Small is dutiful - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
Small is dutiful A  A  A

PRINTER FRIENDLY | ARCHIVES
20 MARCH 2010


Individual investors get a raw deal, primarily because they are not aggregated. Government rules and regulatations militate against their interest and, being dutiful, they are easiest to regulate.

For the year 2007-8, the latest for which figures are available on www.rbi.org, total savings were Rs 17.8 lac crores, of which households contributed 65%, private corporate sector 23% and public sector 12%. Of the household savings, 48% were in financial assets and the rest in physical assets. Now financial assets comprise primarily deposits in banks. A column in the Mint of March 17 points out how interest on savings bank accounts (a paltry 3.5%, resulting in negative returns after inflation) are calculated. Banks give interest on the minimum balance during the month. So if you open an account on, say, March 2, you would have zero balance on Mar 1, and hence get no interest, giving the bank free use of money for 29 days. Small is dutiful!

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Ms K J Udeshi of RBI is about to thankfully change this. Kudos to her! A good chunk of the savings of people invested in bank deposits is mandatorily directed to Government, through CRR (interest free to Government) and SLR. Government, in turn, uses a good bit of this for payment of subsidies which, as per newspaper reports, are mostly eaten by corrupt intermediaries. Part of this appropriated saving goes into Government companies whose value the Government is destroying. The ones that do make profit generate savings contributing only 12% to the total pool of savings.

There are several ways to improve upon this. One is to allow PSU management more freedom to operate. This was the thought behind labelling a few of them as 'navratnas', or nine jewels. After so labelling them, the Government continues interfering (e.g. by dictating prices of petro products, for the oil marketing companies, or by delaying the tendering process, and thus the growth, of BSNL) thus nullifying its good intentions. Another way is to privatise them and allow private shareholders to push management to bring in more efficiency. This runs into political noise; the latest is Railway Minister Mamta Banerjee, who refuses to allow railway companies (some of which are excellent) to be privatised.

"Railways is one of the sectors in which India was previously more advanced than China. In early 1980s, China lagged behind India in both total length and length of electrified routes. But faster expansion in China has turned it around. By 1996, China led India in total length and by 2001 in electrified routes," a study by IIFL, institutional equities division of India Infoline, stated. Ms Banerjee would thus rather allow slower economic growth, and more inconvenience to passengers, than raise required funds from private investors.

About 7% of household savings go into equity. Here, too, the dice is loaded against small investors. Hitherto, in the new issue, or IPO, market, whilst the small investors had to often pay 100% of the application money upfront, at the time of applying for an issue, the QIBs (Qualified Institutional Buyers, the big guys) need pay nothing! This afforded them the luxury of over-applying for stocks, thereby giving a false picture of demand to the individual investors and to the company. Small is dutiful!

This, too, is set to thankfully change with SEBI cleaning up the mess in the animal farm and requiring QIBs to pay the entire amount upfront. Kudos to SEBI!

Part of the financial asset savings are routed through mutual funds. These are sold on the premise that the fund manager is better able, both skillwise and resourcewise, than individual investors, to assess the market and take buying/selling decisions. Fair enough; he is. Yet the selling decision is left to the investor not to the fund manager! Mutual funds assume that it is the investor who would take the asset allocation decision and, were he to wish to exit, would sell the fund units. Investors in mutual funds who assume that the fund manager would ensure that they would get out of stocks in time, are harbouring a false assumption. And even when investors do sell, putting in the redemption request before the start of a trading day, they are given the NAV at the end of the day. Investors thus have to bear the price risk for a day! Why should this be so, if the fund manager is portrayed as, and accepted as, a superior investor? Small is dutiful!

SEBI is now asking mutual fund managers to be more proactive in matters of poor corporate governance. This is unlikely to happen. Mutual funds vote with their feet, preferring to exit a stock where corporate governance has become suspect, rather than stick around and try to improve it. This, alas, is globally true. Chris Hohn, a fund manager who contributes a fixed % of his income to The Children's Investment Fund, run as a non profit fund for the welfare of children, is an activist fund manager. He, however, couldn't change governance at US Steel, and has tired of being an activist, more's the pity.

So, whether small investor savings are channelized into bank deposits, and thence partly to Government, which misutilises them, or whether they are channelized to mutual funds, which do not take the onus of exiting prior to a crash, which their avowed better abilities ought to make them better equipped for, the individual investor is in a rather position.

