»Straight from the hip by Jawahir Mulraj

Is excess global liquidity going to create a problem?
13 JUNE 2009

The global economic crisis was caused by excess liquidity, part of which went into assets that later turned toxic. The global solution was to feed the system with more liquidity, to stave off collapses of financial institutions such as Lehman Brothers. As Edward Hadas points out in www.breakingviews.com (subscription required to access and is free) money is fungible and so there is no assurance it will go into places where it is intended to. Part of it has gone into funding oil buyers, with the price of oil going up from $ 33 to $ 72 a barrel.

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Companies are able to more easily access capital markets than six months ago. Last week the Vedanta group raised $ 1.5b. through convertible bonds. Bajaj Hindustan is raising more money through convertible bonds than its market cap. and Essar Teleholdings plans to raise $900m. Power Trading plans a $ 1b. fund. Reliance Power has raised Rs 1600 crores to part finance its Rs 3500 crores, 600 MW power project in Butibori. US Banks have raised enough capital to allow 10 of them to repay $68 b. of bailout funds. Blackrock acquired $1.5 trillion ETF funds from Barclays Global for $ 13.5b, ie. 0.9% of assets under management. The acquisition makes Blackrock the largest money manager in the world.

Riding on this liquidity, Indian stockmarkets continued their upmove. At least one index did, the other fell slightly, over the week. The BSE-Sensex rose 134 points, to end at 15237 whilst the NSE-Nifty fell 3 to end at 4583. Perhaps because the former is weighted by free float (thereby reducing the importance of stocks like Wipro or ONGC which have a lower free float) and the latter isn't.

With the market booming, the fiscally strapped Government is taking the opportunity, correctly, of divesting stakes in some of its companies such as Oil India and NHPC, from selling a minority stake in which it hopes to fetch Rs 6500 crores. The companies would also make a fresh issue of shares, and both companies are expected to generate good investor interest. Some PSUs, such as Power Grid, price their IPOs sensibly, leaving money on the table for investors, who did not lose out even during the slump.

With more companies making IPOs, the need for independent directors would, obviously, increase. What would be the quality of such directors? The independent directors of Satyam, now resigned, had made a claim to be indemnified for their legal expenses on the company, which refused, quoting Sn 201 of the Companies Act which forbids a company from indemnifying in such cases of fraud, unless the director is proven innocent. The company has given notice to Tata AIG, from whom it has taken a $100m. D&O (Directors and Officers) policy, but the latter has also raised some questions. This raises a piquant dilemma, for which there seems no easy solution. One the one hand, if directors have been sleeping at the wheel, they ought to be hauled up. On the other, given that they relied on accounts audited by a globally reputed firm, would it not deter others from accepting the onus of independent directorships?

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The new Government is taking some steps which show a positive attitude towards reform and some a negative one. The most positive, perhaps, is the attempt by law minister Moily to undertake legal reforms, through consultation with everyone. The biggest bane of India is the abysmally slow pace of the judiciary. If this can be speeded up, it would work wonders. We can also make our laws simple. For example, the rent control act is horrendously complicated and accounts for a large chunk of the cases clogging up the legal system. Why should it not be possible for a state government to repeal a rent control legislation prospectively, whilst letting existing tenancies and disputes, work their way through the efflux of time or of litigation? Why perpetuate the problem? Why not simply state that as of July 1, 2009, the Rent Act will not be applicable for new tenancies but they will be governed by the Contract Act? This hurts no existing interest and is surely politically digestible. In fact, by so doing, it opens up a rental market and, with it, guarantees freedom of mobility, a constitutional right which is encumbered by the absence of affordable rents in big cities.

The RBI is, similarly, thinking of finding a way to calculate the prime lending rate (PLR) and then to disallow sub PLR lending. This now accounts for 80% of lending, making the use of the term 'prime' farcical.

On the negative side, the DMK is opposed to privatisation and Mamata Banerjee is opposed to petroleum sector reforms. Would they be stumbling blocks to both, which are sorely needed. Worse yet, the BJP State Governments are opposing, as being unclear, the introduction by April 1, 2010, of GST (Generalised Sales Tax). Introduction of GST would make indirect tax system uniform and non discretionary and is a very important reform that should not be sacrificed at the altar of politics.

Stockmarkets, in their upward rush, have been undettered by negative news. Such as the declaration of swine flu as a global pandemic. Such as the effects of global warming that are melting the Himalayan glaciers, which will cause human dislocation in India on an unprecedented scale. And such as the El Nino effect which can affect our weather and our agricultural output. It may pause for some breath.

J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. 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 stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same.
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