Will 2G arrests also arrest rally? - 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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18 DECEMBER 2010


The Supreme Court has forewarned of impending arrests, perhaps early next week, in the 2G spectrum allocation scandal. Last week the premises of former telecom minister, A Raja, were, belatedly, raided. The question that has never been asked is why, if there was an investigation and phones were being tapped, the need to raid Mr Raja arose only when the tapes were leaked into the public domain. Either the tapes revealed enough information to warrant an earlier raid or they did not. The Government needs to answer which of the two is true.

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Should the arrests be of politically connected persons such as Mr Raja, there could be a political fallout which would unnerve investors. Should the arrests be of lightweights, and spare the really guilty, the usual pattern of punishment in India, it would further shake investor confidence, already at a low after the volcanic burst of scandals with alarming frequency (Commonwealth Games, Adarsh, Karnataka, telecom and others). That India is one of the most corrupt nations on Earth, according to a Transparency International survey, does not help. So the coming week should be a pretty choppy one for stockmarkets.

Looking to the eruption of scams with political nexus, it is ironic that the FM suggests, rightly, that the corporate sector embed good governance in their business strategy, but doesn't offer the same advise to his cabinet colleagues. Perhaps he, too, has given up on his political brethren, as have most of India.

Talking of good corporate governance, the actions of the independent directors of Novartis is worth mentioning. Novartis had bought 77% of eye care firm Alcan, from Nestle, at a price of $ 180/share and offered minority shareholders of the balance 23% a price of $ 153. When they objected, independent directors not only supported them, but made Novartis create a $50m. fund for minority shareholders to fight the case in court! Novartis finally agreed to pay them $ 168/share.

One hopes that independent directors of Indian companies similarly take up cudgels on behalf of minority shareholders. Cairn India could be an example; the parent has sold a controlling interest to London listed Vedanta, which has agreed to pay a control premium of Rs 50/share to Cairn plc, but not offered to minority shareholders. Dr Omkar Goswami, an independent director of Cairn India, did, in fact, object to this at the EGM; kudos to him! One hopes that other independent directors, such as Naresh Chandra, who was Chairman of GOI committee on corporate governance and hence fully appreciative of the rights of minority shareholders, and Aman Mehta, former CEO of HSBC, also take up cudgels for them as both their reputations and their remit warrant.

ONGC which is to make a follow on public issue in 2011, is, rightly, objecting to the takeover by Vedanta on the ground that the original royalty sharing agreement be renegotiated. Though ONGC has a 30% stake in the oil assets, it bears 100% of the royalty! The question, again, that nobody asks is how such a deal was forced upon ONGC management and why. Perhaps if those papers enter the public domain these questions would be raised, otherwise relegated to the dustbins of history.

ONGC has cheered shareholders with a special dividend of Rs 32 per share and a 1:1 bonus issue.

Of longer term impact would be the recommendations of the Jalan Committee on stock exchanges. (Disclosure: the columnist is also India representative of Institutional Investor and MCX-SX was one of the main sponsors of the October 2010 India Investor Forum). Treating stock exchanges, which are market infrastructure institutions, as the first line of regulation, it has recommended that no owner of a stock exchange owns more than 5% (barring public sector bank or financial institution, which can hold 24%) and that stock exchanges should not be allowed to list, for fear that the profit motive would dilute their regulatory role. The committee also recommends that the exchange should earn only reasonable profit, linked to the return on Government bonds.

These recommendations are retrograde towards encouraging competition, which is probably the best guarantee, together with stricter regulation, of fairness, transparency and good governance. And how would such competition occur, if a promoter is limited, ab initio, to a 5% ownership? One can understand if a promoter is required to reduce his stake to 5% after the exchange is established and running, within a certain time frame. How would 19 other owners, each holding 5%, be enticed to invest, when the return is only a 'reasonable' one and there is no option of an exit through an IPO? Why should they invest? And if they don't, how would competition be ensured?

What is also perplexing is that the 5% cap on ownership does not apply to banks or commodity exchanges. Nor is there a similar cap anywhere in the world. What this would do would be to drive stock markets to other countries. Even a country like Singapore, perhaps the strictest in terms of financial regulation and control, has permitted a fully owned exchange. Given that only 7% of our population invests in equity, which is a part of ownership of the wealth created by the corporate sector, the need increase that number to achieve financial inclusion, is imperitive. The number can be increased by a faster spread of terminals of existing exchanges and/or by permitting new ones. Greater competition, together with strict regulation, for which SEBI is known, would be the better alternative.

