Dual SIM easier than dual listing - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Dual SIM easier than dual listing A  A  A


Bharti Airtel is attempting a merger with South African MTN, in a bid to create a telecom company that can be of global size. The bride has said she would leave the altar by the end of September and has demanded a dual listing of stocks or GRDs of both companies in order that its investors have liquidity. Under the present contours of the deal, Bharti is to buy 36% from MTN's existing shareholders, and another 13% from a new issue. It would pay $ 7b in cash and $ 6b through GDRs which would be equal to a 27% equity holding. SEBI has recently modified rules to make it obligatory for anyone crossing the 15% threshold, even in GDRs, to make an open offer to buy another 20%. This was not so earlier, because voting rights on the GDRs vested with the depository and not with the holder. Dual listing cannot happen as India has not fully converted its currency. So, unless there is new financial ingenuity introduced in the deal, it may succumb to the demand of dual listing.

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The stock market has been wary about the deal, with Bharti underperforming the market; so, should the deal stumble on the dual listing issue, the market may actually cheer. Mr Market is more concerned about the short term rather than the long term future which Mr Sunil Mittal is trying to secure. Investible resources have been significantly institutionalised (thanks to the growth of fund management business) and the value of financial stock of assets of the G7 countries is a multiple (probably 3 times) their combined GDP. When this huge mass of money has an excessively short term focus, global financial crises happen.

Domestically the telecom industry (and their stock prices) are in for what could be a game changer, in the form of mobile number portability (MNP) which is to be (finally) introduced from Jan 1. Once introduced, it would be the consumer, and not the operator, that owned the number, thus freeing him from switching to a new one if dissatisfied with the service of the existing one. He would not need to inform all his contacts of the new number, a hassle that currently allows telcos to pay scant emphasis on customer quality.

There would, of course, be a fee for switching operators, but TRAI is expected to keep it reasonable enough so as not to make MNP a non starter. The industry would then see a 'churn' as customers start venting their anger for poor service they had had to suffer. The churn % in other countries has varied from a low single digit number in Japan, where the dominant player DoCoMo (now tied up with Tatas) was able to retain customers, thanks to a clever strategy of giving them free email ids (which then became the lock) to a high of over 40% in some European countries.

MNP would usher in true competition. Currently there is adequate competition in the industry for new customer 'acquisition' not for old customer 'retention'. One telco is offering, as in the US, a fixed rate per call, irrespective of duration. Existing customers of another telco may be tempted to switch, but prevented from it without MNP, for fear of becoming unavailable.

Domestically there are a few good things happening, which give cause for optimism. Law Minister Veerapa Moily wants all cases to be disposed off within a year! This would be fantastic if it were achieved! Judicial delays are one of the biggest weaknesses of the India story. A fast track for commercial disputes is being advocated, which, too, is welcome. Look at the asinine slowness in resolution of the gas dispute, one that is of vital importance to the economy, the fiscal state of the Government and India's energy basket. Why should it take years for this to be resolved?

There is also some thinking about allowing foreign individuals to invest directly into Indian stocks; currently only FIIs registered with SEBI, are allowed. This could result in a flood of inflows.

In not so good news is the way Human Resource Minister, Kapil Sibal, is handling striking IIT Professors who are protesting abysmally low pay packages. It is these, highly qualified and erudite, people, who have created the world class institutions the IITs are, and not the money Government has given them. They have done it as a dedication, at great cost to their families who are deprived of a better life, and they do deserve better. Compare this to the rampant corruption prevailing in Government circles, for which the only action taken is to put up the names on a website? Surely IITs are capable of getting their own funding; the Government should allow them to repay any debt owed to it and grant them complete autonomy.

Globally, there are still, huge concerns and investors should have an eye open for these. President Obama has imposed a 35% import duty on Chinese tyres, even though G20 countries had agreed not to resort to protectionism.

The huge fiscal and monetary stimuli packages of various countries have pumped in enormous money to stave off a deep recession. Money, being fungible, has been used not only for the intended purpose, for investing in productive assets and for consumption, but has also gone into other assets such as stockmarkets and commodities, which have risen. Investors cheer, for example, that US house prices have stopped falling, taking that as a green shoot. However, some 80% of the bonds issued by Fannie and Freddie, have been absorbed by the US Government, and the moneys thus raised have been used for mortgage loans that have caused the demand that stanched the decline in house prices. Unless private money replaces the US Government as buyers of the bonds, house prices may well decline again. To attract them interest rates would have to rise and, when (and not if) that happens, equity markets would be hit.

The US is in an impossible situation. Being a consumption led economy, it must encourage consumption in order to grow. Yet it needs to discourage consumption and encourage higher savings, in order to pay off the huge debt, initially huge but enhanced by the fiscal and monetary stimulus. It could well witness a long period of aenemic economic growth, much as Japan did for 20 years, though it would come out of it faster because it is a more flexible economy than Japans.

Last week the BSE-Sensex ended at 16693, down 48 and the NSE-Nifty ended at 4958, down 17. Infosys and Bharti were the main losers and HDFC and HDFC Bank the main gainers in the sensex stocks.

There is adequate liquidity, both global and domestic, to spur the rally further. The US $ has weakened against a basket of other currencies, and the $ index is at around 76, indicating a depreciation of 24% against the basket, since the start date. In the previous bull market, there was an element of the yen carry trade, as investors in Japan borrowed at virtually zero interest rates to invest in other markets, such as India, and, so long as the markets rose faster than the currency, made huge profits. A similar thing is happening now with the US $ going down and US interest rates at a low point. If either, or both, conditions were to reverse, so would the carry trade. Watch those.

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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