Save our Seoul - 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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PRINTER FRIENDLY | ARCHIVES
23 OCTOBER 2010


Come early November and quite a few things are going to happen. President Obama is visiting India and it will be his longest foreign visit. RBI will have its review and will probably raise interest rates by 0.25% (although credit growth at 5.5% in the first half of the current fiscal year, upto September, is much less than the target of 20%, so a higher rate will be further discouraging). The G20 nations are to meet in Seoul where the US will put more pressure on China to allow the yuan to rise, after it didn't succeed in its efforts to get the IMF to apply that pressure. Having heard all this before, China is trying hard to suppress the yuan (pun intended).

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As the Economist of Oct 14 points out there are 3 battles being played out. China is not permitting the yuan to rise fast enough (as it would lose some competitive edge if it did) to relieve pressure on the US $. Its not likely to give in but may accommodate by allowing the pace to step up a bit. Another area of discord is the monetary policy of the developed world which, looking at poor growth and unemployment, is printing more money in order to buy Treasury bonds. The money finds its way to other geographies, creating bubbles there. This creates the third area of discord, viz. the response by other countries to monetary easing. Countries like Brazil and Thailand are worried, and have imposed capital controls and higher taxes. India will, too, at some point.

For now, though, fuelled by easy money, the bull continues to run.

Look at the overwhelming response to IPOs. A few months ago, Brazilian company Petrobras raised $70 b. in an IPO and did it floating the stock in Sao Paulo, not in NY or London. Now Coal India, which wanted to raise some $ 3b. has got subscriptions of $ 54 b. (and counting), which is truly phenomenal. It should, for starters, shake off the diffidence of the Government. A well priced issue, properly marketed, can succeed, and the Government can be more ambitious in its target. Another consequence is that employees, who were offered a quota of the IPO, chose not to accept it, under advice from their union leaders, and are now regretting that decision. So, perhaps, this IPO may also succeed in getting employees more acceptable of the disinvestment process.

Next in line are Power Grid, which opens in early November, followed by SAIL and IOCL in January. IOCL is now considering an issue of Rs 19,000 crores, bigger than that of Coal India.

Vodafone must be eyeing these raisings with sombre regret; it has been slapped with a Rs 11,000 crore tax liability for its failure to deduct tax at source when it paid Hutchison Whampoa for purchasing a controlling stake in Vodafone Essar in India. This was an offshore transaction of sale of shares which it was advised was outside the jurisdiction of Indian tax authorities. They thought otherwise, on the grounds that the operating assets were in India, a stand not taken previously. Were the Supreme Court to agree with the IT Department, it would make takeovers more difficult, at a time when, by increasing the threshold for a public offer to be made, from 15% to 25%, SEBI is trying to encourage takeover of failing businesses.

SEBI may, however, not mandate a 100% open offer, once the 25% limit is crossed. As pointed out by Vallabh Bhansali of Enam, this may work against domestic players trying to do large acquisitions, simply because access to large funding is restricted and is mainly with foreign banks. In the case of Bharti's acquisition of Zain's assets, it was only SBI which participated with $1 b.; the other financiers were foreign banks. The reason, again, for this is that Indian banks are not allowed to grow, as they can and should, because of the Government's insistence on retaining a majority holding. Despite being one of the world's largest and fastest growing economies, none of the Indian banks are within the top 150 in terms of market capitalisation. This policy of retaining control over so many public sector banks needs a review the financial system will not be under threat even if the Government retains majority control in 2 or 3 big banks and lets the other banks free to grow.

In other corporate news of interest, a special committee appointed to recommend whether environment permission granted to Korean steel giant Posco, for setting up a greenfield plant in Orissa, be continued, has given a split verdict with 1 vote (the chairperson's) in favour and 3 against.

The Coal India IPO is expected to lead to significant gains on listing. Looking to subsequent IPOs of PGCIL, SAIL and the big daddy IOCL, there would, again, be demands from retail investors for a higher quota for them and a lower one for QIBs. QIBs are given larger quotas ostensibly because the issuer wants long term investors; but the truth is that QIBs also flip (sell immediately for immediate gains on listing). QIBs pay 10% on application and so can apply for larger quantities than retail investors, who pay 100%. Can anything be done to discourage flipping?

Perhaps SEBI could think of something like this. Why not ask QIB's to commit to buying a quantity equal to that allotted to them, at a price which is 10% below the issue price, within 6 months of listing? If they are willing buyers at the issue price they ought to be more than willing to buy 10% below that price and it would help provide a floor. Or, why not, since they profess to be long term buyers, disallow them from selling within, say, the first 2 weeks of listing?

