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Every once in a while, there is a legislation that comes out which can fundamentally change the landscape for investors in the growing Indian stock markets. And sometimes it creeps in silently, with little fanfare.
And then there is SEBI in its present version 2.0 which ensures that the rules written by the SEBI of the 1990's are being followed. SEBI oversees what the exchanges - and other market participants - do.
Keeping in mind that a previous committee, the Kania Committee in 2002, had suggested that stock exchanges should be listed, the Jalan Committee - created in the backdrop of the financial crises which hit the world (and India) just 26 months ago - recommends that:
The reaction to this recommendation has been violent.
Dr. Ashok Desai, a respected economist and ex-Ministry of Finance, was asked by ET Now to give this report a score on a scale of 1 to 10. He gave it a minus 10 and said, "too many restrictions will not get any entrepreneurs but rogues in this business. With Jalan's formula only rogues will get into the exchange business."
Pradip Shah, Chairman of the Capital Market Committee of the Indian Merchants Chamber said, "Committee has gone by the universal truth that individuals can do wrong and assumed they will. Society at large is right to expect that Policymakers to assume that most people do the right thing and devise policies to correct the wrong doing, rather than assume that people will do the wrong thing and devise policies accordingly."
And there are others...but the point is that the free-market capitalists as represented by IMC, Assocham, the private equity funds (who are investors in these exchanges and are hoping for an IPO), and every free-profit individual out there is up in arms. India is regressing, they rage.
This is license raj.
This will lead to inefficiencies.
Only rogues will enter this business.
But maybe the rogues are already in the business?
And the Jalan Report is trying to weed them out.
How many of you believe that "individuals in the field of finance can do no wrong"?
Yes, just a few hands up there.
And how many of you believe that "individuals in the field of finance are out to get you one way or another"?
Yes, I see many hands up there raised in agreement.
Universal truth: we steal your wallet!
Yes, it is a universal truth - the people in finance are generally out to get you.
And laws must be written around this universal truth!
Goldman Sachs has been described by many as a mafia, as a scorpion with tentacles that is out to suck every cent in your pocket. Goldman attracts the most criticism because it is the face of the money machines that dominate US policy making.
That culture of Wall Street firms has found its way to India.
India has "liberalised". Radia is a lobbyist and rather than banning "lobbying" we want to find ways to legalise it! The Political Action Committees (PAC) in USA are legal pools of money that back governments and bureaucrats to make a few people rich at the cost of many.
But, first, the negative connotation to being called a "public good".
There is this media campaign that "public sector" is a failure and "private sector" is successful. "Liberalisation" is equated as giving more control to the private sector and "for-unlimited-profit" motives are chanted as the Holy Grail to India's development.
I question that.
Enron was a private sector firm, and it went bust.
So was WorldCom.
All the NASDAQ bubble companies were private sector and went bust.
And, yes, all those financial geniuses who blew up the world (Bear Stearns, Citi, Goldman, Lehman, Morgan Stanley to name a few) were all private sector.
Closer to home we had Satyam and Global Trust Bank - and many others who still exist out there who are "successful". But one day these emperors will have no clothes and be bared for what they are.
Did I hear you say "telecom in India was successful after it was privatised"?
MTNL was being built as a great company and the DoT under Sam Pitroda had built local exchanges that challenged the multinationals like Siemens and Alcatel. Sukh Ram, the telecom minister, was found with a sack full of cash in his house in
1996 - no one knows why he got the cash.
But I note that private sector telecom took off after that.
IPCL was a good company and then sold off to Reliance.
Maruti was a PSU and then a majority given to Suzuki.
BHEL still fights the multinationals and builds great power equipment.
At the time of the financial crisis where did you place your money: in State Bank of India or in ICICI Bank?
There is nothing to suggest that the PSUs are bad.
There is a lot to suggest that PSUs with political influence can be disasters.
No doubt about that.
Like an Air India.
And there is a lot to suggest that the telecom industry has grown because a few private people knew how to get spectrum allocated. A "public" connection was used to make a "private" profit.
And sure, the private airlines have given us more flights and sweeter smiles.
But note that the government bailed them out when oil prices were surging and the world was collapsing in 2008 and now these airlines don't want to listen to your complaints about high air fares. After all, they are not a public good. They are private sector: come running to the government when you need help and get back to maximising profit when times are good.
