Is this promoter group acting prudent? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Is this promoter group acting prudent? 

A  A  A
In this issue:
» The Big Four auditors under fire
» The evils of Chinese stock markets
» 'Buffett rule' fiscal solution for India too?
» Will the UIDAI project be rendered worthless?
» ...and more!


00:00
 
A share buyback typically signifies promoters' attempt to enhance intrinsic value of the stock by reducing its supply in the market. This could also be done to avert takeover threats by competitors. But the promoter group we are referring to does not face either of these challenges. On the contrary it is looking for better ways to milk its stakes in the companies.

The central government has not had much success so far this year with its disinvestment plans. The aim to garner Rs 400 bn by divesting stakes in PSUs has fallen flat with markets playing truant. The follow on offering of Power Finance Corp managed to raise just Rs 11 bn. Meanwhile, the growth in advance tax payments of the top 100 companies has been just 10% against an estimate of 18%. Rising oil subsidy bill and under recoveries of the oil marketing companies threaten to toss the fiscal balance out of gear. Meanwhile inflation and interest rates continue to impact corporate profitability and investor sentiments.

Given this scenario, the Finance Ministry has proposed the cash rich PSUs to pump up the value of their stock by buying back shares. This will not just offer some immediate funds to the government but also enable it to dilute stake at higher prices at a later date. Whether or not the buyback will be open to minority shareholders as well is not known. While all of this is in order with the law book, it may not be in the best interests of minority shareholders.

For one, losing out cash surpluses at a time when liquidity is both tight and expensive is not a great option for the blue chip companies. Especially ones like ONGC, NTPC, BHEL and SAIL which are looking to add capacities without excessive leveraging. What is more, given the relatively low liquidity in most PSUs, the buyback may further put strain on the same.

Despite some brilliant prospects and solid fundamentals of some Indian PSUs, quite a few of them pale against their private sector counterparts in terms of valuations. We wonder whether the scenario will ever change if such biased treatment is meted out to minority shareholders every now and then.

Are you in favour of the proposal of cash rich PSUs buying back government shares? Let us know your comments post them on our Facebook page

---------------------------------------------------------- Free Video ----------------------------------------------------------

Recently we recorded a short video with Asad Dossani discussing among other things prospects for Gold, Silver, Crude Oil...

In the video, Asad also reveals two derivative trading ideas that you could profit from.

Remember, this video is absolutely free to view!

Quick! Be among the first to view this video! Click Here!

----------------------------------------------------------------------------------------------------------------------

01:15  Chart of the day
 
At a time when steep price rises have dealt a blow on consumption patterns of lower income households one would assume that the public distribution system (PDS) would come to the rescue. However, data from the RBI shows the widening gap in the procurement and offtake of the food grains through the PDS. The gap has in fact been unusually high in the first five months of this fiscal compared to the previous years.

Data source: RBI

01:50
 
The Big Four in the auditing world have come under fire both overseas and in India. Readers would do well to recall the Enron scandal and the consequence demise of Arthur Andersen, which at that time was among the Big Five audit firms in the world. Now in the aftermath of the subprime crisis, the four auditors (Deloitte, PwC, Ernst & Young and KPMG) are faced with multi-billion dollar suits. Not just that, in a move that could change the way these audit firms operate, European authorities are considering rules that could force them to break up. What this essentially means is that the consulting business, a big revenue generator for these firms, would be segregated from the audit business in order to do away with conflicts of interest. Other plans on the anvil also include a requirement that auditors be 'rotated' or changed, every nine years, forcing them to give up some of their best clients. Plus, the introduction of 'joint audits,' so the Big Four would share auditing work with smaller rivals. In India too, these big four have come under the lens of the Institute of Chartered Accountants of India (ICAI). The latter contends in its report that these firms are not following the code of ethics applicable to CAs in India. Indeed, the fact that a big audit firm was involved in the Satyam scandal is testimony to the fact. Thus, a serious change in the way these firms operate and conduct business is in order.

02:30
 
What happens when a developing economy is growing at a breathtaking pace but its capital markets are just over 20 years old? Problems of manipulation and insider trading that earlier plagued developed markets at this stage of financial evolution catch up with it. That means you have 'rats' and 'black mouths' nibbling at your stock markets. Any guesses which economy we're referring to? Well, we're talking about the Chinese stock markets. But who are 'black mouths' and 'rats' in stock markets, you may ask. 'Black mouths' are the so-called stock market messiahs who leverage on public faith to churn out huge profits for themselves. For instance, an article in Reuters names a certain Mr Wang Jianzhong who had become popular as China's "God of stocks" for his astute stock picks. Such was his popularity that his interest in a certain stock was enough reason for stock prices to go soaring. So he unscrupulously took advantage of this and made a huge fortune out of it. Of course, he was later imprisoned, fined and his unlawful earnings were duly confiscated. On the other hand, 'rats' are dishonest mutual fund managers who buy shares in their own personal trading account ahead of large purchases of the same stock by their fund house, hoping to profit from a rise in the share price from their firm's larger transactions. A more common and sophisticated expression for 'rat trading' is front running.

