Who's minding the store? - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
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11 OCTOBER 2013

The International Monetary Fund (IMF) has launched a $ 1b. bond issue, to be bought, and repaid, in Indian rupees, the proceeds of which would be used for financing rupee costs of projects in India. Its great news for India, if the bond issue is successful, for it would mean a demand for the INR, providing it with buyers, and funds for infra projects without the concomitant foreign currency risk. The moot point is, who would buy into these bonds, for the investor would be taking on the currency risk. The way the country is being currently managed, nobody seems to be minding the store.

As this column has pointed out, the Government's first priority is the safety of itself, the second is the comfort of the coalition partners who are propping it up and lastly the health of the economy. The less said about the fate of investors, the better. Even senior bureaucrats like Arvind Mayaram, Secretary, Department of Economic Affiars, Ministry of Finance, made unacceptably callous statements that investors who have been victims of the fraud at unregulated exchange NSEL, ought to blame themselves, thereby shirking any responsibility of the Government. It was the Government that authorised the exchange, and ought to have had a regulator in place. But who is minding the store?

This Government has bred a culture of 'chalta hai', which is a nonchalant attitude to governance. Let things carry on, and we shall see how to react when the time comes. Such an attitude is not conducive to attracting investors, be they domestic or foreign, in INR bond issues by IMF or by anyone else.

There are several examples of 'chalta hai'. Two central depositories, NSDL and CDSL, have apparently opened some 25,000 demat accounts for two exchanges which are not stock exchanges and which, therefore, they are not authorised to open. The exchanges are NSEL and MCX, from the same, tainted group. But who is overseeing this? Chalta hai!

The NSEL itself was run on, to put it mildly, unprofessional lines. Different departments did not, apparently, converse with each other. The warehousing department had not done any verification of stocks supposedly lying in its warehouses. FMC, which was the sleeping regulator, has discovered, after an inspection by EOW (Economic Offences Wing of the Mumbai Police) that out of the 65 warehouses, 30 had no stocks of commodities, 14 were non existent, and stocks i the remaining 21 were far shorter than supposedly there. What was FMC doing?

At the same time, the business development department lent money to companies without verification, many of which are non existent or too small to borrow the sums they supposedly did! It is all a well orchestrated scam and the reluctance of the Government to admit its own faults in not regulating or spotting it earlier points to its possible culpability.

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It would be simple, if the Government's intentions were to protect the investor, to establish the money trail. All the Government needs to do is to ask bankers to follow the trail. That is IF the Government wants to uncover the trail. The easiest explanation for its reluctance, months after the scandal surfaced, to establish a money trail, is that there are politically connected beneficiaries.

The exchange, started by a group that, in fact, made the IT systems to allow trades to happen, did not have control systems and checks/balances in place. This is strange. The group owns ten exchanges, five international, and Multi Commodity (MCX) has been operational. Since it has been running for a few years, and has established a dominance, it is reasonable to expect that the group has the expertise and the wherewithal to install adequate control systems. That Rs 5,600 crores has gone missing and no one can tell where the money is, points to culpability of the management. It must lose its 'fit and proper' status to run any exchange, and must be brought to justice. The delay in doing so makes the Government a partner in crime by the day. This editorial in Business Standard says Government action is too little and too late.

The 'chalta hai' attitude is also seen in the statement by the chief of the Karnataka Congress, that it is okay for minorities to cheat on loans!. A more irresponsible statement I have yet to see! How can the State head of a party tell people of any community, minority or majority, that it is okay for them to cheat??? This is incredibly insane.

The Government has also been destroying the institutions of democracy. Is it not surprising that whenever elections loom ahead, the CBI drops cases, such as those of disproportionate assets, which had been filed against potential co-alition partners, and activates those against opposition?

Similarly, the EPFO (Employee Provident Fund Organisation) has now issued notice to the Sahara group, which had claimed over 100,000 employees, to inquire whether provident fund dues of all of them have been deposited with EPFO or elsewhere. What was EPFO doing all this while? Who is minding the store?

As pointed out in the previous column, this inverted priority of self first, coalition partners second, and country third, is affecting different sectors, which were given to coalition partners as their jagir. The telecom sector is a case in point. The Government is NOW thinking (it takes a long time to reach an obvious conclusion) of permitting the sharing of spectrum, prior to the next auction. This, among several other, columns, had been writing of the need to allow the sharing of spectrum, a scarce resource, with available technologies. Why does it take the Government so long to decide on the obvious? Simply because its priorites are inverted.

Simply put, if spectrum can be shared then a lot of the battles that led to the telecom scandal and the subsequent cancellation of 122 licences, both legitimately and illegitimately obtained (throwing the baby out with the bathwater) could have been avoided. Consider it like a six lane highway, each lane being allotted to one operator and no freedom for the user (car owner) to change lanes. It would be an inefficient use of road space, wouldn't it?

It is not only our political class that is bickering like spoilt children. The Republicans and Democrats in the US are resorting to dangerous brinkmanship to see which side blinks. They have less than a week to decide on whether to approve a raising of the US debt ceiling, which would provide funds to the US Government to carry on its business. Right now, large sections of the Government are closed, such as 400 parks and many other departments (such as FDA testing of some foods). A failure to reach agreement would lead to a default by the US Government, its very first, and a downgrade of its credit rating. That would, in turn, lead to huge problems of all bond holders of US Treasuries which, wherever they are provided as a collateral, would require additional collateral.

