4 out of 5 cases of frauds involve senior managements - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

4 out of 5 cases of frauds involve senior managements 

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In this issue:
» Why is FinMin so annoyed with RBI?
» RBI's wish to remove FDI cap to boost current account
» Is the worst over for auto sector?
» US$ 60 bn stimulus for Chinese economy
» ... and more!

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Frauds. Scams. Common words. We read about a new one pretty much every other day. If it is not a new scam then it is the revised estimate of loss attributable to the same old scam. But the bottom line remains the same. Poor governance has cost India dearly. As per leading consultancy Ernst & Young (E&Y), the cost of frauds in India is estimated to be a whopping Rs 66 bn this year.

As reported by the Financial Express, E&Y has conducted its research using 180,000 news reports for the analysis of frauds in business, government and financial institutions in FY12. The major brunt of this loss was unfortunately borne by the Indian banks. As per their study most of the frauds were conducted using insider help. More alarmingly over 79% of the cases were due to the involvement of senior management. Apparently they exploited their positions of authority to interfere in company decisions to conduct fraud. Not that it helps but as per E&Y the incident of fraud was consistent across the country.

These numbers are just statistics. But they highlight a mounting and alarming problem in our country. Trust is the foundation of any relationship. More so in the world of making investment decisions, trust plays a vital role. If you cannot trust the leaders, be it of a company or a country, then how can you invest your hard earned money with them? If things continue in this direction, investors, domestic and foreign alike, will find it increasingly difficult to trust and invest. The poor governance standards have already taken a toll on the investor confidence. Unless the standards are revised upwards, the decline in confidence is all set to continue.

The need of the hour is better governance. The only way that can be brought about is by putting checks and firewalls in place. Technology too can play an important role and therefore needs to be improved. The bigger need is to improve the legal system that does not allow the wrongdoer to go unpunished. Other countries have already woken up to the fact that better governance is essential to drive long term growth. Look at the way Brazil has made an example of itself in this regard. But in India things are still the same.

The quality of Indian polity seems to be deteriorating day by day. It is time for citizens to wake up and take a stance against this. If you feel this way too, then help create a 'snowball' effect to save India's democracy and growth story. Make your voice heard. Participate in our petition to the government.

What steps do you think should be taken to improve governance standards in India? Share your views or you can also comment on our Facebook page / Google+ page

01:10  Chart of the day
Investopedia defines current account as the difference between a country's total exports and its total imports. It is considered to be an indicator of the trends in foreign trade. A current account deficit (CAD) indicates that the import bill is much larger than the total export. Having a deficit in the current account is not necessarily a bad thing in the short term. But if it continues for a longer time then it indicates that the country is becoming more and more a net debtor to the rest of the world. Not such a good position to be in. Unfortunately this is the position India is in. Over the last few years, India's current account deficit as a percentage of GDP has been rising. In fact the percentage in FY12 was as high as 4.2%. Though things are expected to improve next year but even then the projected percentage is still higher than what it was in FY10 and FY11. It even fares poorly compared to its Asian peers.

Source: Economic Times

As much as the government would want to give the RBI false hopes, the central bank is not one to be fooled around with. Last week the Finance Minister laid out a plan to cut fiscal deficit. As expected, the plan was rather lame, largely relying on spectrum auction and PSU disinvestment proceeds. Since the proceeds from neither are very certain, the chances of fiscal deficit being lowered too seemed rather tiny. The RBI on its part responded by thumbing its nose at the government's demand for rate cut! It clearly displayed unwillingness to go by the government false hopes of better fiscal management.

Taking a step further it has now suggested a plan of its own. One, which by the looks of it at least, seems more realistic. The RBI has proposed changes to foreign direct investment (FDI) norms. These include doing away with sectoral caps on FDI. Further it has suggested increasing the overall limit for investment in Indian debt, currently US$ 60 bn per year. Here too, long term debt investors should be given preference. The RBI believes that both these measures will help curb current account deficit problem. It will be interesting to see if the government responds well to RBI's suggestions. Or will it be a tit-for-tat?