SEBI should also, as mentioned in a previous column, seriously look at the senseless wastage of paper in printing thousands of thick red herring prospectii, probably 90% of which aren't read but go straight to the ruddiwalla. In the interest of information dissemination, it can be given on CDs and, at a cost, to those who desire a printed version. I invite reader feedback on this. Should SEBI stop giving printed prospectii and give it on CD instead?

  • Yes
  • No
  • No comment
One of the reasons emerging markets will continue getting foreign inflows is because of the huge pension liabilities in the developed world. In order to assess future liabilities, they make an assumption about the rate of return the pension assets will fetch. This assumption is erroneously high, at 8%. If they assume a lower rate, the estimated liability goes up, and the shortfall has to be funded. All developed countries are unable to meet the shortfall. One of the things they are trying to do is to raise the retirement age; the other is to cut benefits. But when President Sarkozy of France tried to raise retirement age, there were street protests in Paris. So, willy nilly, they need to invest larger amounts in other assets, hitherto considered riskier. A lot of US pension funds are investing in hedge funds, the riskiest asset class! They are also sending more money to emerging markets like India, which will continue.

Last week the sensex lost 40 points to end at 20165 whilst the Nifty added 4 to end at 6066. The long term is good especially if some agreement on the future of currencies is arrived at by the G20 in Seoul. Its time to save our Seoul.

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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23 Responses to "Save our Seoul"
sundara ram
Oct 27, 2010
YES SEBI should consider your suggestion positively and provide CDs. And also i request you to give your view on printing the annual reports of companies (very costly print version + postal, courier charges) and sending a copy to shareholders. Instead shareholders can be provided with e version through their email address to save the environment. Like 
satish
Oct 26, 2010
sir, I need your inputs on this. Last week I was watching a documentary called the "The Secret of OZ". It says that FEDERAL RESERVE is privately owned and it lends money to the goverenment at 6% interst which accounts for the national debt of US. So, the US governement is actually taking a loan from the FED and saving the big banks which are inturn prining money and lending it back to the goverenment.
Can you please tell me the scenario in India. Is this the same case here? Thanks, Satish
Like 
SATYA MOHAPATRA
Oct 25, 2010
Well written. God reading!

YES, SEBI should provide CD version of RHP.
Like 
SB Deshpande
Oct 25, 2010
Yes. I entirely agree with your view that the Red Herring Prospectii should be allowed to be issued on CDs. In fact, the same goes with all the Annual reports of companies. Hardly anyone of the retail investors, albeit with a few exceptions of knowledgeable people, ever read those bulky documents. One could request for a printed version from the company, who must then make it promptly available. Like 
K.Venkatraman
Oct 25, 2010
SEBI should also, as mentioned in a previous column, seriously look at the senseless wastage of paper in printing thousands of thick red herring prospectii, probably 90% of which aren't read but go straight to the ruddiwalla. In the interest of information dissemination, it can be given on CDs and, at a cost, to those who desire a printed version. I invite reader feedback on this. Should SEBI stop giving printed prospectii and give it on CD instead?

* Yes
* No
* No comment

Yes to CD
Like 
V.Vijaykumar
Oct 25, 2010
I refer to your article about printed DRHP. YES. Printing may be stopped.

Further I wich to bring to your notice the following:

We receive annual reports and other communication from registrars in envelopes which contain our name and address. It also contains sensitive information like our DP ID and Client ID of the Demat Accounts.

SEBI should mandate that this sensitive information should not be put on the address labels as it compromises the shareholder's security.

This should be done urgently
Like 
Vinay S
Oct 25, 2010
My undestanding is that QIB's also now pay 100% of the Bid amount so there's a level playing field.

On the "long term investor" theory; Anchor Investors do have a 30 day lock-in but QIBs don't. The backstop option sounds innovative from a price-stability perspective but its unlikely to end there. A large # of lock-ins open after 1 year of listing - there is pressure on stock prices then also. Maybe ask the "long term investors" to provide a back stop between the 12th & 14th month IF they've sold earlier?

Distributing Prospectii via CDs and/or email would save the environment also
Like 
shastry
Oct 24, 2010
This is wrt to supplying issue prospectus on CD instead of paper.While paper is recyclable and hence environmental friendly,but consumes more energy for making paper and fuel for transporting (paper prospectus) which generate more green house gases. In the case of CDs consume less energy for making and less fuel for transport,they are not biodegradable.If biodegradable CD can be made they are welcome. Like 
K R Chadha
Oct 24, 2010
Hi,
Referring to my earlier mail. 2nd batch was 1965-67. regret error.

with best wishes

K R Chadha
Like 
K R Chadha
Oct 24, 2010
Hi,
I hv been reading your column for a long time now and find it very educative.I am also an alumnus of IIM Calcutta (2nd batch 1964-66).
SEBI should stop wasting paper on prospecti and give it on CD.
Like 
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