Did the UPA just sanction criminalisation of politics? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Did the UPA just sanction criminalisation of politics? 

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In this issue:
» NSEL crisis: Should auditors be allowed escape like this?
» Foreign banks make a killing as RBI woos dollars
» India Inc will have tough time refinancing forex debt
» Chinese investments and the debt trap
» ...and more!


00:00
 
Throughout the UPA regime, there has been an endless relay of corruption scams. One scam after another... And every time the scam got bigger.

What the UPA cabinet just did is easily the mother of all scams ever! And it has put our democracy in deep danger...

The UPA just passed an ordinance to protect CRIMINALS... Yes, you've read it right! The ordinance protects convicted MPs and MLAs from facing immediate disqualification.

On July 10, 2013, the Supreme Court had pronounced a historic judgment which mandated that a lawmaker (MP or MLA) would stand immediately disqualified from office if convicted by a court for crimes with jail punishment upto two years or more. Moreover, the convicted lawmaker would also be barred from contesting elections. By the latest ordinance, the UPA has effectively reversed the Supreme Court's judgment.

Well, the UPA's move doesn't seem too difficult to comprehend, especially if you consider the timing of this ordinance. As per Hindustan Times, there could be two chief beneficiaries of this new law. One is Congress Rajya Sabha MP Rashid Masood who has been convicted in a corruption scam. The other beneficiary could be Congress ally Lalu Prasad Yadav, in case he is convicted in the notorious fodder scam. The sentencing in the case of Masood and conviction in the case of Lalu is due next week.

But that's not all... Here are some shocking findings of a report posted by IBN Live. As per the report, out of 543 Lok Sabha MPs, 162 have criminal cases pending against them. In fact, 75 of them are facing serious criminal charges. In all, there are about 4,835 MPs and MLAs in India. Of these, about 1,448 are facing criminal cases. Out of these 1,448 members, 641 have declared serious criminal cases like rape, murder, attempt to murder, kidnapping, robbery, extortion, etc.

Need we comment on this? The general elections are less than a year away. And the ruling party seems to be determined to go to any extent to ensure that it comes back to power, even if that means destroying the democratic fabric of the nation!

Do you think the UPA government is encouraging criminalisation of politics? Let us know your comments or post them on our Facebook page / Google+ page

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01:15  Chart of the day
 
India is currently facing a double whammy of economic slowdown and high interest rates. In such a scenario, the highly indebted sectors tend to be among the worst impacted. We came across an insightful report by Macquarie Equities Research on the status of corporate debt restructuring (CDR) in India. As it turns out, the corporate debt restructuring pipeline is showing no respite and continues to soar. As the chart of the day shows, the worst impacted sectors include iron & steel, infrastructure, textiles, power and construction. These sectors have the highest share of the total outstanding CDR as of June 2013.

During June 2013, the aggregate debt of the total approved cases under CDR stood at Rs 2,503 bn. It must be noted that just 30% of all the restructuring is done through the CDR cell. Most of the restructuring is done through negotiation between the bank and the borrower. Even the debt restructuring of state electricity boards is not done via the CDR route. What this tells is that the aggregate debt under stress in the economy is likely to be much higher.
Sectors with the maximum debt stress
Data source: Macquarie Equities Research, September, 2013

01:55
 
Auditing is conducted so that financial shenanigans do not escape. Auditing of books creates a sense of trust amongst investors. They are assured by a third party, an auditing firm, that there are no irregularities in the way the accounts are being managed. However, recently, a very strange situation happened in the Indian auditing space. The auditor of Financial Technologies Ltd (FTL) withdrew its audit report on the company. It may be noted that FTL is the parent company of scam-struck National Spot Exchange Ltd (NSEL). Withdrawal has come as a shock to the auditing industry. How can a firm withdraw a report which it has issued earlier? There could be two reasons for it. One, there is an oversight error. Second, the auditing firm was in the know.

