Govt. is to blame for bad corporate governance - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Govt. is to blame for bad corporate governance 

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In this issue:
» Chinese competition impacting capital goods
» Mr. Jhunjhunwala no longer believes in Mr. Buffett
» Should investors worry about ICICI Bank?
» European Union should be dissolved
» ...and more!

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00:00
 
India Inc. in recent times has received a lot of flak for dubious corporate governance practices adopted by certain companies. The Satyam scandal and the 2G scam are prime examples in this regard. But while fingers continue to point towards corporate India, can one say with certainty that the Indian government is above water in this matter? Not really.

Take the case of the Coal Minister. In a scenario where the government finances are in disarray , his solution to this was apparent in the following statement, "Cash-rich companies like Coal India Ltd can lend to the government whenever the government is in need of funds. For example, enactment of the Food Security Bill would require huge funds. Coal India belongs to the people of this country and an amount of Rs 250 bn can easily be given to the government for implementing social schemes". So the obvious question is, what has Coal India got to do with the Food Security Bill? The Coal Minister appears to have forgotten the simple fact of taking into consideration the interests of the minority shareholders and believes that funds can simply be diverted from public sector enterprises to meet government needs at the drop of a hat. Coal India for its part may not lend money unless it gets interest payments for the same. But again, can the government afford this when its finances are already stretched?

In a country where the government has failed to meet its target as far as power generation is concerned, surely the focus should be on how to improve the availability of coal. It should be noted that despite being home to one of the world's largest coal reserves, the Government has revised upwards its estimated coal shortage for FY12. The same will now stand at 112 m tonnes, up from 83 m tonnes forecasted in December 2010. The entire shortfall is likely to be met by imports.

Hence, it only makes sense that any funds that Coal India has should be utilized towards improving coal productivity and the prospects of the company and shareholders rather than for meeting some government agenda. There is no doubt that government needs to keep an arm's length distance from the way public sector enterprises are run. The management of these companies need to focus on growing and enhancing the overall growth of the economy rather than bowing down to the whims and fancies of the government. And the government for its part needs to seriously take a long and hard look at its corporate governance practices and go in for a big overhaul of the same.

Do you think that the Indian government is equally to blame as corporate India when it comes to bad corporate governance practices? Share with us or post your comments on our Facebook page / Google+ page.

01:28  Chart of the day
 
How much leave one is entitled to is surely of much interest to all employees across countries. Today's chart of the day shows that Asian economies work more than their European counterparts. Interestingly, southern European countries such as Greece, Italy and Spain which are struggling with the burden of massive debt are among those who enjoy the highest number of holidays. Does this mean that they will now have to work more to get out of this slump? One will have to wait and see.

Source: The Economist

02:08
 
So, the dismal IIP numbers has been the latest thorn for India's economy. However, if one digs a little deeper, like Firstpost.com has done, a 25% fall in capital goods has been even more disappointing. It isn't just the order inflow that has taken a beating; the competition from Chinese players is making matters even worse. Not only are the Chinese power equipments 15%-20% cheaper, their delivery timeline is also more efficient. Besides, the Chinese equipment companies can reach into the deep pockets of Chinese financial institutions to provide cheaper loans for Indian firms that buy Chinese equipment. Thus, in view of these advantages, it is not difficult to find out why the Indian firms are a worried lot. Of course, the Government of India is mulling a 14% import duty on Chinese equipment to stem the slide but a lot of people say that this would be too little, too late. Thus, the next few quarters are likely to be the key determinants whether the sting of the dragon hurts Indian companies in the power equipment space and if it does, then to what extent.

02:45
 
It could be a case of 'once bitten twice shy'. But the term Credit Default Swaps and its association with the subprime crisis have such charred memories in the minds of investors that they would rather stay away from it. The recent reports of the country's largest private sector lender ICICI Bank entering into the maiden CDS transaction approved by RBI has not gone well with investors. Speculations are rife about the bank doing so in anticipation of huge NPAs on its books. Whether the same is justified is difficult to say as the bank's management has yet not divulged any statistics. Even its exposure to the beleaguered Kingfisher Airlines is not substantial enough to call for panic. However, ICICI Bank does not have a venerable track record when it comes to sustaining asset quality. The bank has painstakingly corrected its processes and brought its balance sheet and asset quality in order after the subprime crisis. It is for the entity to now prove the naysayers wrong. However, investors would be better off not taking impromptu decision on the stock based on under researched facts.

03:31
 
Warren Buffett is a name that everyone has heard of. The legendary investor's investment style that has helped him become the second richest man in the world has been the subject of discussion in every investment book. His style of investing that is termed as value investing is simple though difficult to follow. It involves investors to invest in fundamentally strong companies and then sit back and wait for the share prices to reflect the true value of the company. Many have tried to imitate the legend and many have become rich in doing so too. India's own Mr Rakesh Jhunjhunwala was one of them.

However, the recent volatility in the stock markets has prompted Mr. Jhunjhunwala to change his investment style. He no longer advocates holding investments for a very long period of time. Instead he feels that holding stocks for 12 to 18 months is also value investing. His change in approach may have something to do with the fact that he has taken a serious hit to his portfolio in recent times. Whatever his reason for change, we still do not agree with Mr Jhunjhunwala that this is approach is akin to value investing. For fundamentals and intrinsic value of a company to actually get unlocked, 12 to 18 months is an extremely short period of time. It does not even take care of one business cycle in most cases. Adopting a short term approach like this is equivalent to bowing to Mr Market and appreciating his manic depressive mood rather than taking the advantage of the same. This in itself is against the philosophy of value investing.

