The governance gap

8 AUGUST 2009

After the announcement of the results of the general elections, the market opened upwards with a huge gap, ending the day with a gain of 17% on the sensex. Perhaps this magnitude of gain in a single day has rarely been witnessed. The gap in the sensex, between 12,219 to 13,479, was symbolic of the hope of investors that the Government, unfettered by constraints of reluctant coalition partners, would be able to move ahead with economic reforms much faster than when it had the Left as a partner. When, in the Union Budget, which is like an AGM of the Government (the only real opportunity it has to capture the eyeballs of millions of its citizens for 2 hours without commercial breaks) there were no signs of its reformist intent, the market was disappointed.

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The upward gap was fuelled by huge investor inflows, both foreign and domestic. Flow of good corporate results for the June quarter and announcements such as the huge outlay on the road sector, were bullish news; whilst the failure of the monsoon (64% deficit in the last week, a crucial one or sowing) was bearish. The Minister of Roads, Transport and Highways, Mr Kamal Nath, plans to spend $ 70 b. on roads in what is the largest public private partnership road projects anywhere in the world.

This can have a galvanising impact on the economy, not only because of the huge spend. It is expected to result, over time, in 300 new cities (defined as having a population of 1 m.), which means that some 300 m. people would migrate. As of now, about 62% of our population is dependent on agriculture, which accounts for 18% of national income, an entirely unfair distribution of income. This would be partly corrected by the migration, which would, of course, take years, of 300 m people who would get job opportunities in the new cities and their satellite towns, not presently available. Money for this will come from global and domestic sources, so long as there is good governance of the projects.

The huge discoveries of natural gas in the KG basin is another bullish factor, although it has been stuck in a dispute between the two Ambani brothers, and between RIL and NTPC; a dispute that ought to have been resolved long ago either through arbitration or through a fast track judicial process. It is far too important, nationally, for it to linger as it is. The latest development is the averment by Petroleum Minister that since the contractor, RIL, did not submit to it any pricing formula for approval of the deal to supply 12 mscmd of gas annually to NTPC, the price discovered by EGoM of $ 4.2/mmbtu would apply. NTPC is protesting. And, since the supply to RNRL is at the same price as to NTPC, the price of the 28 mscmd of gas to the latter would, by extension, be at the higher price. The Supreme Court would decide in the matter, hopefully soon, since the Government is to launch its next round of NELP tenders in early August.

A signal of good governance would also emanate from how the Telecom Ministry responds to the demands by telecom companies, of imposing ridiculously high charges for mobile number portability (MNP). The DoT wants to announce norms for MNP this month and to introduce it by end of the year. Mobile telephony has been a success story of reforms in India, and the number of mobile phone users, at 427m, is 11 times the fixed line users of 37 m. There is adequate competition for customer acquisition (increasingly attractive packages are offered), but none for customer retention. Competition for customer retention can come only through MNP, which allocates the mobile number to the customer instead of the telco. So, a customer who is dissatisfied with service, can switch telcos without the hassle of informing contacts of a change in number. MNP ought to have been introduced long ago, but telcos were resisting it.

They now want to put a roadblock by suggesting a cost for switching operators, of Rs 6000, based on the assumption that only 2% will migrate to another telco after MNP, and should bear the cost involved in setting up the systems to allow the transfer. DoT should consign this demand to the dustbin, where it belongs. Subscriber migration figures for different countries which have introduced MNP vary, from as low as 2% in Japan to something like over 40% in Norway. NTT DoCoMo of Japan had cleverly linked a mobile number to a free email id and it was the fear of losing the email id that locked its customers in, despite MNP. That, plus the better customer care DoCoMo gave.

The BSE-Sensex failed to convincingly (by 3%, which is a thumb rule) the 15,750 mark and fell back, after an initial spurt, to end the week at 15160, down 510. The NSE-Nifty ended down 155, at 4481.

Is it trying to fill the gap of 12,219 to 13,479, created after the election results? That would imply that investors have completely lost faith in the Government's reformist proclivities. The failure of monsoon would, of course, lead to a degrowth in agriculture; but because it accounts for 18% of GDP, the result may at worse, be a 0.5% drop in GDP growth. The bigger concern would be to avoid famine, and reach relief to affected farmers promptly. On the other hand, if more reformist measures are announced, the gas dispute quickly settled, more initiatives such as the road projects outlined, then the investors would rush in again.

