Decisions, and their repercussions - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
Decisions, and their repercussions A  A  A

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17 FEBRUARY 2012


Very often the consequences of wrong decisions are observed years later, making it sometimes difficult to link the consequence back to the action. We also do not seem to adequately garner learnings from past mistakes.

Consider the recent Supreme Court judgement cancelling 122 telecom licences. Inasmuch as the judgement corrected an improper allocation of Government resources, viz. scarce spectrum, through an arbitrary process, it is to be hailed. But inasmuch as it cancelled 122 licences, probably including those not obtained in an out of turn manner (both the Birlas and Tatas are objecting to their babies being thrown out with the bathwater) there would be consequences.

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Telenor, of Norway (not Sweden, thank you readers), has, as a consequence of cancellation of its licenses, sought a separation from its partner Unitech, and a refund of the amount paid by it. In 2009, believing that the India telecom was like a juicy melon, it has paid Rs 6100 crores to acquire its majority stake in Uninor, but now finds itself to have bought a lemon. Interminable litigation is sure to ensue.

The Department of Telecom, called DoT not because of its size but because of the acronym, has decided, as a consequence of the judgement, to allocate future spectrum only through auction. This is unfortunate, and a lesson unlearnt. One only has to go down memory lane to learn that the auctioning of the first batch of telecom licences was found to be an unviable exercise. Because of the high prices paid in auctions, telcos (which are for profit organisations and not charities) had to levy call charges at Rs 16/minute, paid by both parties, effectively Rs 32/minute. This made mobile telephony exclusive and unaffordable.

The Government wisely shifted to allocating spectrum at affordable costs, treating it as 'commons', and taking a bite of the revenue. Lo and behold! Call charges dropped to as low as Rs 0.10/minute, payable only by the calling party, and mobile telephony became affordable to everyone. This, then, was a policy that led to inclusion!

Call charges will now go up by at least 30% and even higher when spectrum is next auctioned. The fisherfolk, dhobis, milkmen, small farmers and others who have benefitted from it, would be the ones to most feel the pinch.

Determining policy and the basis of allocation of Government resources is Government prerogative, not judicial prerogative and it is sad that, in order to correct one wrong, we are about to commit another.

The Government would also have to refund the licence fees it had collected for the 122 cancelled licences, widening the fiscal hole.

In order to fill this hole it is rushing through, before its year ends in March, some disinvestment programmes. It has agreed to sell 5% of Oil and Natural Gas Corporation Ltd. (ONGC), hoping to garner Rs 12,000 crores, by auctioning the shares on the stock market. ONGC's profits would have been far higher had it not been arm twisted by its majority owner, the Government, into providing crude oil to oil marketing companies at a significant discount, just so that the subsidy burden isn't reflected in the Budget, where it would widen the hole. The consequences of this decision (to foist part of the subsidy burden on ONGC) will be felt when the Government collects a far smaller amount than it could have, had ONGC not been saddled with the subsidy sharing burden.

The subsidy burden is also shared by another upstream company, Oil India, which, last week, declared a profit of Rs 1,013 after tax, for the Dec quarter. Its profits were impacted to the extent of Rs 1039 crores because of the burden of sharing subsidies! This is untenable.

The same, subsidy sharing burden foisted onto its companies, which also have private shareholders, has resulted in oil marketing companies (OMCs), which refine the crude oil and market the product, into loss making companies. Their balance sheets have been destroyed. Consumers, ultimately, pay the price through higher petrol/diesel prices. Petrol prices are expected to go UP Rs 3/litre after the UP elections.

Another balance sheet which has been destroyed is that of Air India, by the Civil Aviation Ministry compelling it to buy more aircraft, taking on a debt burden it could never hope to service. It was then forced to merge with Indian Airlines, in order to disguise the poor financial picture. The two airlines couldn't integrate, leading to organisational and human issues. The airline, once a proud Maharaja, is but a shadow of its former self. The consequence of the decision, taken years ago, to saddle Air India with an enormous debt burden, is now becoming manifest. Last week, it lost its monopoly on bilateral air traffic rights; all airlines can now use them.

It quite looks as though the Government has a sadiM touch (the opposite of Midas touch) and everything it touches turns from gold to lead. Having destroyed the balance sheets of the three OMCs and of Air India, and making a big dent in those of ONGC, Oil India Ltd. (OIL) and Gas Authority Of India Ltd. (GAIL), its now the turn of Coal India. Last week Coal India announced a whopping 54% jump in net profits to Rs 4038 crores.