In corporate news of interest, RIL's $2b bid to acquire majority control of Canadian tar sands player Value Creation, lost out to a bid by BP. As a major gas producer in India, it may like to look at UK based Compact GTL, which is building, for Brazilian energy major Petrobras, a pilot plant to convert gas, which is flared, into usable oil!. If it works, not only would it help convert gas to oil, it would significantly reduce carbon emissions.

In telecom, most of the large foreign players refrained from bidding for 3G licences in the auction. The auctioning has been delayed far too long, with 4G technology around the corner. 4G makes better use of spectrum and has much faster downloads.

The RBI has raised both repo and reverse repo rates by 25 basis points, taking solace from the 16.7% increase in Jan IIP, indicating sustained industrial activity following a 17.6% rise in Dec, and mindful of the 9.8% rise in inflation. Home loan rates are also likely to be raised. Corporate tax collections are up 20% but less than the growth estimated by the Government, which would compel it to reduce expenditure or widen the deficit. Not good news.

The global crisis is not yet over, so one can expect shocks, with markets reacting to each one. The India growth story remains good, albeit it could be much better with better governance. The BSE-Sensex gained 411 points last week, to end at 17578. The main contributors to the 411 point rise was RIL, with 147, followed by Infosys with 65. The NSE-Nifty gained 133 to end at 5262.

We are approaching the sensex level, around 17,700, from whence the sensex dipped. It can be expected to dip again. President Obama is not ruling out military force to take out Iran's nuclear reactors, which would trigger a nervous reaction. There are news analysis indicating some big US banks may be shaky, and any such disclosure would again lead to a nervous sell off. It may not be a bad idea to lighten up.

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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8 Responses to "Small is dutiful"
r j
Mar 24, 2010
I applaud the good work Mr Mulraj is doing, I feel that the courage aspect is something that should be a part of any free country that claims to be democratic, like India.
Like 
Lakshman Pardhanani
Mar 21, 2010
Mr. Mulraj,
The edition of 14th March appears to have been blanked out for some reason that I cannot understand.
When I call up that report listed in the Google summary I get the edition dated 20th March. I am disappopinted as I took the trouble of making two comments on that edition of 14th March. Or were they considered too hot for continuing reproduction??
Please rectify,
Regards,
Like 
Viraf J. Panthaky
Mar 21, 2010
In the 2nd para I think you are making a mistake in the calculationof savings bank a/c interest. interest is paid on the 'minimum clear balance in an a/c between the 10th and last day of the month', and not as stated by you Like 
vibhav shah
Mar 21, 2010
i want to add to your observation about paltry interest on minimum balance in saving bank account that the real misguiding by the private sector banks ,asking AQB rs.5000/- or so ,(very high compared to public sector banks ,)calculating on daily product (and creating impression on client that the same principle would be for interest calculation) and giving interest only on balance maintain bet. 10th to last day of month!thanks to RBI that from 1st april,'10, it is mandatory for them to pay interest on daily product basis.
vibhav
Like 
M.Balachandran
Mar 20, 2010
Jawahir,

You say:

"So if you open an account on, say, March 2, you would have zero balance on Mar 1, and hence get no interest, giving the bank free use of money for 29 days. Small is dutiful! "

This is incorrect. The minimum balance between the 10th and the end of the month is what is taken into account. Moreover, soon banks will calculate interest on a daily basis - so this point will become irrelevant.

Bala
Like 
K.D.Viswanaathan
Mar 20, 2010
The weekly column(March 20)has been beautifully penned. To call a spade a spade, one should have the courage of one's convictions. The columnist definitely has it. The incisive comments - on the mode of utilisation of CRR by the government and the needless excessive control it exercises over the PSUs- should serve as an eye-opener to the government. As rightly pointed out in the write-up, the odds are always against the retail investors. Like 
Hemant K U
Mar 20, 2010
Small is dutiful is an eye opener. Wish I had subscribed to straight fm the hip earlier. Where does the small investor invest in then?
Keep up the good work
Like 
Unvala
Mar 20, 2010
Excellent is the right word.
you have the courage to enlighten us on facts.Sincerely hope if today, youngsters have the courage to expose this anomolies & penalise the GUILTY
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