Janet Yellen has been appointed the new US Federal Reserve Chairman and is expected by Wall Street to be one who would continue quantitative easing. But for how long can fiat money be issued in this manner? The day of reckoning will come one day, at which time it will be everyone who would be Yellen.

Managing a democracy is not easy, for sure. The interests of different sections have to be addressed, albeit in a proper manner. Take the opening up of FDI (foreign direct investment) to multi brand retail. This was something over which the UPA Government almost lost its majority, after being forsaken by Trinamool Congress. Then, in order to accommodate the worries of different states, several conditions were imposed, which required the retailer to obtain permissions from the states as well, separately, as also to invest in back end infrastructure, and to source locally.

All these conditions have led to the breaking down of the partnership between Walmart and Bharti, as the former felt that the conditions were too onerous. FDI in multi brand retail has flopped. It will not, under present conditions, generate the employment it was expected to generate, which is a huge huge source of worry for India. Manufacturing is the sector that can provide employment, but it has been hobbled by various acts, including inflexible labour laws and now, the Land Acquisition Act. Not forgetting the environmental clearances needed.

Or take the interests of farmers versus consumers. Everyone knows that tobacco causes cancer, and that the most widely spread form of cancer comes from chewing tobacoo (as it is affordable) rather than from cigarattes. Yet the Bihar Government has, last week, exempted chewing tobacco from taxes, in order to encourage farmers. It tilted the balance in favour of farmers (seeking their votes) than consumers, many of whom will die because of this tilt. Sub kuch chalta hai!

Last week the BSE-Sensex added 612 points, to end at 20,528 and the NSE-Nifty gained 188 to close at 6,096. Of the 612 points, 255 came on the last day, thanks to results for the Sep quarter declared by Infosys. The profits were below analyst expectations, but the guidance for next year was better than expected, and the market cheered.

Next week the crucial event would be whether a deal would be struck in the US to avoid a default. It is expected that they will strike a deal for a temporary raising of the ceiling. (which is something like the lawyer bragging to his client on death row, that although his mercy petition had failed, the lawyer had managed to get the voltage reduced!).

Later, on Dec 8, results of 5 State elections would be announced. They would indicate the tide of electoral opinion, and be a pointer to dates for the General elections.

In short, the market is propped up by two factors. One is the continuation of easy money policy by the US Fed. The other is the hope that things are getting better, when, in fact, public governance is at its pitiable low. Time to wake up and smell the coffee! For, the current Government is clearly not in favour of investors and does nothing to protect them. Foreign direct investors, like Walmart, are not investing. For Foreign Institutional Investors (FIIs) it is, till now, a triumph of hope over experience. At least till they discover that no one is minding the store!

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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10 Responses to "Who's minding the store?"
Leslie Menezes
Oct 29, 2013
Do we more such skeletons. Should we not question the government right now and get the answers. I recall in one of the CAG reports the Quality council (QCI) has been given funds by government and it has no rules for administering them. How many such instances are there where Govt and its departments are allowing misregulation. Like 
rj
Oct 13, 2013
Don't you know? Its Jerry Lewis who is minding the store ! Like 
P.R.Chari
Oct 12, 2013
The story must be told of the old Jewish shopkeeper who lay dying. His family gathered around him to be with him in his last hour.
"Is everyone one here," he asked in a low voice.
"Yes," came the reply.
" Is Joseph here,"
"Yes."
"Is Japhet here."
"Yes."
"Is Job here."
"Yes."
And the old Jewish man got up and shouted. " And, who is minding the store."
That's the difference between the private and public sector.
Like 
Mithun
Oct 12, 2013
The governance of this country has turned into a theatre of the absurd.
Take a look at the "gems" falling out of the mouth of the minister for I&B-Mr.Manish Tiwari.He squarely blames the former CAG for "damaging India's growth rate".Wow!
Talk about shooting the messenger!His govt's ministers merrily looted the treasury and this worthy coolly points his finger at the one who looked at the books.

May God save my India............

Like 
anupam garg
Oct 12, 2013
Umm...no predictions on market movement? Like 
LOVEPAREEK
Oct 12, 2013
YOUR ARTICLE AS ALWAYS IS DAMN GUD, BUT YOUR SELF-ASSUMED MANTLE OF A SOCIAL REFORMER AND PREACHING ON ILLS OF TOBBACCO DOESNT BODE WELL. LUKS LIKE U YRSELF R GROOMING FOR A GREATER ROLE IN FUTURE. Like 
rj
Oct 12, 2013
It is a lot more sinister than just 'chalta hai ". The fact that they are managing a democracy is the best excuse they have whether it is India or the US. Like 
shishir
Oct 12, 2013
what about alembic pharma Like 
shekhar
Oct 12, 2013
A country of scoundrels.Nobody cares.Surprising so many intelligent folks in India are just watching the anarchy unfolding in front of their eyes Like 
Christopher
Oct 12, 2013
This is exactly why I shy away from the Demat forms of GOLD etc. Like 
  
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