Thanks to the govt, your broker is set to get richer... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Thanks to the govt, your broker is set to get richer... 

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In this issue:
» What Greece default can do to stockmarkets
» The impact of recession on human health
» Goldman CEO's tainted emails
» The biggest restraint to India's infrastructure
» ...and more!


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00:00
 
We are least surprised when our subscribers tell us stories of their brokers having mis-sold IPOs to them. These are generally offerings of little known companies with poor financial history. The rationale for the IPO ranges from offering listing gains to retail discount. The reason for such hideous act on the brokers' part is the huge commission offered to them by the company promoters. But we were shocked to say the least when we read about a promoter wishing to repeat this act in public! More so, because this promoter enjoys the best credit rating and is offering shares of very respectable businesses. We therefore fail to see the reason behind this desperation to sell the shares at higher prices.

A business daily today reports that none other than the government is set to grease the brokers' palms. This is for "selling" the offerings of PSUs in the pipeline. It will pay as much as 0.35% for retail and 0.15% for HNI subscriptions. Thus, this win-win situation for the government, investment bankers and brokers is set to be a losing proposition for investors investing in the IPOs. We can understand the necessity to raise capital through these offerings (disinvestments) to make up for fiscal funds. But the fact remains that most of these are strong businesses. Hence a reasonable visibility into the future and attractive valuations are all that are required to lure retail investors.

If the government cannot set an example of being a good promoter, we wonder it will suffice to blame the private sector for misdoings. Share with us your views on this.

01:05  Chart of the day
 
As skeletons keep tumbling out of the debt ridden economies in Europe, it is necessary to gauge the risk that they pose to other economies as well. Most importantly, to the foreign banks having exposure to their assets. As today's chart shows, economies like that of Germany and France have much to fear from a possible default by Greece. German banks alone have a fifth of the total exposure of US$ 1.8 trillion towards Greece, Portugal and Spain.

Data source: Economist
Note: Countries are representative of their respective domestic banks.
Assuming 1 Pound = 1.522 US$

01:42
 
A Greece default would not just mean an adverse impact on stockmarkets. It would also shake the global financial system that was supposedly limping back to normalcy (so what if under the influence of printing machineries run by central bankers!).

As for the impact on Indian markets, yes there will be one. In fact, all emerging markets will be in for a rude shock if Greece actually defaults. Not because these 'economies' are dependent on the Greeks for their growth. But simply because these 'markets' depend on cheap US and European funds for keeping the prices of their stocks and real estate high. Now with funds expected to dry up owing to the Greek crisis, the emerging markets will suddenly see the liquidity tap run dry!

For Indian markets, the impact could well be knee-jerk i.e., short term. But whatever it is, it could provide you with opportunities to buy into your favourite stocks at lower prices. The idea is to not take cues from the 'price action' that will follow a Greece default, but to take a call on stocks' 'valuations' and then act.

Warren Buffett once said, "The dumbest reason in the world to buy a stock is because it's going up." This also applies when stocks go down.

02:25
 
The ill effects of the global crisis and the recession are there for everyone to see. But ever wondered that the recession would make you ill literally? Well, it could turn out to be the case. The Mint has reported that the Baltic States risk seeing an upsurge in tuberculosis (TB) cases because of the recession brought about by the financial crisis. What it means is this. The global crisis has eaten into the wealth of the Baltic nations. So, shortage of resources has meant that there is not enough to spend on public health. The rise of tuberculosis could spell trouble for countries surrounding the Baltic states as well.

Tuberculosis killed 1.8 m people in 2008, or nearly 5,000 people a day. What is more, more than 2 bn people are infected. At present, WHO provides TB medicines to nations of Africa and Asia where the disease is widely prevalent. And among the Indian pharma companies, Lupin is the one who has a strong presence in the anti-TB space. Overall, it looks like the recession is going to leave a scar on different countries in different ways for some time to come.

03:10
 
Goldman Sachs is one of the biggest and most revered names in the world of investment banking globally. It might be the only one among its peers to have survived the credit crisis without losing an arm and a leg. However, one cannot say the same about its reputation anymore. Recent reports throw light on some internal emails that Goldman's employees and management were sending to each other before the bust. And the picture does not look very good.

Take its CEO Lloyd Blankfein for example. In an e-mail dated February 11, 2007 he said "Could/should we have cleaned up these books before and are we doing enough right now to sell off cats and dogs in other books throughout the division." By this, he was referring to Goldman's stock of bonds backed by home loans including subprime mortgages. Which in effect gives one the uncomfortable feeling that Goldman was furiously trying to get rid of its own subprime exposure. This, even as it was on the other hand, convincing clients of these bonds' attractiveness as investments. Given this, should one take the words of big investment banks like Goldman at face value? Certainly not. After all, their interests are seldom aligned with that of the investor.

