The most ridiculous reform proposed by SEBI so far! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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The most ridiculous reform proposed by SEBI so far! 

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In this issue:
» Bank bailouts have wiped out privatization proceeds!
» China's huge deficit in pension funding
» Will this institute make Indian cities better?
» Drought doubles up problems for Indian farmers
» ...and more!


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00:00
 
How do the idea of having a 'safety net' and 'guaranteed returns in 6 months' sound for your investments? No doubt they are very comforting. Well most readers would assume that the instrument being referred to would be a fixed deposit or a debt paper. But what if even your equity investments were ring fenced against market volatility? Well, as investors most of us would prefer safe returns in shortest possible time. But that the capital market regulator should go to any extent promising goodies to boost sentiments seems ridiculous!

The Securities and Exchange Board of India (SEBI) is worried about the lacuna in primary markets. Understandably so. The last 24 months have hardly seen any major capital market issuances by India Inc. Plenty of them have been cancelled at the last minute. Most others have seen investor money getting eroded over time. As a result investors have completely lost interest and confidence in IPOs.

Therefore, in order to reverse the fortunes of the IPO market, the SEBI has proposed some radical reforms. Key amongst them is the proposal to introduce a 'safety net' guarantee for the investors in IPOs. This safety net mechanism is being considered only for retail investors. It would be mandatory for promoters and other entities offloading shares through IPOs to compensate investors in the event of a loss. That is if the company's shares plunge below a certain threshold limit within six months of listing, the promoters will be liable to pay.

We believe that if implemented, such ridiculous reforms could be the perfect recipe for heightened speculation in stock markets. First of all the very idea of making returns from stocks in six months is uncalled for. Moreover, market speculators will hardly miss an opportunity to speculate on such IPOs. If promoters fail to compensate investors in the event of heightened volatility, confidence of retail investors in capital markets will be quashed for good.

Instead of making such absurd promises, we believe that the SEBI could do with some initiatives to ensure better corporate governance amongst companies. That coupled with promoting the idea of long term investing in stocks will solve the purpose. Fiscal incentives and adequate transparency on companies could go a long way in boosting stock investing. To top that we would also suggest that the regulator takes some solid steps in educating retail investors about stock investing.

Do you think that SEBI's suggestion to guarantee returns from IPOs in 6 months would boost market sentiments? Let us know your comments or post them on our Facebook page / Google+ page.

01:30  Chart of the day
 
The growth in sales and profits of Indian companies for the quarter ended June 2012 has been one of the lowest in recent times. Add to that lingering concerns about key sectors like power, banking, telecom and energy. Domestic investors have almost lost confidence in the stocks from these sectors. However, as reported by Business Standard, data from the BSE shows that the share of FIIs investments in the market capitalisation of BSE companies has risen over the past 2 years. This is even as the market cap of BSE companies at the end of March 2012 were down by 16% since the peak of December 2010.

Data source: Business Standard


02:05
 
Financial Times, the popular financial daily, has come up with a very interest statistic. First, it has taken proceeds of the last 30 years from Government backed privatisations across the world. And then it has compared those with the amount these very same Governments have put into rescuing crisis hit banks. Do you know what the outcome has come to? Well, it so happens that the privatisation proceeds of roughly US$ 1.8 trillion get nearly wiped out by the US$ 1.7 trillion that has been pumped into various banks in order to bail them out. In other words, Governments have nationalised assets just as they have privatised them.

You would wonder why there haven't been more privatisations despite the efficiencies that the private companies bring to the table. The answer could be had from the fact that whenever political and economic interests have clashed, it is mostly the former that has prevailed. Thus, Governments may have shown a tendency to indulge in more privatisation. But they have backed off at the very first signs of opposition. Besides, the volatility in capital markets hasn't helped either. And as things stand today, there isn't a very strong chance of privatisation edging out nationalisation over the next few years at least.

02:35
 
Pension costs. This phrase is giving the Chinese government a headache. With an aging population, the costs became more of a burden for the government. As per a research carried out by Deutsche Bank which was published in the Bloomberg Businessweek, currently around 13% of the population of China is over 60. This is expected to increase to 34% by 2050. The rapidly aging population would lead to a huge deficit in the pension funding. As a result, the central government would be forced to fill up the balance. The government has stated that currently, it has sufficient funds to meet the pension related liability for a while. However, it is unknown as to how long would the funds last.