Just like the mutual fund houses who went to the RBI for a Rs. 20,000 crore bail out after Lehman went bust but allowed all their CEOs to keep their bonuses from selling you FMP's.
Unlike Deepak Parekh, I don't believe that the established industrial houses are necessarily more honest than the "new age" ones.
And unlike many in the financial services industry, I don't believe that we as a community should be given a free hand to do what we want. Imagine the power we would have if we had a third, free hand to pick your pocket!
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The profits of power companies are regulated
In addition to the fact that monopoly does not mean PSU, does not mean bad service, there is the other aspect of providing a public good: how much money can you make?
And who will buy shares of a regulated entity, the existing investors ask.
So, Tata Power is a regulated entity and it cannot earn more than 15.5% RoE on the regulated businesses plus some efficiency returns and the bidding for the Ultra Mega Power Plants was on the basis of the lowest cost bidder winning the mandate - so, presumably, the lowest profit target won the mandate.
Yet we buy the stock.
We also buy telecom stocks in the market knowing fully well that the regulator can change tariff rates if they feel that profits are too high.
So, what is so odd about the stock exchange having regulated profits? Linked to some kind of average to corporate India, or to a risk-free rate of a government bond?
Aha, the problem is that there are many financial investors and PE funds that had made investments in stock exchanges with a view that they will list.
And, on listing, they will make a great profit if they could sell a business with unregulated profits.
But now there is no listing at least for the next 5 years.
And a great profit from a listing would have meant a great personal bonus.
The Jalan Report has threatened that.
And the rogues are upset that now there is no listing.
But you promised we could list these exchanges, they scream.
Tough luck: we all make investments and tax rates may change, the environment changes, these are some of the risks we take.
When we launched Quantum Mutual Funds, we assumed that the distribution channels would work for investors and introduce our disciplined research and investment process to their clients.
What a wrong assumption!
Yes, those who are "stuck" as existing shareholders can sell their investment to a State Bank of India and to any other non-rogue who will buy them for the 100 years of guaranteed profits such a monopoly can generate.
I will buy it - even if it is never listed. And maybe readers of the Honest Truth would like to buy it, too.
Let's discuss the price.
And Jalan is not saying "no listing forever" - all he is saying is let's review this in five years.
But 5 years is a lifetime for a quarterly-oriented financial investor.
Though 5 years is but the blink of an eye for an economy trying to build a capital market to support India's funding needs for the next twenty years.
But people with a long term view are in short supply; the rogues are in abundant supply. The rogues and mafia are pitching big time in the very buyable Indian media space with guest columns and interviews (don't forget the role of the journalists in the Radia tapes as they supposedly look for their scoops!)
So, please send in your email to SEBI
The focus on profit maximisation and the power of the financial firms is what caused the great bust in 2008.
The bust is not over - it has been swept under the carpet by a flood of money from Helicopter Ben.
The financial firms have been bailed out by their friends in the US governments.
The SEC was sleeping on the job for much of this past decade.
The Fed is lulling the US public into a dream world of a recovery.
But India was lucky to have the RBI and SEBI - the RBI under Dr Reddy refused to surrender India as the playground for the great financial jugglery. Unlike the local politician who signs away a community garden plot to a real estate developer for a private profit motive, Dr. Reddy told the derivative geniuses to stay out.
With reference to the Jalan report, Mr. Bhave, SEBI Chairman, has said, "Profit maximisation for market infrastructure institutions will not be encouraged. Proper mechanisms need to be put in place to discourage profit maximisation."
As the Jalan report concludes, "The stock market is evolving and a review (after 5 years) may be inevitable in the light of new technological developments....it would be desirable to keep a close watch on the working of the MII so that gains from the well-tuned markets results in the growth of the real economy and maintenance of financial stability."
So, email your views to RajeshKD@sebi.gov.in by December 31, 2010.
This is the email I plan to send in the suggested format, along with this Honest Truth:
And to prove that this rogue has no bias against any particular financial intermediary, I wish that SEBI appoints a committee to review the workings of the entire financial services sector and put in place a cap on salaries and bonuses that get paid to all of us in this "business". After all, it is time that those in the financial services industry really began focusing on the public good rather than our private pockets.
Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)