|»5 Minute Wrap Up by Equitymaster|
On This Day - 5 FEBRUARY 2014
Has SEBI got this one wrong?
In this issue:
Before deciding whether this move is beneficial or not to retail investors, let us first try and understand SEBI's motto behind it. The primary reason for making grading voluntary is to boost the inactive primary market. As per a consulting firm, SEBI approved IPO mandates worth Rs 720 bn are yet to hit the market. Voluntary grading would reduce regulatory hurdles and expenses incurred to get one-self rated. This would make the listing process hassle free.
However, the most important factor in making the grading process voluntary was to reduce the reliance on external rating agencies. Ratings from these agencies are typically fraught with conflict of interest. Rating agencies get paid by the company whom they rate. Thus, there are chances of their ethics being compromised. We know what happened to the sub-prime mortgage debt that was rated AAA by renowned rating agencies. It was effectively a junk debt which saw a series of defaults later. Hence, reducing the role of such rating agencies in investment decision making was a good move in some sense.
But will excluding them all together do investors good?
We do not think so. Agreed, there are chances that ratings are fraught with conflict of interest. But a grade at least gives investor a sense of comfort. Not having it all together means that companies which have poor financials can easily escape retail investors' eyes. A rating grade made that pretty evident in the first place.
Also, if the regulator feels that conflict of interest is a bigger risk and can mis-guide investors it should look for alternatives to assess the financial quality of companies. Here it is giving them a leeway of eschewing the entire process.
Access to management for such companies is already constrained. By not having someone assess the financial quality the grey area expands. Further, the very rationale of activating the IPO market through voluntary reporting does not seem to gel well with us.
The duty of any regulator is to protect the interest of investors. At the same time it should make sure that the investing environment is healthy. However, we feel that in an effort to bolster the latter, former agenda seems to have been sidelined.
Do you rely on IPO grading to apply to public offers? Let us know your comments or share your views in the Equitymaster Club.
But an obvious question is: Where is this supply coming from when domestic gas supply scenario remains broadly unchanged? It is the non priority sectors like steel, refineries and petrochemicals bearing the brunt of reallocation of domestic (excluding NELP) gas. It is their share of domestic gas that will now be diverted for CGD, on a pro rata basis. Well, the best part about this is that the benefits of reallocation will be passed on to the end users. Further, the order to provide same share of domestic gas to all CGD entities at the same base price will help to remove price distortions across different regions as seen in today's chart. Also, the lower prices will aid in further spread of CGD network.
The move may be cheered by the public in the short term. However, it will not help to resolve the issue of shortage of domestic gas supply. Further, post the gas price hike applicable in few months from now, we wonder if the benefit from price cuts will remain.
We have had an increase in the number of subsidized cooking gas cylinders and also the implementation of the budget 2013 promise to provide loans to rural women's self help groups at attractive interest rates. Besides granting minority status to a certain community and special education schemes for another minority group can also be construed as means towards pleasing the vote bank. In fact, even financial jugglery has been resorted to. What else explains the hand wringing of PSUs like Coal India for paying out more dividends and also postponing oil subsidy payments? So, while there has been no shortage of effort on the part of the Government to salvage its reputation somehow, we wonder if it's a case of too little too late.
As the central banks of the developed printed money, most of it found its way into emerging markets on the hopes that growth will be robust there. That has not been happening. Emerging markets have been beset by a slew of problems ranging from high inflation to widening current account deficits. This coupled with the US Fed tapering its bond program has led to a huge outflow of money from these markets. This has hampered exchange rates as well. Indeed, when the world economy slowed down in 2008-09 post the crisis, all hopes were pinned on China to rebalance global growth. But obviously China is not ready to take on such a big responsibility just yet.
If Mark Faber aka Dr Doom is to be believed, it is not just the Fed taper that is a matter of worry. One of the major reasons for the fast-faced economic growth in the previous decade was soaring asset prices. As per Faber, emerging markets have lost steam now and are not growing much. Moreover, the Chinese slowdown could have far more adverse repercussions than expected.
An interesting point that strikes us is that the world could be at the beginning of 'a vicious circle to the downside'. The thing is that when times are good, the economic growth enters a virtuous cycle. As it is said, money makes more money. But when the tide turns, the exact opposite tends to happen. So is the world heading towards another major financial crisis? Only time will tell...
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