Another problem with the entire pension system is the huge inequality. In the rural areas, people are paid as low as 55 Yuan while in the urban areas, the amount is nearly 1,500 Yuan. This means that the people who are earning well continue to earn well even after retirement while those in the lower income group sink further. This has angered the younger working population who has expressed their dissatisfaction of funding the government retirees without having sufficient funds to fund their own retirements. The one possible solution for this is participation by the local provincial governments, but they don't like handing out cash for pensions. As a result, the Chinese government's credibility over sustaining the pension system has come under fire. It would interesting to watch and see how it performs in the future.

03:12
 
Most cities in India are faced with the challenges of rapid urbanisation. As a result, town planning has become very important. Indeed, there has been a sharp rise in the influx of people in India's leading metros. But poor planning has led to shortage of space and increased congestion. And it is not that the concept of town planning is something new. This was practiced even by the ancient civilizations of Mohenjo Daro and Harappa. Thus, there is an attempt now being made by India's prominent business leaders and academicians to lay the intellectual and financial foundations of the Indian Institute of Human Settlements. Nandan Nilekani and Uday Kotak are some of the names that have already doled out donations to this institute. Of course, there are already many ills afflicting the cities. And the establishment of such an institute may not be able to completely resolve these issues. Also, it could be a while before the institute really scales up as well. But one needs to start somewhere and this could be the solution that India is looking for from a long term perspective.

03:40
 
How can India's per capita income increase fivefold by 2025? It needs to reach levels of US$ 8,000-10,000 from the present US$ 1,600. This will help the country achieve the status of a middle income country. According to C Rangarajan, Chairman of PM's Economic Advisory Council, this can only happen if India grows at 9% annually. Economic growth is an important factor to generate employment and reduce poverty. Leveraging technology in every sector can also help enhance production levels. Right now, India is passing through a tough phase where growth has slowed and inflation continues to run high. The going may be rough. But one cannot ignore the fact that from the seven years beginning 2005-06, the avg. annual growth rate has been 8.3%. Can history repeat itself? We sure hope it does. But it will require sustained efforts on the policy front.

04:00
 
The weather officials have finally confirmed that India is facing a drought. So far, the rainfall has been 17% below normal. The situation is unlikely to improve in the coming weeks. For an economist, the drought in India may only mean a drop in the country's GDP (Gross Domestic Product) growth by some basis points. Given that agriculture now contributes just about 14% to India's GDP, the impact would be relatively less adverse than some decades ago.

But the ground reality is very different. For the 600 million people who depend on agriculture for their livelihood, the drought is severe curse. The worst affected are small farmers whose only assets are their small land holdings and livestock. One bad monsoon can wipe out a significant chunk of their annual income, thereby putting them into a severe crisis. Though the drought will not affect supply of staples such as rice, wheat and sugar, there is a shortage of grain crops used for animal feed. This will either force farmers to borrow to sustain their cattle. Or they may be forced to sell their cattle to slaughterhouses. Either way, both farmers and livestock would be adversely affected. The government has promised that it will provide animal feed to all vulnerable farmers. But reaching out to such a huge and scattered population will be a big challenge. The other big challenge will be on the fiscal front. With slowing economic growth and increasing fiscal deficit, this will only add further pressure on government finances.

04:40
 
The indices in Indian equity markets hovered around the dotted line for most part of today's session. The BSE Sensex was trading higher by around 20 points at the time of writing. Commodity, IT and auto stocks were under the maximum selling pressure. Most other Asian indices closed higher today with Europe opening on a negative note.

04:56  Today's investing mantra
"Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics, the more uncertain and speculative are the conclusions we draw therefrom." - Benjamin Graham
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28 Responses to "The most ridiculous reform proposed by SEBI so far!"

Vinod Sahni

Aug 19, 2012

Don't you think it will restrain shady promoters from excessively pricing their IPO through manipulation of the price of their stock just before public offering?

Like 

arun

Aug 15, 2012

laudable. If the purpose is to prevent excessive valuations
of all ipo's, rights issues and issue of govt paper and bind all the parties to giving a bit in the beginning instead of making a profit on an ipo for the promoters. Also encourage safe underwriting at lower cost and risk.Speculation can not be stopped and healthy speculation is good for growth.

Like 

Murali Krishna

Aug 14, 2012

I do not see any reason to object to the proposal of SEBI. After all with its past experience, it would like to impose such restrictions on unscrupulous promotors. Suggestions by EM may go lo.....ng way and I feel not implementable.

Like 

T J Raghu Veeran

Aug 14, 2012

Guaranteed return and stock market do not go together. How SEBI is unaware of this is really surprising. "Ridiculous" and "absurd" are mild words used by Equitymaster to describe this move. Time and again SEBI is exposing its ignorance of the knowledge of the market and its lack of expertise to control it.

