The new patriots: Plug the trust deficit - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
The new patriots: Plug the trust deficit A  A  A
24 JUNE 2013

Recently a host of financial institutions are suddenly turning patriotic.

Typically such acts of patriotism are reserved for August 15, Independence Day, or for October 2, the birth day of the Mahatma. Sometimes, the PSU banks will waste public money to celebrate the day that Mrs Indira Gandhi was born or mourn the national loss the day she was killed. Images of Rajiv Gandhi could also make their way into some PSU bank advertisements as a sign of patriotism.

But June is an unusual month to show patriotism from some usual - and unusual - suspects.

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Gold hatao, desh bacha

Press reports suggest that the PSU banks? - whose majority shareholder is the Government of India - have stopped selling gold coins. This gold hatao, desh bachao (remove gold, save the country) program was apparently at the behest of the Finance Minister. Frustrated at the continuous import of gold which is swelling India's reliance on foreign capital flow, the Finance Minister had a choice:

  1. Send the Income Tax officers after politicians, bureaucrats, and businessmen who are known to have black money, get them to pay taxes, plug the fiscal deficit, win the faith of the people (and maybe win an election), and watch natural market forces bring billions of rupees into the stock markets to invest in a more ethical India; OR,

  2. Nudge the banks to stop selling gold.
Well, you guessed it: they went for Easy Option 2.

No one has time to treat the symptom in this 24/7 world. Our instincts urge us to reach for the fly swatter and whack out a quick-fix solution.

So, as per press reports, Canara Bank, State Bank of India, HDFC Bank, ICICI Bank, and Reliance Capital all decided to stop selling gold "once their existing stock runs out".

Is it possible that some firms may have done this to please the RBI and the Ministry of Finance with a view to further their case of getting a banking license? Others may have done this to offset all the bad stuff they have done and get back in the good books of the regulators and the Ministry of Finance.

But do these entities really expect us to believe they are true patriots?

Loyal to themselves

If these financial firms are truly patriots and love the country so much, here are a few suggestions:
  1. PSU Banks: publish a list of loans given by them based on factors "other than merit". Sahara had sent 127 trucks to SEBI with documents related to its problem. Collectively, the Public Sector Undertaking banks will probably have more cartons than Sahara, so they will need more trucks. Not only will such an act boost the demand for Telco trucks and kick-start the economy, but the "animal spirit" so unleashed from honesty and transparency will bring billions of rupees lying "wasted" in gold and real estate back into stock markets;

  2. Private Banks: maybe true patriotism will come to the forefront when their employees are less willing to convert black money to white money. If the banks were to give the names of those with black money to the Income Tax officials, not only will the tax base increase and the fiscal deficit see a reduction, but the wealth managers of the private sector banks will actually have time to look after clients with white money. Having said that, the wealth managers - inspired by this disease of patriotism - should take better care of clients and not push high-priced structured products, bad mutual funds, and high cost insurance "solutions". In fact, since these private sector banks are in such a patriotic mood, maybe they should refund all the money made from selling suspect products to unsuspecting people. And the branch managers, sales people, senior executives, and CEOs can refund a chunk of their bonuses to cover for some of these refunds. This act of apology may decimate the wealth of the CEOs, but it will put the savings back into the hands of your clients. With a renewal of confidence and revived trust, these clients will be ready to invest in stock markets and mutual funds again. (Pssst: please don't ignore the Quantum Long Term Equity Fund, just because we refused to be a part of the opaque commission regime);

  3. Reliance Capital gave an elaborate statement on how they will help with "the cause" of reducing India's Current Account, is this part of the same group that did the Reliance Power IPO? The IPO that was priced at Rs 430 per share for retail investors and raised Rs 11,000 crore from investors. Even after adjusting for the very generous 3:5 bonus offer, the effective IPO price for retail investors was brought down to Rs 269. Note that the bonus did not result in investors getting their money back, the just got more shares for the money invested. With the current price hovering at Rs 64, that is a wipe out of Rs 8,900 crore more than 5 years after the IPO. The book running lead managers to this "hot" issue, as per the Draft Herring Prospectus, were Kotak, UBS, ABN Amro, Deutsche Bank, Enam, ICICI, J M Financial, J P Morgan. The co-book running lead managers were Macquarie and SBI Capital Markets. To top it all CRISL and ICRA both rated the IPO as a Grade 4 (out of 5) and both cited "above average fundamentals". One of the lead managers was stated to have said that the price, on listing, could be "4 digits" suggesting that Rs 1,000 was a possibility. So, rather than stopping the sale of gold, maybe all these entities - and many more not in the list above - should stop the selling of bad paper? And, to further their patriotic passions, why not send everyone back a cheque to cover their initial investment - even without the interest?
You may stop selling it, but why would people stop buying it?

There is a reason why people are buying gold - and will continue to do so, even after the government stops selling it.

People do not buy gold because they like the glittering metal to take up space in their cupboards. People are buying gold because not only do they love their country, they also love their families - and want to ensure their savings are not wiped out.

Since January 2008, the price of gold has surged (per annum, each year) by 19.76% in Turkish Lira, by 17.95% in South African Rand, by 17.46% in Indian Rupee, and 9.86% in US Dollars. The Indian stock markets - and most global stock markets - have given no returns. The rise of gold is a global phenomenon, caused by a host of factors but mainly centred on the inability of governments to control the greed in the financial sector and make it safer for investors to participate in the financial markets. With central banks in the US and Europe busy rescuing the financial firms and restoring the bonuses of these "fat cats" to pre-Lehman levels, gold has been a decent place to be.

