'objects' for which the capital was raised, etc. at the cost of small investors.

But the new Companies Bill, 2011, seems to hold some encouraging signs. Now, promoters will not be able to easily sideline minority or dissenting shareholders to push their transactions. How? Though the new Bill does not prevent corporates from conducting normal business or diversifying into new businesses, it will empower minority investors with an option to exit the company if they are in disagreement with the company's move.

Say for instance, a company named XYZ Ltd has recently listed on the stock exchanges. The company raised the money for certain stated objectives. But post-listing the company wants to use the funds for some other purpose. In such a case, it has to first obtain permission from shareholders through a special resolution. Moreover, dissenting shareholders will have to be given an option to exit. It is important to note here that 'exit' in this case does not mean the usual sale of shares in the stock market. It will be the responsibility of the company to provide the investors with an exit option which would be on similar lines such as a share buyback or delisting offer.

We believe that this is indeed a very positive reform. While it will send strong signals to erring companies to not take small investors for granted, it will re-instill the confidence of investors to invest in stocks for the long term. So if things really go as they look, minority investors have a sure reason to raise the toast.

Do you think an exit option from stocks will be a great relief for small investors? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
In recent times, the colossal decline in the rupee has emerged as a new threat to the already slowing Indian economy. No other Asian currency has depreciated against the US dollar as much as the Indian rupee. Today's chart of the day shows that while other Asian currencies have depreciated not significantly against the US dollar, the Indian rupee has gone down by a staggering 16.7% since the start of 2011. During this same period, the Chinese currency has, in fact, appreciated by 3.7% against the US dollar.

Source: Business Line
*As on 15th December, 2011

If you thought that rupee depreciation has been giving sleepless nights to importers alone, think again! Exporters that rely heavily on imported inputs are finding it difficult to pass on the hike. Petroleum products, capital goods, gold and gems and jewellery together comprise more than 60% of India's imports. The exporters processing and selling these items have been the worst affected. Thus, the rupee's fall does not bode well for India's trade deficit at all. It is time that not just the central bank but also the government does something about it.

Can anything positive come out of perhaps the worst ever thrashing the rupee has received in recent times? To get an answer, we will have to go back to the days when a crisis of similar magnitude stared the Indian economy squarely in the face. That period will have to be the balance of payments crisis of the early 90s when we had to sell some of our gold to pay for our import bills. And what came out of that dark period? Well, the mother of all reforms we believe. It was then that the Indian policymakers chose to unleash India's true entrepreneurial spirit and removed the shackles that prevented free markets to work their magic. Can something similar be expected this time around as well? We don't really know but noted economist Raghuram Rajan has certainly called for the same. Addressing a lecture, Rajan the former IMF Chief economist opined that we need to go back to fundamentals and think about what made us grow. We need a second generation reforms was his opinion. Rajan may be spot on but the irony of the situation is that the very man who was considered one of the chief architects of the first big bang reforms is in even more powerful position today but has hardly given the impression of going down the same path.

After making big moves over the past 18 months, the central bank has decided to maintain the status quo for the time being. In its policy meeting today, the RBI maintained the cash reserve ratio (CRR) at 6%. The repo rate (rate at which banks borrow from the RBI) was also kept unchanged at 8.5%.

Over the past year, India's macroeconomic fundamentals have taken a turn for the worse. GDP growth has plummeted below 7% and IIP numbers have also sunk into the negative, according to latest data. Action or maybe the lack of it in this case was required from the RBI to prevent a further dip in growth numbers. With so much uncertainty looming overhead, it's hard to predict what the next action step for the central bank will be. Inflation seems to be on a downward trajectory but credit growth is seeing a slowdown in the country. Things overseas also aren't looking too rosy and may not for a while. But at least we can breathe easy for now, even if it is only for a short while.

Food prices have been burning a hole in our pockets. Therefore, it was with some relief that some of us read that the food inflation had dropped to 4.35% last week. This is the lowest number recorded since February 2008. But does it mean that food articles got cheaper? Or is it a factor of the huge base price which makes any further increase seem small? Well as per chief economic advisor, Mr Kaushik Basu, it is a function of the former. Bumper harvests as well as the effect of the government's efforts to control inflation have led the prices of food articles to drop. To put this in perspective, vegetable prices declined by 7.67% during the last week from what they were during the same period last year. The same is true for some other food articles like fruits and pulses. Mr Basu is confident that the trend would continue and expects food inflation to drop below 3% by January, 2012. All we hope is that this forecast is based on the assumption that food prices would actually decline the way they did last week. And not just the effect of the higher base that was there in January 2011. Otherwise such numbers are nothing more than numbers. They would offer no respite to the common man.

Europe may be faltering on account of the deepening debt crisis but that does not mean that its problems are restricted to that region alone. The MD of the International Monetary Fund (IMF) Christine Lagarde opines that the outlook for the global economy is gloomy. She further believes that no country is immune from an escalating Eurozone debt crisis and each one must act to head off the risk of a global depression. This applies to not just Europe and the US, but also to low income countries, emerging countries and super advanced countries. All of them will be impacted to some extent by the crisis in Europe. This holds true in today's world which is globalised. As a result of this, no country can truly claim that Europe's crisis will not affect it. Hence, there are expectations that all of these countries work together towards taking action and resolving the crisis. Having said that, the first steps have to be taken by the beleaguered countries from Europe given that the roots of the debt crisis lie there. This means that the deadlock among the European nations and the consequent policy paralysis will have to end soon.

In the meanwhile, stock markets have extended their rally. At the time of writing, the benchmark BSE Sensex was up by 179 points (1.13%). All the sectoral indices were trading in the green. Auto and Consumer Durable stocks were leading the rally. All Asian stock markets were trading higher led by China and Hong Kong.

 Today's Investing Mantra
"Proper accounting is like engineering. You need a margin of safety. Thank God we don't design bridges and airplanes the way we do accounting". - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'

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