Last week the market rallied, with the sensex gaining 355 points to end at 19864 and the Nifty adding 91 to close at 5948. Given the likelihood of arrests in the coming week, it appears that the sensex would consolidate in the range 19000-20000.

On a more positive note, the Finance Minister says that the oft delayed roll out of GST can happen, in phases, from 2012-13. State Governments, headed opposition parties. Introduction of GST can, in itself, add 1-2% to GDP growth.

On a negative note, the Government cites its poor fiscal deficit picture as a reason why foreign currency reserves cannot be deployed (as China does) by Indian companies, to acquire energy assets abroad. Why not try and rein in the fiscal deficit, a lot of which is due to leakages of subsidy payouts? And a lot also due to scandalous decisions of corrupt politicians. Coal India, e.g., is bidding $1 b. to acquire coal assets in Australia.

The market could be expected to move in the 19-20K band of the sensex.

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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5 Responses to "Will 2G arrests also arrest rally?"
C.P.Unnikrishnan
Dec 21, 2010
Unlike other developed countries corrupt politicians will not be punished ultimately in India There are hundreds of examples after independence. Then why should we waste our time discussing all these? Let us
plan ourselves and do whatever we could for the development of our motherland and our brothern
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Shyam Bhattad
Dec 21, 2010
Sir, I have read your article. I am of the view that if the arrests will be under political pressure it may not effect the rally of stock market.
Another point that call my attention is the job of independant director in board of directors of a company. As far as I believe the appointment of independant director is being done by the company to just fulfill the mandatory requirement. Independant directors are normally appointed by the companies whom they like to accomodate or who have long standing in government, semi or quasi govt. organisation. In fact independant director should have guts to question the working of the company rather than just voting positive for every resolution of the company.
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rk77
Dec 19, 2010
Let the rally stop but the corrupt politicians, businessmen, officials of GOI and journalists must be brought to book for once. Only then can investors confidence in India Growth Story will continue.
Are there any independent directors on Hero Honda Board? Who will lift the veil of secrecy from the terms of breakup with Honda since the management has been reluctant to come clean.
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govindaraajan
Dec 18, 2010
DEAR SIR,

TODAY CENTRAL GOVT ANNOUNCED THAT THEY HAVE DECIDED TO COLLECT EXTRA AMOUNT FROM 2G SPECTRUM OPERATORS TO MAKE GOOD THE LOSSES TO GOVT....THEY WILL PAY THE AMOUNT AND IN TURN THEY WILL COLLECT FROM THE CONSUMERS...IS IT CORRECT...A GOVT WHICH IS USELESS IN PREVENTING LOOTING EVEN BEFORE IT OCCURS...OR GOVT TO BRING BACK THE LOOTED MONEY TO GOVT TREASURY....INSTEAD OF DOING THIS THEY ARE INDIRECTLY MAKING TO COLLECT MONEY FROM THE CONSUMERS. HERE I AM HAVING ONE GREAT DOUBT THAT ONLY IDIOTS ARE RULING RULING INDIA NOW ...PLEASE ANSWER.IF ANYBODY IS KNOWING THE ANSWER PLEASE INFORM ME.
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GMR
Dec 18, 2010
Your articles are very good and you speak the right thing but who cares about them People of India has stopped lateral thinking They had a little Space around them i e "Their family"(Ex:if you think of country the no of medals in any sports event will counted by figures.we want our children to became a doctor or an engineer or a businessman because it is the best way and safe way to earn).Nobody cares about others and no body cares what you say Nobody can change the Politics because due to its diversity and the the sentiments of the people(Indians only impressed by only one attribute in their lifetime that is the reason why still Congress is ruling the country. Indians once liked cannot be tuned to other easily That is the difference between Indians and west).
In previous article u mentioned about political parties scams know to each other.In india all political parties are working as Syndicate.This type is called "POLITICAL SYNDICATION".I feel that u must post this impressive articles in NEWS papers is that the change may happened.............


G M REDDY KANAMATHA REDDY
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