However, the Government is now asking Coal India to assure coal supplies to large power plants coming up, for the next 20 years, through domestically produced and imported coal. By 2015 some 50,000 MW of capacity is likely to come up. Coal India would be penalised for failure to supply 80% of the committed supply, and rewarded for supplying over 90%. Now its own domestic production is curtailed by environmental issues and its financial performance is curtailed by having to set aside a quarter of its profits. Surety over supply of imported coal depends on the exporting countries. Some, like Indonesia and Australia, have recently imposed export tarrifs. Adani Power, which has committed to a fixed tariff for supply of power for 25 years, has found out the cost of this commitment.

State Bank Of India (SBI)'s results for the December quarter are encouraging, with net profit up from Rs 2810 crores to Rs 3263 crores. Its new management had taken a hit by providing for non performing loans in previous quarters, for which it had faced flak from Government. That, however, cleaned up its balance sheet and resulted in a good performance.

MCX, India's largest commodity exchange, which started trading only in 2003, is to make an IPO, offering 12.6% of its shares in a price band of Rs 860-1032. At the higher price, it would be valued at $1b., which is more than the valuation of the 130 plus year old Bombay Stock Exchange.

Last week the markets were enthused by the apparent conclusion of the Greek crisis, after its Parliament approved stiff austerity measures. Global markets rallied, as did Indian. The BSE-Sensex gained 540 points over the week to end at 18389 and the NSE-Nifty added 182 to close at 5564.

The Greek crisis is not over. The EU countries, especially Germany, want to have oversight, in order to ensure that Greece adheres to its commitments. (Its history suggests it never does). The austerity is going to shrink Greece's economy and repaying more debt would be impossible. The whole effort, as mentioned in last week's column, is to ensure that Greece is not declared a defaulter, thereby triggering off payments on CDS (credit default swaps). With 95% of CDS reportedly being held by American banks, the pressure on Greece to do things and avoid being called a defaulter. This is not a stable position.

Nor is the Iranian crisis over; it just moved to a higher plane. Last week Iran announced domestic capability to make nuclear fuel rods. The fear is that this may prompt Israel to take military action, in order to remove any nuclear bomb making capability. This would be a worse nightmare for global stock markets.

Getting lighter may not be a bad option.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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6 Responses to "Decisions, and their repercussions"
NVS
Feb 19, 2012
Normally I enjoy the comments in these pages as they are to the point and unbiased. However, licenses obtained by deceit, and arbitrary action of the executive have to be cancelled irrespective of consequences. Otherwise, we were hurtling towards a situation where MNCs and big money were leading us to become a banana republic with license to loot. In fact by laying down auction as a procedure greater transparency will result in govt processes. The argument that it will raise costs to consumer is incorrect as the buyers of spectrum now know what the market can bear and will not bid to stratospheric levels as happened in the early part of telecom story. Like 
Anil Kelkar
Feb 18, 2012
Having mobile telephony charges as low as Rs. 0.10/minute is not necessarily a good thing. The mobile towers apparently use subsidised diesel to the tune of several thousand crores. The disgraceful amount of yakking that goes on on the streets of India, whether walking or riding a motorised vehicle, is basically being subsidised by the taxpayer. A rate of about 50 paise or a rupee per minute would be more balanced - affordable enough so that people can get their messages across, but discouraging constant and pointless nattering on phones at the cost of everything else. Like 
MAHESH DAVE
Feb 18, 2012
At the outset,let me congratulate this popular st.from HIP.

a deep insight,takes me out,to derive this comment.

For time immemorial BIG, or SMALL ,whatever its magnitude be it,has time solved ,ex-route problem seen, solved itself SUCH mistakes occurred. YES,if not history repeats it self.

YOUR lucid thinking is nor creative nor constructive.....
why, ? its very simple......
without mistakes no progress or learning a better route/path to success.
quick or slow ,a decision has its repercussion....
a +ve or -ve it can be....
IM possible stays as i am possible,
So my dear,what can't be solved ? not at resolved yet;
has to be endured.
Like 
rajeev rai
Feb 18, 2012
very good guideline Like 
Om Prakash Sharma
Feb 18, 2012
Suggest to Govt and it will do the opposite as is happening world over. But some how Nature brings about the balance. The powerful will eat the cake,poor not even the bread Like 
SSN Raju
Feb 18, 2012
I think in case of spectrum the government should make a policy decision and fix the upper limit for the call charges and then go for bidding so that players will do their home work before bidding.

Like 
  
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