If there were any doubts that the Mint Street and the North Block do not quite see eye-to-eye these days, they were firmly put to rest recently. It was quite evident that Reserve Bank of India's (RBI) decision to keep the status quo on rates did not go down well with P Chidambaram. The latter even went to the extent of blurting out that if need be, the Government will walk alone to face the growth challenge.

But is the FM's ire justified? We certainly don't think so. Agree that the current dilemma we are facing is the classical growth-inflation dilemma. But 10 times out of 10, controlling inflation should be our top priority we believe. For it is the biggest tax on the poor and the middle class of this country. And these sections of the society need RBI's help more now than any other time in recent history. The world is awash with cheap liquidity and even in India, Government's efforts at fiscal consolidation are all putting continuous pressure on inflation. Thus, the RBI is completely justified in holding up its rate cut plans. And once Mr Chidambaram looks beyond the narrow self-interests of elections and politics, he too will be able to admire the steps taken by India's central bank we reckon.

The Indian auto industry has been facing headwinds for quite some time now. Slowdown in the economy, firm fuel prices and interest rates had all dampened demand. Labour troubles at Maruti's Manesar plant further compounded woes especially since the company is the market leader in the auto space. However, there seems to be a silver lining in the cloud with the start of the festive season. For the month of October 2012, car sales soared on the back of Maruti Suzuki, Mahindra & Mahindra and Hyundai posting strong numbers. This has been on the back of new launches, Dussehra and well-stocked dealerships ahead of Diwali. Maruti witnessed a surge in domestic sales of around 87% on account of the low base effect. M&M also witnessed an overall growth of 44% in sales of cars and utility vehicles (UVs). It must be noted that UVs in particular have displayed spectacular growth in the year so far. Robust sales are expected to continue during the festive season. But the real challenge will again be post this period as the overall environment of high fuel prices, interest rates and economic slowdown has yet of ease off.

Central banks have never been so much in news ever before. Almost every day there is news about some or the other central bank. This only goes to show that the role of central banks has significantly expanded in its scope. Armed with their monetary tools, central banks across the globe have been tampering with their respective economies. It almost seems as if interest rates and money supply alone can get the economy going in the desired direction. But how much of this is real and how much is fluff is anyone's guess.

The Financial Times reports that the Chinese central bank People's Bank of China recently injected US$ 60 bn into the country's money markets in just one week. This has been the highest weekly amount ever. In recent weeks, the central bank has been infusing large chunks of short-term liquidity into the financial system via open market operations. While the Chinese economy is showing signs of a slowdown, the government has been pushing for more investment in infrastructure to prop up economic growth. The central bank correspondingly has been trying to keep monetary conditions loose.

But how much can short-term liquidity injections can really do? Now, most of these short-term instruments tend to expire in 7 days. So the moment the bank withdraws money back from the system, money market rates tend to shoot up. In fact, a major worrying sign has been that money market rates in China have become very volatile. So the question is should central banks interfere so much with the economy? In our view, the role of central banks is important. But the level of intervention needs to be reconsidered.

In the meanwhile, after opening the day in the green, the Indian equity markets continued to trade above the dotted line. At the time of writing, Sensex was up by 157 points (0.8%). Other major Asian stock markets have closed the day on a mixed note with Hong Kong and Japan closing in green while Indonesia and Malaysia closed in the red.

04:55  Today's Investing Mantra
"The single greatest edge an investor can have is a long-term orientation." - Seth Klarman
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2 Responses to "4 out of 5 cases of frauds involve senior managements"


Nov 3, 2012

Dole out privileges like reservations, money given to companies with out accountabilities, money spent as well fare measure on public with out control or governance are the main reasons of economic and polity failures. The present experience is that more literally educated make more frauds and scams which increases with theirs so called higher education qualification.



Nov 2, 2012

There is total character deficiency in the rulers of the country. Ultimately it is the character of the top which percolates down. Nothing will change by mere talk and petitions. It is time to take proactive action by the citizens of the country to totally change the system. I salute the beginning made by team Kejriwal in this direction. After all a long journey is completed by starting first forward step.

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