The size of this scam is 1.2 times corruption in India!

In this issue:
» Why the biggest hedge funds are holding cash?
» A state that can be a model for Indian economy
» Poor financial reporting hits Chinese companies
» A new industry to create 1 lakh jobs in India!
» ...and more!----------------------------------------------- Your Vote Matters! -----------------------------------------------

Was Infosys more trustworthy under Narayan Murthy when it came to financial reporting?

Do you see it any differently under K V Kamath?

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00:00

The power of compounding seems to be working overtime when one counts the addition of zeroes to the size of scams hitting India. Over the past 4 years, the numbers have been mind boggling! Corruption has been a menace that has hit the Indian economy harder than any natural disaster. Unfortunately, the roots of the same have been so widespread over the decades that tackling it has been a tall order.

An interesting article in the Wall Street journal had put into perspective how the government could have utilized the funds from the 2G spectrum had no scandal taken place. Food for every destitute Indian for the next decade. Funding of the flagship employment program for India's marginalized for the next five years. Primary schooling for every Indian girl for the next three years. The reduction in every Indian's tax rate by 15% for the next year, or the reduction of India's outstanding debt by 10%. Thus the absence of the scams over the past 2 decades could have meant a huge boost to the Indian economy. But the chronology of scams shows that policy inaction has left the culprits more confident over the years. In fact, in the biggest scam in Indian history that was uncovered in 2010, members of the government itself were found responsible.

Chronology of scams in India	Size* (Rs m)
Bofors scam, 1989	400
Harshad M scam, 1992	6,000
Telgi scam, 1995	20,000
Hawala scandal, 1997	1,000
Ketan P scam, 2001	50,000
Satyam scam, 2008	90,000
CWG scam, 2010	80,000
2G spectrum scam, 2010	1,760,000
Overall corruption	15,550,000
Money laundering	18,860,000

Data source: Wikipedia, Equitymaster
*Estimated numbers

The synonymy of corruption with India has indeed left a bad taste in moth of global investors. Indian stocks witnessed a huge downgrade in valuations when the CWG and 2G scam were uncovered. Since then, investors have dumped every stock that has been even remotely in the news for being associated with a scam. But the problem does not end there. There's another scam that dwarfs absolutely everything that has occurred so far. And this scam answers to the name of money laundering. As per the results of a study on corruption, published by Rediff, the size of money laundered by Indians stands at staggering Rs 18.8 trillion. The same is apparently 1.2 times the overall size of corruption menace in the country. We believe that it is time both the government and companies realize that being corrupt is no longer going to take them too far.

We recently got some very interesting results from a poll conducted on the most trustworthy companies in India. Why don't you too participate and make your opinion count? Click here to participate.

01:15		Chart of the day

With most governments being held accountable for their inexplicable debt burdens, budgets are now being shot down. Expenditures like that on defense have been the major reason for the US' debt problems. Being the country with the second largest armed forces, the US has 1.6 armed personnel for every 1,000 civilians. This ratio is much smaller for China and India that have the largest and the third largest armed forces in the world respectively. Although defense continues to remain amongst the top priority for all governments, it is likely that some nations may see a cut down in budgets.

Data source: Economist

01:50

Investing is indeed tricky. For it depends taking a call on the future, which, as we all know, is highly uncertain. And this has perhaps never been truer than the current times. Clearly, the global economy is battling uncertainties of huge proportions. It is not about the fundamentals anymore. Although these are quite weak, Government actions can make them change in a jiffy. Imagine what will happen if the US congress finally decides to raise its debt ceiling? Or China decides to tighten further. How about Greek defaulting on its debt and the contagion spreading to other Euro nations? Indeed, any of these events has the potential to induce a huge price change in asset markets the world over. And in the process take a lot of investors by surprise. Little wonder, hedge funds across the world are treading with caution currently. Businessweek reports how prominent hedge funds like those belonging to George Soros and the like are moving into cash big time. They are reducing the amount of money invested in stocks, bonds and currencies and waiting for more clarity on global events. What bigger proof of this trend than Soros, arguably amongst the world's best big picture guys, admitting that he finds the current situation much more baffling and much less predictable. It does look like we are in dangerous waters.

02:35

Mumbai may well be the financial pulse of India, but the state of Gujarat is also staking its claim as the industrial future for India. Indeed, Gujarat's enterprising population has ensured that the state thrives despite not being known for its agricultural pursuits. In fact, Gujarat's long coastline and very little rainfall have not really made the state conducive for farming. But that has hardly impacted the population since many of the people there are traders and businessmen. What is more, many men work for small industrial firms and earn wages 50% higher than what they would have earned on the fields. Little wonder then that Gujarat accounts for 5% of India's population but 16% of its industrial output and 22% of its exports. The government has played its role too by reducing red tape to the minimum, not asking for bribes and ensuring that there exists constant electricity, gas and abundant water. It has also refrained from interfering much and has thereby enabled businesses to thrive. The real challenge for the Government then is to ensure that there is no outbreak of violence on communal grounds of the kind that was witnessed in 2002. Overall, Gujarat can certainly act as a model for other Indian states that are looking to enhance their manufacturing prowess.

03:10

Does it pay to have transparent reporting? Does good corporate governance impact shareholder value? Well, companies in China are facing the brunt of poor financial reporting and risky operating models. Their borrowing costs have skyrocketed to record highs. This was after rating agencies like Moody's and Fitch put up red flags on some of them. Certain companies were either overstating profit margins or exaggerating asset holdings. Some had long serving independent directors, and very high levels of private ownership. All these are serious issues.

Fitch has rated that around 35 Chinese companies may have closed the door to the capital markets on escalating corporate governance issues. Issues like these make investors once bitten, twice shy when it comes to investing in such companies or markets. Maybe China should take a leaf out of the book of some of India's top trusted companies.

03:50

The fact that the Indian IT industry is emerging as one of the biggest employers in India is not exactly new. But what is new and interesting is that just a single new segment in the industry would create nearly 1 lakh jobs by 2015. That's right. Cloud computing, a relatively new concept, is expected to create a large chunk of new jobs as per a study carried out by a management consultancy. The study goes on to state that the market for this business is expected to reach US$ 4.5 bn by the same year. It currently stands at US$ 400 m. In this business, the private segment would create roughly 1 lakh jobs from its current level of 10,000 jobs. Although, cloud computing is expected to be the next growth driver for the IT industry, it is still in very early days. The quantum of its growth may exceed all expectations as we have seen happen in the outsourcing industry.

04:35

After a positive opening, profit booking in IT, power and commodity heavyweights, led the benchmark indices in the Indian stock market to move below breakeven in the latter half of today's trade. At the time of writing, the BSE Sensex was trading lower by 100 points. Other major Asian indices, however, closed higher. Europe has also opened on a positive note.

04:50

Today's investing mantra

"To suppose that the value of a common stock is determined purely by a corporation's earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Wells when he told them over the radio that the Martians had landed." - Jim Grant