Global shift in financial centres?


The news that Petrobras, the state owned Brazilian oil exploration company, successfully raised $ 70 b. in a stock issue, handsomely overtaking the previous record of $ 22b by Agricultural Bank of China earlier this year, is astonishing. Even more astonishing is the fact that this was raised not in New York, not in London, not in Frankfurt, but in Sao Paulo in Brazil! The Agricultural Bank issue was floated in Hong Kong. Is there a shift in global centres of finance? It used to be London, before the world wars, after which New York has dominated. A bulk of financial assets still reside in the US and the stock of global financial assets would be perhaps 4 times the global GDP.

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But money is hugely mobile. Of the four factors of production, viz. Men, material, machinery and money, it is only money that is capable of being digitized. This allows it to move at the click of a mouse whilst other factors take days, weeks or months. The $ 70 b could thus have come from anywhere; what becomes important is where it was raised and hence where it would be traded.

In the calendar year 2010, so far, the FIIs have been net investors of Rs 80,000 crores and the domestic mutual funds have been net sellers of about Rs 20,000 crores! Last week, too, it was the FIIs that were leading the charge, driving the sensex up another 451 points, to end the week with its chin above the 20K mark, at 20045. The Nifty gained 126 to end at 6018.

This is simultaneously a good sign (of greater faith in emerging markets and greater willingness to put more of their money in them) and a bad sign (a sudden withdrawal of this inflow would cause a sharp drop).

The reasons for this is not far to seek. Central bankers are pumping in liquidity to stave off further recession in the developed world (Warren Buffet says the US is still in recession; poverty rates have reached unprecedented high of 14%) and a part of it is coming to emerging markets. India's GDP is set to grow at 9.2% this year, according to CMIE, with agriculture growing at 5.7%. Money is flowing where the growth is. It will continue to flow, so long as our story remains encouraging.

For it to do so, one of the biggest impediments is the rampant corruption, now universally accepted. The Government has banned Dow Agro Sciences for giving a bribe, which is great, but never has any important person been penalised for taking it, which is not. The CAG is unable to opine either ways whether or not Telecom Minister Raja should be prosecuted for giving out cheap licenses. Why is that? It is because political compulsions take precedence over good governance. So long as this does not change, the India story, though good, will not be glowing. Why should investigations not commence against the horribly planned CWG?

It is the same political-consideration-takes-precedence-ove-national-consideration thought that is preventing the GST, one of the most bullish factors for the economy and the stock market, from being introduced. The BJP States are blocking a good idea merely because it comes from the opposition.

This is why it will be years before we are able to raise valuations to the level of an Agri Bank of China or of a Petrobras.

Different states, run by different parties, are competing with nary a thought for national interest. This affects business. BSNL, for example, is stymied in its plans to offer more telecom services in the North East because Assam has levied a 4% tax on telecom and IT products passing through it. Since there is no other road, this effectively means that states like Mizoram, Meghalaya and Tripura are deprived of telecom services, and BSNL of revenue. And then the Government decides that BSNL will not be listed until it is profitable, even as it ties the hands of BSNL management since it is fully owned by Government. As the 9th largest telecom company in the world, in a hugely profitable sector, BSNL, left alone, would command a good valuation. Yet it is swathed in red ink.

Coal India has got SEBI clearance to come out with a Rs 14,000 crore IPO mid October, which ought to be well received. It has one of the world's largest coal reserves. Here, again, it is sad to see that, despite having enormous coal reserves, the Government is slow to clear proposals to develop coal mines and power companies, one of the largest users of coal, have invested Rs 35,000 crores to acquire coal reserves abroad. The Coal India IPO will be followed by one by Power Grid and one by SAIL, in a bid to take advantage of a booming secondary market. There are some 11 IPOs this week.

The Ministry of Finance is asking banks to ensure that micro finance institutions, to whom they lend money at lower rates, do not charge more than 24% interest on the loans they, in turn, give. This is a bad suggestion. Micro finance institutions (MFIs) are providing a service which public sector banks have been unable to provide, viz. very small loans given to people with no credit history and no assets, for the purpose of starting a small business. Such people would otherwise have had to borrow from local money lenders at rates far higher than the 36% they would normally charge, and which the Finance Ministry finds to be disturbing its conscience. The fact that MFIs have a 1% npa record, indicating that borrowers not only value the service but are honest enough to repay, shows that there is a need which the MFIs are meeting and which the PSU or private banks cannot.