Graph 1: Gold does well in local currencies of Turkey, South Africa, and India since Jan 2008
Source: Bloomberg

The culprit for the bloated savings account is not the import of gold. The culprit is the failure of the regulators to punish and eliminate the financial firms that have pocketed the savings of the individuals. Rather than banning the entry of such individuals to their offices, these financial firms still have access to the highest levels of government. And yes, on retirement, these individuals from the government get advisory jobs at many of these financial firms.

Neither the Ministry of Finance nor the regulators publicly acknowledge that investors were duped and mis-sold financial products. To correct a problem you first need to state the problem.

Given this cuddly-fiddly relationship between the financial services industry, the regulators, and the policy makers, individuals - worldwide - have invested in gold.

And the firms that acted as the spoilers of our habit to invest in stock markets are now showing signs of patriotism by not willing to sell gold to their clients? What a joke!

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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.

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12 Responses to "The new patriots: Plug the trust deficit"

Dr Anil k Kothari

Aug 10, 2013

Recently with Mr Padamnabhan Deputy Governer of RBI i suggest a gold saving scheme to him because we indians love gold. The scheme is just like saving account. For example if a person wants to invest in KG of gold to be delivered in future/spot buy . PSU bank say like SBI can ask this person to deposit the spot price of 1 kg gold say RS 25,00,000. SBI in turn can hedge the gold in international market by paying 5% upfront margin and can buy 20% of actual gold. Now they are left with 18,75,000 which can be invested in Govt securities at 8%. The investor can be paid 2% on his gold. All purchaser will not come on same day and demand the gold and even if one comes the spot20% gold will be available to be deliver. The scheme can have denomination of 250gms 500 gms and so on. This one step will increase the profitability of Banks rdsuce gold imports and reduce CAD and fiscal deficit. The scheme can also ask investors to deposit their existing holding of Gold and pay a interest of 4-5% because it will reduce the cost of buying of the gold by banks and they will be able to earn a NIM of 3%.


Dr Rajeev Kapur

Jul 5, 2013

You are saying the Truth but who will listen to this in the cacophony of corrupt and sectarian politics ? A Hindi saying "is nakkarkhane mein tooti ki aawaz kahan sunai degi" aptly applies here. There are many who agree with you but reamain silent and watch the politician loot national resources. A recent news paper article showed the increase in gold holdings of the politicians over the years with 20 Kg being the highest held by a famous politician!

Nehru persuaded Indians to give up gold in 1962 when it lost heavily to Chinese intruders making an emotional appeal. Can FM connect to Indian masses in the sme way? Is he capable of shedding the image of an arrogant politician? If he does, people may suspend buying gold for some time and help tide over CAD crisis. If he fails, he will be popular with the gold smugglers for his unwise policies - increasing customs duty etc on gold.


Pinakin Mamtora

Jul 4, 2013

frank, fearless & forthright...truth & nothing but the truth...wish all his suggestions are implemented someday...then, India will be a real super power



Jun 27, 2013

In Democratic system there are ONLY two class of people, one ordinary and other extra-ordinary. Exploitation of ordinary by this special class is pervasive through out the system, political or economic.

It feels nice when someone speaks your language, in fact articles like these help you maintain sanity.

Hope establishment is listening!

Like (1)

Dinesh jain

Jun 27, 2013

Ajit Sir,in his true form as was Sikhar Dhawan in champion trophy

Like (1)

Nozer Damania

Jun 26, 2013

A must read for the Finance Minister

Like (1)


Jun 26, 2013

Mr. Ajit, you are doing a great job of showing everyone a mirror. More and more people should write about the rot in our system. Please continue doing the good job because you are the voice of millions of indians.

Like (1)


Jun 26, 2013

Thank You very much sir, for taking initiative and expressing the root cause on "why resident Indians are not investing in indian stock market".

The Honesty and legitimate business will survive at the end. No one would like to invest and see dropping of stock price by 50% due to some investigation and again coming into normal by no reason. It is just gambling.

If government focuses on corruption both on politicians and businesses, automatically economy will increase by tenfold, there might be little impact in a short term.

Instead of burdening common man with more taxes, withholding tax refunds and by providing concessions to FII, they should concentrate more on generating local employment, local consumption with long-term vision. It is very much necessary for these Stanford, MIT and Oxford graduates to use their commonsense instead of their theoretical knowledge.

if they catch top 100 big corrupt people and punish them severely, everyone will come to normal. There is no need to behind every tom and harry.

Like (1)


Jun 26, 2013

I am an investor who desisted from investing in Rpower IPO,and several of my friends. I was an odd man then ! Such was the mania all over India.To be precise, Nobody dared to speak against ! For the success of the IPO, other ADAG stock prices were rigged and soon after the IPO, market crashed. A well knit drama ! I personally valued the stock for Rs 80 and that too for the Great Ambani fame.Now it is turning to be a buy and no Fund manager recommends it !Thank you for your 'memory' since many of fund managers will not make/allow you 'remember' their follies/frauds.

Like (1)


Jun 25, 2013

Look forward each week to the Honest Truth. Thanks for the insights!

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