Like 

AKSINGH

Aug 14, 2012

SEBI should use all prudence while approving RHP/details of past and future performance of the company.This is to be critically analysed with a view to arrive at a conclusion that the upper price of price band is the minimum reasonable price which the company share should fetch.Such absolutely perfect professional approach SEBI should have.after critical ANALYSIS OF DATA PROVIDED BY THE COMPANY FOR ENTERING THE MARKET FOR CAPITALISATION, SEBI HAS right to discuss/interrogate/negotiate and advise the BRLMs and other LMs/ on the basis of its findings .ONCE A COMPANY IS IN MARKET THE PRICE IS SUBJECT TO SO MANY FORCES/FACTS/RUMOURS/POLICIES OF THE GOVERNMENT/NATURALCALAMATIES/OTHE MAJOR INCIDENCES/ACCIDENTS WITH IN THE COMPANY OR WITH THE PROMOTERS OF THE COMAPNY/ANY OTHER UNFORSEEN OR FORESEEN MAJOR EVENT.SO CONTROL OF SHAREPRICES OF A COMPANY BY THE COMPANY IS NOTHING LESS THAN RIGGING OF THE SHAREPRICE WHICH ISD AN OFFENCE.NEED IS TO CONTROL THE PLAYERS OF THE MARKET WHO ONE DAY INCREASE THE PRICE OF THE SHARE AND SAME PLAYER THINKS IT USE LESS AND MERCILESSLY SELLS TO LOWER THE PRICE OF THE SAME SHARE WITHOUT ANY FUNDAMENTAL CHANGE IN THE COMPANY OR MARKET CONDITIONS.COMPANY CANNOT BE MADE LIABLE TO COMPENSATE DIFFERENCE OF SHARE PRICE IF IT FALLS BELOW PURCHASE PRICE IN AN IPO,MAY A MATTER OF SIX MONTHS/ONE YEAR OR EVEN ON THE LISTING DAY ITSELF.SEBI SHOULD REVISIT THE ISSUE WITH A BROADER SPECTRUM OF ALTERNATIVES TO SAVE THE INTEREST OF SMALL INVESTERS,FOR WHICH A SUGGESSION IS THAT EVERYCOMPANY SHOULD BE ASKED TO ISSUE CERTAIN CONVERTIBLE DEBENTURE-CUM SHARES,WHICH WILL DEFINIELY BE CONVERTED IN TO EQUITY AFTER EXPIREY OF CERTAIN FIXED PERIOD AS MAY BE SUGGESTED BY SEBI AND DURING THAT PERIOD THE INVESTOR WILL GET ASSURED INTEREST PAYBLE QUARTERLY BY ECS AND MAY DECIDE TO REMAIN IN THE COMPANY OR OTHER WISE DURING CURRENCY OR EXPIRY OF THE DEBENTURE PERIOD,SINCE IT SHOULD ALSO BE LISTED AND IS REQUIRED TO BE TRADEABLE.

Like 

Venkatesan

Aug 14, 2012

Yes it is absolutely absurd. The regulator should think of other indirect means of protecting shareholders interest, one being corporate governance. Why not focus on analysts and other intermediaries recommending the stock pre-ipo? Are they not supposed to play fair considering investors interest instead of siding with the issuers?

Like 

raghavan

Aug 14, 2012

What is the harm, after so many years of exploitation of retail investors by unscrupulous elements, this step will at least curb fly by night operators.

Like 

Omkar Josh

Aug 14, 2012

Firstly, people invest money in stocks having sound fundamentals with a positive approach expecting positive return of investments and never to get a compensation when it is going in loss. This move is indeed questionable because this will only give a negative impression in the minds of the investors. Moreover the biggest worry would be FIIs. There's been a big drop in the investments sentiment lately and this would further reduce confidence of Foreign investors.

Like 

Umesh Sharma

Aug 14, 2012

One should not consider this as ridiculous idea.In fact if properly implemented this can achieve twin objective of achieving the growth by additional investment and fair reward for the people who provide the important ingredient for such growth namely capital.It is a fact that a common share holder has little say in running a company and often receives a rough deal in that while the CEO and workforce demand and get a lions share from the income earned the common shareholder has wait for small mercies like dividend which the Board of directors fancifully decide and if there in decline in the health of the company the common shareholder loses his investment.So there is nothing wrong if the new investor is provided for a limited period the option to get back his investment.Such period may be fixed up to 6 months to one year.It would also be a good idea to have an independent director to look after the interests of the minority share holders

Like 

biraja shankar hota

Aug 14, 2012

Your suggestion for better corporate governance and transparency is welcomed, but the criticism of SEBI's proposal is uncalled for

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