Right lessons from the US

As recently as last year, movements in domestic software stocks were dictated not by developments in the domestic economy, but those on the US bourses. Unfortunately so. There was a time when stock prices of Indian software companies were tracking the US market so closely that everything that happened in the US economy was reflected in the price movements on a day-to-day basis in the domestic markets. While it is for sure that the US economy is miles ahead of us in many ways, if one were to look back, there are some valuable lessons to learn from them.

• Corporate Governance -
  The US companies were literally worshipped for their corporate governance standards. While it needs to be mentioned that they were the first ones to emphasise on improving governance, the Enron debacle has clearly thrown some light on what the US markets and what companies are capable of. The US investors seem to have been looted by the management of Enron thanks largely to the accounting capabilities of one of the top five accounting firms in the world. Number of other companies in US is now being closely scrutinized and it is feared that Enron is just a tip of the iceberg.

  Just compare this with India. Though the general attitude of managements in the past has been not so investor friendly, it is improving for the better. Thanks to committee set up under Mr. Kumar Mangalam Birla, certain standards are compulsory in India currently. How many companies in the past have bothered to explain about future business prospects of the company in their balance sheet? How many companies have taken effort to show division-wise sales in the past? Now, management discussion and analysis is a must. Insider trading norms, which is still rampant in the Indian markets, has been introduced. It should be appreciated that we have made lot of progress in the last two years.

• Investment bankers -
  Analysts and investment bankers, at one point in time, were also adored. The likes of Henry Blodget and Merry Meeker, despite their absurd recommendations, were considered as Internet gurus. Investors failed to understand the fact that Internet is one of the most efficient delivery mechanism and not just a business in itself.

  Even in India, during the tech bubble, we saw fund houses recommending the likes of HFCL, GTL and Cyberspace Infosys at high prices. Again, investors saw investment banking at its best during yet another IPO boom in 1999-2000, both in the US and in India. Investment bankers backed many new companies and enabled them to raise money from the primary market. Most of such companies neither had track record nor a sustainable business model. While investment bankers made money through commission, retail investors ended up being losers. Bottomline, there are some investment bankers out there who want to make money and whatever suits their purpose will be pushed out to the gullible investor. Caution is the watchword, both in India and the US.

• Stock markets -
  While it is true that disclosure norms in the US markets under the Security Exchange Commission (SEC) guidelines are stiff, the Indian stock markets have also come a long way. But the saddening part is that it took a crisis for the regulator to change the way stock markets, in India, have been functioning. Badla has gone. We have futures, options, derivatives, rolling settlement and 100% online trading. However, there is still a lot of room for improvement. One hopes that SEBI considers reforms as an ongoing process and not a one-time affair.

• The Indian consumer -
  If one were to compare a common Indian and a US resident, differences are apparent. In India, people save first and then they spend. The concept of consumer financing took a lot of time to take off in India. Of course, interest rates were also on the higher side. Whereas US is a debt driven economy. It was estimated that the average credit card bill of a US consumer was in the range of US$ 5,000 (Rs 240,000) in 2001. Some perceive that the buoyant US growth rates in the last twenty years have made Americans less cautious about the future. Even if they cannot save, they do not hesitate to mortgage their house and spend. Even in a difficult period like 2001, car sales jumped sharply backed by record low interest rates.

  Even in India, retail investors received a big blow in the last budget when the Finance Minister lowered interest rates on PPF and NSC. While it is good for the economy, retail investors do not have a lucrative safe market to invest in. While lowering of interest rates encourages investments, we have to be careful of not falling in a similar loop as the US.

• Software -
  While it is true that the Indian economy and the Indian software sector are a sub-set of the global economy and the factors that have a bearing on the global economy will affect Indian companies, there are some differentiating factors. Indian software companies are still at an evolving stage i.e. they have been gradually moving up the value chain. The bourses came to know the potential of Indian software industry just in 2000 (i.e. during the Y2k period) even when the likes of Infosys were building a strong foundation since early 1990s. Just to put things in perspective, IBM's revenues from IT-enabled services last year was US$ 38 bn, almost five times the size of the Indian software sector. We still have a long way to go and given our intellectual capabilities, one is positive in the long run.

Given this backdrop, it is just that we have failed to appreciate our progress and we keep complaining and comparing with other markets. Change never comes unless it is thrust upon someone. As Mr. Mahesh Vyas puts it "if we can work out a long term strategy, the growth prospects are great" Read interview.