Now, whatever the reason, the stance of withdrawal is unacceptable. What is more worrying is that the audit firm is asking users of accounts to not rely on it at all! In that case, what checks and balances did the auditing firm conduct before issuing the audit report? Oversight errors do not result in blatant refusal of reports. It seems that the entire process of auditing had many loopholes. Everyone knows what happened to the auditing team of Satyam which failed to detect the fraud that was being perpetrated under their eyes. As such, Deloitte Haskins & Sells, the auditor of FTIL is just trying to wash its hands off this entire issue by disowning the report now. However, this will not absolve them from their moral & ethical responsibility. The fact and the matter is that Deloitte has failed to conduct adequate due diligence. And disowning is not the way out. If it is allowed then what is the purpose of issuing the report in the first place? Hope the Indian accounting authorities are listening.

02:40
 
The foreign currency deposits (called FCNR (B)) have hardly ever attracted as much interest, as they have in the past month. Little did the RBI expect that its attempt to salvage the rupee will end up becoming a golden goose for foreign banks. The cycle started with the RBI trying to woo NRIs into parking dollar deposits. The banks in turn went a step ahead and offered immediate loans on these deposits. The customer used the loan proceeds to create yet another FCNR account, which fetched yet another loan. The process is repeated 8 to 10 times. The customer benefits as he earns more interest on FCNR (B) deposits than he pays on loans against those. And the banks multiply their balance sheet without any real growth. While Indian banks too have tried to cash in on the move, it is the foreign entities that have made the killing. This constant process of deposits and lending could very well go on to become a systemic risk; as and when the RBI decides to undo the policy. Moreover, the cost of rupee-dollar swap, which is currently being subsidized, will act as a burden on tax payers.

03:15
 
Even though rupee seems to be recovering from all time lows against the dollar, the woes of Indian companies are far from over. As per leading rating agency Moody, around 14 companies will see around US$ 16 bn of foreign currency debt maturing by the end of this fiscal year. This time, it is going to be a real test for the balance sheet strength of Indian companies. This is because refinancing this debt at times when rupee has lost almost 15% of its value against the dollar will not be without consequences. To make things worse, even the borrowing costs abroad have gone up.

So how does all this impact Indian companies? While the cash rich companies may get an easy access to funds, in case the rupee falls further, the value of debt will go up. Along with a rise in interest costs, this is likely to lower the financial covenant cushion and make the profile risky. At a time when the business environment is already weak, this does not bode well for India Inc.

03:50
 
The unprecedented growth in China and the recent slowdown has exposed many chinks in the Chinese armour. There is no doubt that China will need to rebalance its economy and cut down on investments. But is that easier said than done? Fall in investments is bound to hurt GDP growth. That will curtail business operations leading to unemployment. This would be followed by reduced consumption leading to a vicious circle. The problem is that failure to cut investment rates would lead to unsustainable debt levels.

So is there a way out? One solution being proposed by an article on Bloomberg is the transfer of wealth from the state to the private sector. This is by privatizing assets and using the proceeds directly or indirectly to boost household wealth. The other option is to raise real interest rates sharply and wages. Or reduce income and consumption taxes. Again the logic behind this is the transfer of wealth from the state to households. The issue is that there might not be the political will to do so. After all, reduction in importance of the state's contribution to GDP will gradually strip it of many privileges. This is something that may not be acceptable to the political class. Whatever be the case, all of this only highlights the constraints that the Chinese economy is bound by. And the current state of affairs will hardly be allowed to last for long.

04:30
 
In the meanwhile Indian stock markets are trading in the green. At the time of writing, the benchmark BSE-Sensex was up by 96 points (0.48%). Metal and capital goods stocks were the biggest gainers. However, oil and gas and realty stocks were trading weak. Most of the Asian stock markets were trading mixed with China and Taiwan leading the losses, while Japan and Singapore were trading firm. The European markets have also opened on a mixed note.