Over to you, Manmohan Singh!

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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4 Responses to "The governance gap"

Prasanna Ogale

Aug 10, 2009

First let me congratulate you and your team for such lovely series of articles.I am new reader and ai really feel that I missed this in my past.Secondly you should change the title to Straight from the Heart and not Hip.
As you are touching the subjects which keep cropping in our hearts.Wish You All The Best.



Aug 9, 2009





dinesh kotecha

Aug 9, 2009

There is only gap and gaps in governance. if it were to be imbibed in spirit as stated in the law, what will happen to corruption which is so rampant in every sphere of life.
In corporate scenerio, companies don't print annual reports on time, after that they do not send it to shareholders[particularly to those who speak/spoke bluntly in the AGM/EGM.Some send abridged copy wherein no annexures are given.Meetings are kept at odd times and at odd places. The corporate goverance is there, but dead shot in practice. Top managements egos are flattered by hired speakers who speak everything else under the sun except the annual report contents. they have nothing to do with annual report, they just want their share of 1000-5000 rupees for their spoken flatterry for the management. oh god when will transparancy and before that ability to earn and willingness to share come in the heads of corporate hunches.
It is all a joke about governance[except for some very few companies following it]. openly flaunted, not feared by companies because they think that by bribing the officials of the caretaker of the law they can get away with anything they want to do. Take the case of Essar steel, it raised money at a huge premium from the public 15 years ago. first 1/2 years manipulated the results,gave dividends, then next 5/6 years there were losses-no dividends, no annual report, agms/egms notices not sent,the management was quietly buying shares from the market at dirt cheap prices, losses were shown more and increased, management had manipulated delay of good and improving results. then buyback at 50 odd rs,after management had more than 75% stake and then delisted. then expansion and takeovers in foreign countries announcements followed. no one has come to the rescue of minority shareholders because the management had high level contacts, money to corrupt honest officials, and yes corporate governance as they defined it.
we live to be ruined / buchered by such ruis. on the same lines are dhoots of videocon. beware of all such corporate wolfs in sheeps clothings.

Jai hind on this 52nd Independence day.

Ca. Dinesh Kotecha


Rakesh Gupta

Aug 9, 2009

Hi All:

Thru your circle of friends I wish to bring to notice the dangers posed by one oligarchy or the other to a country like India.

Recent dispute between the Ambani brothers can be another tale of grapes gone sour but the points raised are not and the scale of corruption is unimaginable.

Anil Ambani alleges that reliance Gas Project was Gold Plated by 30,000 cr., which may or may not be true. But if it is true, look at the consequences then you not only have cheated India of 30,000 cr. But also you will get 15% return on this Gold Plated project till perpetuity. In effect you will have Natural Gas for free (effectively) without giving any share to government.

You can expect these guys (Reliance Industries like) to buy petroleum ministry 100 times over and they will naturally side with them. Also, since you are in petroleum business you ought to have cosy relationships with these ministers. Fine. Congress being a ruling party will naturally side with their minister

What is disturbing is response of main opposition party of India, BJP. Silent. Pin drop silence. CPI - seeks explanation from Government thru a communiqué of secretariat. Underplayed by general media expect one news
channel (CNBC-TV18) which may be case of reverse oligarchy.

India is progressing no doubt but if we create such oligarchies like Reliance or others, then none of the national resources are safe.

It is oligarchy of reliance today in Petroleum and tomorrow it can be any other in power.

Internationally same thing is happening in industrial Metals, where metal traders are so rich and resourceful that they can buy scarce industrial metals many times over and jack up prices at will and ultimately consumer pays.

And disturbing thing is none of us are protected thru any of our democratic defense mechanism of legislators or Media, since these can be bought over many times over by these big Giants.

Welcome to Capitalism.

Same thing has happened in USA where 1% of population controls 50% of wealth and half the population has little or no networth. A so-called richest nation of the world.

Am I getting too worked up stating the obvious?


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