Votes of confidence - The Honest Truth By Ajit Dayal
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25 JULY 2008

So, July 22nd has come and gone.
The United Progressive Alliance got through a "vote of confidence" motion.
Just about. It has not "gone".

The media keeps on writing that the majority was "better than expected".
"Better than expected" is not saying much in our view.
And now there are expectations that the recent win will allow the UPA to push through the unfinished agenda of reforms.
For example, there is talk that foreign ownership in insurance companies will be increased from 26% to 49%.

We have never understood what the advantage is to allow foreign companies to own any share in any insurance company.
They don't have any special technology that we know of. Many of these insurance companies went bust in the 2000 and 2001 period. They did not price risk correctly. And they made excessive investment in stock markets. The 9/11 terrorist attacks and the subsequent meltdown in global equity markets strained their balance sheets to the hilt.
So why should the allowance of a 49% equity investment in an Indian insurance venture be of benefit to India remains a mystery to me. And I am not sure why this is an indicator of "reform"?

But it could be an indicator of India's willingness to take another bad foreign practice and dump it on our investors here. Just as we have imported the terrible practice of dumping high-expense, heavy-on-distribution-costs mutual funds to the innocent lambs flocking to the stock markets.

Or the ease with which we have let the Participatory Notes flood into India only to witness how short term hedge fund money distorted the stock markets on the way up - and now on the way down.

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Yet another good example of "reform", I guess.
Dump another global disease onto a gullible Indian public.

Or take the foreign ownership of Indian banks. It was to be reviewed in April 2009. Now there is talk that this "reform" will be pushed through by the UPA. Wonderful idea, isn't it? Read the news from the US, folks, you could soon have all those illegal and aggressive lending practices right here at home.
Made in USA. Imported into India.

Left alone.
But please don't brand my thoughts as "leftist". I have little sympathy for a group that seems to be stuck in some time warp and still follows dictats that comrades in China and Russia laid out 50 years ago.

Oh, no: I am all for "reform".
But of the real, cleansing kind. Not the superficial foreign ownership kind.

If the UPA - or any government - really wants to "reform" the way insurance companies and banks are run, they need to let these banks and insurance companies compete with the private sector on an equal footing. On salaries, pricing of products, or introduction of new products.

Over the last decade, successive governments have drained the PSUs and made them poor - and enriched the private sector.
State Bank of India - if left to market forces - would never have surrendered so much ground to the competitive pressures from an HDFC Bank and an ICICI Bank.

LIC and GIC - if left to market forces - would never have given so much ground to the new breed of insurance companies.

And ONGC, OIL, GAIL, BPCL, HPCL could have had a crack to build what Reliance and Essar have built.

Instead, these companies have seen management talent drained, potential profits thrown away for the private sector to reap, and lost their competitive edge.
Bad policy and lack of real "reform" brought them to this situation, not lack of changes in laws of "foreign ownership".
The PSU bloc has been left out of the "reform" process.
It is time to get them back in.

Voting machine weighs in.
The stock market, they say, is a voting machine.
Well, an interesting point: through the price movements of various shares, the market has voted on who is likely to win because of the new political alignments.

On July 23rd, the day after the UPA's "better than expected" victory, the BSE-30 Index gained 5.94% and the NSE 50 Index gained 5.58%.

The Anil Ambani companies were the clear winners: 100% of the 6 companies profiled by www.equitymaster.com did better than the BSE-30 Index and the NSE 50 Index.

The Tata group came in next with a 35% winning vote.

Mukesh Ambani tallied a 33% winning vote.

The UPA, in contrast, came in with a 51% winning vote.

Table 1: The market has its own voting mechanism.
Group Number of
companies
Did better than
the BSE-30 Index
Did worse than
the BSE-30 Index
Win %
Anil Ambani 6 6 0 100%
Mukesh Ambani 3 1 2 33%
Ratan Tata 17 6 11 35%
Votes, total* Yes No Win %
UPA 275 256 51%
Source: www.equitymaster.com *Includes 10 abstentions;

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Table 2: The details of the group-wise voting.
Mukesh Ambani
Scrip NSE Price (Rs)
S&P Cnx Nifty 4,476.80 (5.58%)
Rel Petro 170.90 (6.95%)
Reliance 2,267.30 (5.35%)
Rel.Indus.Infras 835.95 (5.01%)
Anil Ambani
Adlabs Films 518.65 (-1.12%)
Rel Natural Resource 96.15 (-2.68%)
Rel. Infra 985.70 (-4.21%)
Reliance Capital 1,312.80 (-5.12%)
Reliance Comm 503.55 (0.35%)
Reliance Power 170.45 (-3.15%)
Tata
Avaya Global Connect 138.05 (-3.97%)
Honeywell Auto. 1,245.00 (1.07%)
Ind Hotel 84.30 (1.02%)
Infomedia India 137.00 (-2.25%)
Tata Chem 303.60 (-1.17%)
Tata Coffee 207.55 (-0.36%)
Tata Comm. 434.10 (-5.84%)
Tata Elxsi 173.80 (0.64%)
Tata Finance 39.50 (-1.13%)
Tata Motors 426.35 (-3.18%)
Tata Power 1,036.00 (-1.12%)
Tata Sponge 225.80 (-1.93%)
Tata Steel 630.85 (-0.01%)
Tata Tea 768.00 (0.04%)
Tata Teleserv (Mah) 25.10 (-1.18%)
Tcs 794.05 (-1.06%)
Titan Ind. 1,107.00 (0.90%)
Trent Ltd 475.00 (-3.18%)
Voltas 129.00 (0.12%)
Nse Prices: July 23, 2008

Our investment view has not changed.
While the markets vote and the elected representatives vote, we still maintain the need for individual investors to buy low cost, simple investment products for the long term.

And if the "reforms" on foreign ownership of insurance companies and the banks do progress - hang on to your wallet. The distribution channels will be ready to pounce on you.

Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you should own it: An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 15% 5%

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Note: Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.


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