04:50  Today's investing mantra
"You're looking for a mispriced gamble. That's what investing is. And you have to know enough to know whether the gamble is mispriced. That's value investing."- Charlie Munger
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65 Responses to "Did the UPA just sanction criminalisation of politics?"

vrknair

Sep 29, 2013

India is the second most populated country in the world. We have no dearth of principled, patriotic citizens then why we should make criminals our law makers. Let the convicted criminal whoever he may be go to hell. India is first.... no need of any criminal in our parliament and assemblies. Ordinance shows how far away are today's congress(which Mahatmaji wanted to disband on getting freedom) from the Gandhiji's principles of Truth and Ahimsa

Like 

M R ROY

Sep 28, 2013

Sir,
corruption is now national disease.Almost all of us including IAS/ IPS/ IRS/Chartered Accountants now M B A(S)/ Newspaper correspondent (through their news presentation) besides Advocates and judicial system in delaying judjement --are sharing this directly or indirectly

Like 

M R ROY

Sep 28, 2013

Is it U P A only ? What is the role of all other political parties ? What is their reaction? How they have supported or opposed the legislation through ordnance.

Like 

Tikam Patni

Sep 28, 2013

It has nothing to do with criminalisation or decriminalisation of Indian Politics. They wanted to save Lalu, hence the ordinance. Then RG realised thru his chamachas that it will also help Modi as he has many criminals in his cabinet, RG dumped Lalu and asked to dump the Ordinance in waste basket as well.

Like 

Ambar Sinha

Sep 27, 2013

Sir, This is the most dastardly act by the Govt. it cannot be condoned and no amount of high decibel secular proclamation can dismiss the fact that the very nature of having good governance is defeated.
Shame on you Congress for this ordinance.

Like 

Radhakrishna

Sep 27, 2013

This is such a blatant misuse of the trust and hope placed on the Government. It is SO BLATANT and such a pure show by the elected representatives of this country that they care two hoots about the feelings and sentiments of the people. It is a dishonour to the people who sacrificed so much to bring freedom and self rule to our nation. DEMOCRACY is being twisted around by 542 self serving individuals, in our name, in the name of the people of our country. These 542 people DO NOT represent OUR voice. They WANT to criminalise our Parliament in the name of Democracy, in our name. Are we going to sit and watch this violation of our country, or DO WE HAVE A VOICE ? ARE WE GOING TO MAKE OURSELVES HEARD ? Is the Aam Aadmi Party our only hope ???

Like 

a.k.maiti

Sep 27, 2013

Congress always say coalition compulsion. This is a great example of coalition compulsion. How many scams are in UPA's feather. This criminalisation will be a just another one. This will help them initiate so many other scams. Still some news group support Congress blantly, remain silent. Recent past news group did many good things by exposing VIPs either politicians or Bureaucrats. Hope news gr will play a great role to prevent such criminalisation by making general people aware of such political crimes.

Like 

Jose Mathew

Sep 27, 2013

Power at any cost is the new motto of congress party. Mahatma ghandi must be turning in his grave. The party he contributed the most to grow into a most powerful political party and was lead by selfless great leaders like Bal Gangadhar tilak, Sardar Vallabhai patel etc come to this stage now. Wake up all young indians. your future is in danger. Teach the congress a lesson or two.

Like 

D D Kochar

Sep 27, 2013

Sir, people who can win elections and muster razmataaz strength can only be proven allies of any political party. Any party will welcome these hoodlooms with open arms.
No party is sacrosanct be it Congress, BJP, SP, BSP or parties from South. We can only wait and watch how Aam Admi Party (AAP) behaves after elections.

Like 

D D Kochar

Sep 27, 2013

Sir, people who can win elections and muster razmataaz strength can only be proven allies of any political party. Any party will welcome these hoodlooms with open arms.
No party is sacrosanct be it Congress, BJP, SP, BSP or parties from South. We can only wait and watch how Aam Admi Party (AAP) behaves after elections.

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