03:50
 
India needs infrastructure. Everyone knows that. But let us break that down into requirements. We need government's intent, land, raw materials, money and skilled manpower. It may well be that manpower is the biggest challenge. The services sector, especially IT and financial services, generally pay much better than the infrastructure sector. As a result, the best and the brightest gravitate towards them. Working in an air conditioned environment is a bonus. Given that India plans to build infrastructure on a large scale, there simply isn't enough quality staff for supervision and project management work.

In our view, infrastructure companies need to take several steps. Become better paymaster at the middle management level. Retain employees even during a downturn. Recruit and train promising candidates on the job. Eventually, there is no getting around the need of quality manpower. And India can't afford a major bottleneck in infrastructure building.

04:37
 
The possibility of a default by Greece had a negative impact on global stockmarkets. The benchmark indices in India went deeper into the negative territory and the BSE-Sensex was trading nearly 336 points lower at the time of writing. Mid and smallcap stocks also found no takers as the respective indices were down 2% each. Other Asian markets closed in red. European markets have also opened on a negative note.

04:50  Today's investing mantra
"One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as 'marketability' and 'liquidity," sing the praises of companies with high share turnover... but investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pick pocket of enterprise." - Warren Buffett
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34 Responses to "Thanks to the govt, your broker is set to get richer..."

V.VIJAYAMOHAN

May 1, 2010

Government should quit Businesses altogether, but must regulate them. So, selling of PSU shares is a must. If public do not look at them favourably, government should search within the PSU, why people don't prefer the PSU. All the answers are within.Incompetent,slow and inefficient PSUs will find no buyers.

Like 

GM Rao

Apr 30, 2010

In any country it is same. If the government acts as business man, the public will become more poor. If government says it will take care of a problem, then the problem will become more insolvent. Our corrupt government is not much different from this. As I know there are some progressive and honest leaders and soon there will be a split in the government.

Like 

Sreenivas

Apr 30, 2010

Very shocking!!Somehow views of the general public should be communicated to the concerned officials/Ministers/Govt.in general or a way is to be made how public can subscribe without going through this channel.

Like 

vbk

Apr 29, 2010

when govt recognizes and agrees for payment of brokerage commission why should fingers be raised against commission paid in insurance industry both life and mutual fund business?


Like 

Sridhar

Apr 29, 2010

We have long been taken for granted by our politicians who have polluted the beaurocrats also. Though helpless in the beginning, the educated class also has taken a wrong lesson and chosen to join and emulate the politicians. Net result is corruption everywhere!!

Like 

Nagappan

Apr 29, 2010

I am really surprised and wonder this article was really from equity master(EM)! hope somebody has not hacked it. because itlacks logic. I normally beleive EM and their balanced views. but in this case i just could not belive that such a paltry sum paid to the Brokers who do this financially unviable job is criricisied by you. Its peanuts when compared to the work done by a Broker including sending the forms to the investor by courier/post, assisting the investor in filling up the forms, verifying the data, keying in the system,submitting it, collecting/issuing acknowledgement,following up on allotment, receipt/non-receipt of refunds and listing dates,etc. in most cases Brokers do this loss making job only to please and retain customers. Please do your homework properly - which you normally do except this case- before writing anything like this. i suggest youplease speak to ANMi or FISE on this subject.

Like 

santosh paranjape

Apr 29, 2010

your view on this subject is onesided, dont u offer the commision (bonus) to your employies for doing good (extra) work, i see nothing wrong in giving commission, i dont think agent will fool his clients just for selling the bad ipo.ultimately he is surviving on these clients. how many people know the valuation is right or wrong. one thing is clear , if its PSU, most of the cases the company is good,then why not it should reach to maximum people.

Like 

RS SABU

Apr 29, 2010

A GREEDY GOVT with many bloats another added to it. when you can persist with hounourable persons like sh sharad pawar and mr raja there is nothing which this govt cannot do thanks

Like 

rs sabu

Apr 29, 2010

the comment is timely reminderof govt misdeeds.this govtis not apoor friendly orhave a kind attitude towards any body but is trying to create opportunities to fill their coffers for further misuse andfill in to their personal coffers there are two big examples the great sugar strey ie. shSHARAD PAWAR AND RAJA WHO ARE STILL

Like 

ganeshan

Apr 29, 2010

AS USUAL, QUITE A FEW MINISTERS' COFFERS WILL GET BLOATED UP!

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