The evils of Chinese stock markets are not only limited to insider trading but go as far as falsifying numbers of listing prospectuses. It is not uncommon to find IPO prospectuses in China with false figures for revenue and other data. In fact, the list of illicit stock market practices is very long. The effect of the same is evident on the growth of the mutual fund industry. The fund industry's assets under management have fallen steadily over the last few years. As a result, the performance of Chinese stock markets has been lacklustre despite the rapid economic growth.

03:10
 
Time and again the concept of inclusive growth has been raised in India. But hardly anything substantial has been done in this direction. Even though India boasts as one of the fastest growing economies in the world as reflected by its GDP numbers, the disparity between masses and classes has only widened over the years. The economic bias that exists in our society speaks loud of the failure of objectives of the economic policies. This is obvious from the agricultural sector that is lagging behind, poor health infrastructure and a yet to develop financial and social infrastructure. So is there a way to fix this gap?

The country's ex Finance Minister who presented the dream budget by slashing tax rates has come up with a solution. Taking cues from Europe where the rich have volunteered to pay higher taxes, Mr. P Chidambaram has dared to go against popular support by stressing for the need to tax rich people at higher rates in India. This is pretty much in line with the 'Buffett rule' that the Obama government is looking to implement. And we couldn't agree more. An all inclusive growth does need an all inclusive participation of the stakeholders. We have blamed the Government enough; it's time to do our bit.

03:45
 
Most of us face problems with regard to proof of identity as well as proof of address whenever we need a new bank account, a new gas connection or a passport. And when we heard of Unique Identification Authority of India (UIDAI) project, named as Aadhar, we thought these problems are going to be sorted out soon. The reason being the card issued by UIDAI was supposed to be accepted as proof of identity as well as proof of address. Many petroleum companies had already given a green signal for the acceptance of Aadhar for bookings for gas connections. However, recent directive from the Reserve Bank of India (RBI) to the banks seems to dampen the whole purpose of UIDAI. According to the directive, Aadhar would only be accepted as an identity proof while opening a new bank account. We need to furnish a separate document as proof of address. Hence, for opening a new account, Aadhar would be useless for most of us. The reason is producing documents for address proof is more problematic than for the identity proof.

If we look at this issue in the right spirit, Reserve Bank of India (RBI) must have reasons for issuing such a directive. Other agencies may also follow suit. So it is high time to discuss the reasons for non-acceptance in the beginning itself. That would help make systems and procedures of issuing Aadhar robust and increase the acceptance. Else, Aadhar would just be an addition to the stack of already existing documents such as voter ID card, driving license, telephone bill, ration card, passport. None, alone serving the purpose of foolproof ID, the way Social Security number does in the US.

04:30
 
Due to buying interest in select heavyweights from the banking, IT and auto sectors, the Indian indices managed to consolidate gains since early trades today. At the time of writing, the BSE Sensex was trading higher by 142 points. Most other Asian markets closed higher. However, Europe has also opened on a negative note.

04:50  Today's investing mantra
"It's true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard." - Warren Buffett
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
Why Hasn't Warren Buffett Rung the Bell Yet?
August 22, 2017
It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.
How Unique Are the Companies You Invest In?
August 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.

Equitymaster requests your view! Post a comment on "Is this promoter group acting prudent?". Click here!

3 Responses to "Is this promoter group acting prudent?"

N.M.R.Shreedhar

Sep 29, 2011

The meaning of "buy-back" is not very clear --these PSU's are planning to buyback shares from the stockmarket OR from the government? I think there is a difference between the two. If from the stockmarket, they are effectively reducing the "free float" which will definitely increase the market price. However if the PSU's are buying back from the govt with the intent of offering them later to the public in the form of disinvestment, then may be good in the long-term. I am not very clear on this -- is ownership by the PSU and ownership by the Govt meaning the same-- can somebody clarify? regds

Like 

Ramanand

Sep 29, 2011

If I were a shareholder in the PSU companies, it would not be in my interest that the companies take debt to buyback shares, hence I would oppose it. Otherwise its a good idea floated by Govt to raise cash for its expenditure.
On PChidu raising tax rate, wasn't the idea that there should be less layers of taxation and simplification of the whole process a few years ago? Maybe equitymaster should support that instead of Indira Gandhi style of ever increasing tax brackets. Is the intent to make rich people poor or poor people rich by increasing tax on Rich people?

Like 

A Chopra

Sep 29, 2011

Mr Chidambaram wants to increase tax rate so that they can bungle more, and surprisingly you agree.

Like 
  
Equitymaster requests your view! Post a comment on "Is this promoter group acting prudent?". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407