SEBI has come down heavily on investment bankers for pricing IPOs too aggressively. But in a free market pricing is more of an art than a science, balancing the needs of the issuer and of the investor. Entrepreneurs like Dhirubhai Ambani had mastered the art, always leaving enough for his investors on the table to ensure their continuing support; but issuers of the day are more wont to take a shorter term horizon. A better way, which these columns has advocated, is to give, perhaps on SEBI's website, a 5 or 10 year history of investment bankers. For issues led by them, simply give a chart of the company they led, the share price at the time of issue, the sensex then, the share price now, and the sensex now. Let the market decide after seeing the track record.

Whilst on the topic of IPOs, why should it be necessary to offer analysts a thick red herring prospectus, 99% of which are consigned straight to the ruddywala? Its a colossal waste of paper. Here is an idea for SEBI. Those who want a thick paper prospectus should be made to pay Rs 100 for it or they could be given a free CD with the prospectus on it. But stop this nonsensical waste of paper in printing prospectus which hardly anyone reads.

The market is FII driven. In the coming week the Ayodhya judgement is to be delivered. One hopes that it will not lead to law and order problems. That, however, would be something that could spook the FIIs. Tread cautiously.

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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9 Responses to "Global shift in financial centres?"

Sachin Wagal

Sep 26, 2010

Surprising to hear you opposing Ministry of Finance capping interest rate charged by MFI at 24%.
In-fact there is every reason to cap interest rate below 24%. Reasons mentioned below for the same.
1. Banks lend at around 15~16% for personal loans which fall in the same category of business done by MFI.
2. NPA for banks in personal category is definitely more than 3%.
3/ With NPA of less than 1% for MFI there is in-fact more reason to ask them to reduce lending rates to less than 20%.
4. MFI charge high interest rate on the premise that the defaults will be high. But with NPA less than 1% show that is not to be the case.

Hence MFI should reduce lending rates or they would be no better than the village money lenders who believe only in exploitation of common man. Only difference being MFI guys loot wearing suit and boot where as village money lender in traditional dress.


Thresiamma Dominic

Sep 25, 2010

Dear Sir,
This article is worthy to read. Hope such kind of themes of real world may be useful to both parties, ie. the publisher and the public.
Keep it up
with regards


Om Prakash Sharma

Sep 25, 2010

A salute to you for suggesting a free cd (in place of red herring prospects).



Sep 25, 2010

can anyone tell me what is GST?


sudhir apte

Sep 25, 2010

Your suggestion for giving cd instead of hard copy is excellent. I hope our dear Bhave reads your column. I think he is doing an admirable investor protection job.
But how can you defend 36% interest being charged by MFIs.
Its nothing but usuri. If npas are low, it makes charging high interest rates to poor even more unjustifiable. I know that they have to deal with small borrowers which involves a lot of extra work. But if they are getting their funds at around 10 % then a spread of 26% is nothing but exploitation of the dire situation of the poor. For a change I think the govt is right.



Sep 25, 2010

The collpase of steel overbridge at CWG and the delay in construction of facilities are an example of the corruption and mismanagement that aflicts the Indian Infrastructure Industry. The official bottlenecks in development are to ensure that corrupt thrive. Pt Nehru in his book Discovery of India had lamented that the Block Development Officers appointed to ensure development thought that they were meant to Block the Development! Corruption in the infrastructure is massive. Nothing happened to Gamon India after the mishap at Delhi Metro. The company continues to win govt tenders in other parts of the country. If corruption is minimised the Indian growth story will be spectacular.


Hasmukh Gandhi

Sep 25, 2010

Dear Sirs

Suggestion given for agressive pricing of IPO should also include the 5or10 years history of investment bankers should also include the history of rating given by rating agencies Most of them favours the management. giving a example in recent issue of Shri Ganesh Jwellers co ltd where the rating was given 3out of 5 average but their price on listing day down by about 50% is this clled average rating



naval anklesaria

Sep 25, 2010

I fully agree with you & Chairman of SBI Mr. Bhave who have only raised their voice as far as Pricing of IPOs is concerned. SEBI is only remaining a silent spectator, grumbling all the time but no action taken. Let the prospectus be made but only for Approving Authorities and not for Public as you rightly say not even 1 % of investors go thro it. Instead we should get 1 page re[ort of the Companys Past Performance & future projections for us to go thro.& decide whether to apply or not. Last 25 years I have been writing for all such changes but of no use. People come & people go but things remain same forever. God save this country.


N.R. Shekhar

Sep 25, 2010

Why prospectus? Even the thick Annual Report which the company sends to regularly to shareholders nobody reads. It should made optional to shareholders whether they want the annual report or not or the alternative is to send the same through email to shareholders,which will save lot of money of the company as well as precious manhours. The annual report can be sent in a brief concise form of not more than 4 pages through email, instead of more than 100 pages which nobody has time to read. What say??

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