04:06
 
Ever since the debt crisis in European Union (EU) unfolded, credibility of the Euro was increasingly being questioned. There were two options in front of EU to get out of the current debt trap and save Euro. The first one was to extend support via bailout packages to the debt ridden countries. And the second one was to let those countries default. While the first option is being pursued now, noted economist Marc Faber is of the opinion that EU should be dissolved as intervention is the wrong medicine. While allowing the countries to default would mean further pain is on the anvil, intervention can just delay the imminent rather than providing a meaningful solution to the current crisis. He believes that while the default option appears to be more agonizing in the near term it will be beneficial in the long run. We second his opinion here. If the liquidity injection exercise continues, perhaps the future generation will be loaded with debt slavery and pay a price for the deeds of their ancestors. You may call it a generation debt trap!

04:47
 
In the meanwhile, the stock market opened on a weak note but recovered the losses during the course of the day's trade. At the time of writing, BSE Sensex was up by 82 points (0.5%). FMCG and banking stocks led the rally while consumer durables and power stocks suffered losses. Red marks were seen across Asian stock markets with Taiwan (up by 0.4%) being the only exception.

04:57  Today's Investing Mantra
"The only time to buy that which you don't understand, is on the day with no 'y' in it". - Warren Buffett
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17 Responses to "Govt. is to blame for bad corporate governance"

RAJEENDRAN

Dec 15, 2011

Same mistake again. In the US, some financial institutions made their financial products so complex that they defied simple understanding from the commoner. Everything boiled out to result in the tragedy of 2008. The solution provided by the Govt was minting more money to bail out the wrong-doers.

Our Minister is no different from the US authorities. He wants to channel funds of a sound corporate in public domain to finance a govt project. The govt itself has managed its finances badly and burned its fingers.

It will be better if he undergoes some coaching on answer-ability to the minority share holders in particular.

Like 

Dip Mitra

Dec 15, 2011

The "chalta hai" attitude of the population of this country is taking a toll on everything including corporate governance.
The firm opinion of most corporates is that everything can be "managed" for a price.

Like 

Yogesh Vaidya

Dec 14, 2011

This is like what happened in case of GMDC few years ago.

We have non sense political leaders.

It is our destiny. Nothing more than that.

God bless us all.

Like 

Girish Sumaria

Dec 14, 2011

Everything boils down to huge uneducated population who elect the corrupt governments and even more irresponsible educated population which instead of using or disqualifying their vote considers election day as holiday and thus leaves their vote for mass manipulation..
More typically this is the class that enjoys 5 days 8 hours week as compared to less educated mass working 6 days 9+ hours..
Why blame government and MPs..they work hard to achieve their targets of accumulating huge cash..

Like 

Ashraf

Dec 14, 2011

before two years Govt given tax benifits of 85000 cr for the corporates in favour to continue their new firms in India. That was people's asset. Now , Ultimately they will do on the same thing with the new conclusion. "sambhawami yuge yuge".

Like 

sunilkumar tejwani

Dec 14, 2011

it is the age old nexus of politician/industrialist & bureaucrat in our country. Every politician needs funds to stay in power & for him this flow comes from large corporates, & ultimately the bill is footed by common man.
God save the country.

Like 

R.Jayaraman

Dec 14, 2011

Corporate India and Govt of India are inseparable partners in corruption. Both receive favors from the other.Why Corporate India and the various Trade Organizations kept quiet when issues regarding corruption were discussed?Now when FDI is discussed and thrown out of the window into the dust bin Corporate India is crying foul.Corporate India has grown only by corrupt practices

Like 

dr.m.narayana. bhat

Dec 14, 2011

coal india is not an isolated case. look at oil marketing companies. the interest of minority shareholders does not concern anyone. they can be taken for granted. govt. can assure some reimbursement and yet not act upon in time. these companies borrow huge sums to meet working capital needs and wait indefinitely for govt. dole. an example of superb governance of political interests at the cost of minority shareholders. there are too many overseeing regulatory bodies including sebi. at the end, they are all creations of the king. and king can do no wrong.

Like 

Suresh Kumar

Dec 14, 2011

The question on corporate governance can be split into two. If the corporate is making good profit, its because of the leadership provided by the ministry, and if its in deep debt, its because of the bad decisions taken by the CEO like that of Air India. Could CEO of Air India have averted heavy investments in purchase of aircrafts more than needed ? Coming to profitable PSUs like BHEL, will government impose import duty to counter 50% advantage enjoyed by Chinese power companies due to low taxes and currency manipulation ? Will the government do something about low production of energy resources like coal and gas so that import bill could be cut by 30% ? As the state elections get closer, the government may get lesser and lesser time for governanace.
The basic problem is that none has a deep patriotic feeling and a sense of ownership, and continuation in office gets the highest priority rather than corporate governance. This results in populism at regional level and shorter term approach. Unfortunately, this approach percolates down to corporates and unions too. Corporates would like to use temp staff to make astronomical profit and the union would go on strike on some pretext.

Like 

tnbala

Dec 14, 2011

Govt behaves exactly like Satyam Raju!

Like 
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