Waiting in line - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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18 DECEMBER 2008

When the dead die, they leave behind grief.
But, for some, they leave behind an opportunity to make money.
To clear the bodies of the victims of the recent terrorist attacks in Bombay, the grief-stricken families had to pay bribes.

Death is a good business.
And so is a fading economy.

As economic activity slows – and in some cases collapses – jobs are lost, incomes are shrunk. There are people suffering. The governments step in to find out how they can help. The middlemen are there: waiting in line. Each with their arguments for why they should be given a hand out. Why they should be protected.

So the banks that blew up the financial world are given government hand outs to stay afloat. And yet they still pay millions as bonuses and salaries to mostly useless people.

Why? Because, the argument goes, you need smart people to get the banks out of the mess they are in.

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Ironically, it was those same smart people who got the banks and financial companies into this mess!
So, were these smart people paid millions for their dumbness?

But the show must go on. As the RBS ad claims: once in a while a player appears who raises the level of the game. Sachin Tendulkar did save Indian cricket and he may be one of the catalysts for the change of mood in South Bombay.
The big banks did change the level of their games for sure, with not-so-masterful strokes. RBS and Citibank and many others are now all PSU Banks – like our very own State Bank of India.

They are all in queue living off tax payer money. If there is “truth in advertising” now is a good time to demonstrate it. At the bottom of their ads they should have a sign: your tax payer money paid for this campaign.

GM, Ford, and Chrysler also want to be in the tax payer’s rescue package.

Not to be left out the plumbers and general contractors in USA also applied for the free government bail out money. Their logic: the decline in property activity in USA will make them all go bust. Someone needs to maintain the homes that no one is buying. So, if the plumbers and contractors go bust – who will maintain those unsold homes? If a portion of the money being handed out to everyone else came to the plumbers, at least those unsold holes won’t have a leak and mess up the neighbourhood!

India is certainly coupled
I have long argued that the Indian economy is not that closely linked to the US economy as compared to China or Mexico. So, India will be a safer place to invest from an economic perspective. That argument was shattered by the plummeting share prices of Indian companies. To add insult to injury, Indian companies are all looking for hand outs. Just like their counterparts in the US. All funded by tax payers, of course.

So mutual funds are rescued from bad investment decisions; banks are saved by money being piled on them; companies are back again to asking for the usual export breaks and subsidised interest costs.

No one has asked any of these people standing in the queue for tax payer money to take a salary cut. Or to forgo their stock option packages. Or surrender their past stock option gains.

Every government is so eager to help – millions of jobs will be lost, you see – that no one is pointing out the obvious: tough luck Mr. CEO, you made the wrong choice so now walk out of here and we will run the show.

The real problem is that there is no one else to run the show.
Or, if they do exist, they cannot be identified quickly.
So, the CEO stays.
And he gets a higher salary because now he has a tougher job – to get the company out of the mess that he got it into, when he was paid handsomely!

A capital idea
And how can members of the broking community be left out of the clamour for a rescue package? Since their revenues are a function of trading volume, they would like to see that grow as much as possible. This fits in nicely with the thought process that markets are gods unto themselves and liquidity is the sacred chant. The P Note folks from the gambling lands have disappointed since they have not come in to buy shares as yet. In fact, their selling is depressing local share prices so much that people are scared to buy! So, based on a report in Business Standard, here is the solution:

Faced with increased volatility and dwindling volumes on bourses, stock brokers are suggesting suspension of the Securities Transaction Tax (STT) the collection for which has shrunk by more than 15 per cent during the first eight months of the current financial year.

"The government should at least suspend securities transaction tax for a year. This will encourage market participants to take their position aggressively. The sentiment of the market will improve as the volume will increase," (a broker) said.

The STT, levied on share transactions at 0.125 per cent of the total value, declined to Rs 4,156 crore during April-November 2008, down 15.42 per cent during the corresponding period last year, mainly on account of reduced capitalisation in the India securities market.

Indian stock markets have suffered immensely on account of withdrawal of funds by the Foreign Institutional Investors (FIIs) with Bombay Stock Exchange benchmark Sensex declining from a high of over 21,000 to less than 8,000 points.

The turmoil in the market had an adverse impact on the turnover from the national stock exchange. It reduced to Rs 1,73,123 crore in November from Rs 4,47,138 crore in January, when the market was at its peak.

The total equity turnover from the Bombay Stock Exchange also declined to Rs 63,571.11 crore in November from Rs 1,85,622.78 crore in January. "Removal of securities transaction tax will be a very good option but even if the government goes back to the earlier position (when it was used for tax deduction rather than as expense at the current level), it will be a big boost to the market," (a broker) said.

So, there it is. Reduce the STT, spur volumes, and save the brokers.

Uh, while we are at it, may I also stand in queue?
Can the government ensure that the prices of the shares held by the Quantum
Long Term Equity Fund move back to their peak level of January, 2008?
The decline in the NAV, you see, has hurt the value of my investment. A higher NAV would really work well for me – and for all the other investors in the Fund.

We are all adults.
We are all working in businesses.
We are all investors.
When we will learn that we must live with our decisions – for good or for bad.

But this gold-plated capitalism model that the world has followed stinks of a “heads I win, tails the tax payer loses” syndrome.
Seeking handouts is not what business barons, glorified by the media, do.
Seeking handouts is what the robber barons do.

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 (New)** 46% 12% 42%
Suggested allocation (old) 80% 15% 5%
** Assumes 2 years of expenses are kept in safe places like liquid funds.

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: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt Ltd and Quantum Asset Management Company Pvt Ltd.. 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.

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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