Friday, 30 March, 2012

Rajiv Gandhi Equity Savings Scheme

Rajiv Gandhi Equity Savings Scheme

Came across in the website of Money Life an interesting article about:

The author has given a whole host of suggestions, most of which are valuable. One hopes that someone "up there" passes it on to Pranabda!

However, I disagree strongly with respect to a critical point mentioned in the article:

  • The author says: "SEBI should ban loss-making companies from coming out with Initial Public Offers (IPOs)".

I wonder why??? There are many instances, especially in a capital-starved, infrastructure-deficit country like ours, when new companies seek to come up with greenfield projects which involve long gestation periods. These projects are often highly capital-intensive. In fact, even in industries which are highly profitable, the initial years of a company are not profitable as they need to establish themselves in an already competitive market.

It is but natural that such compies which are loss-making in the initial years would not find too many easy sources of funds. One of the best ways of raising funds for such companies is to come up with an IPO. Obviously, the IPO is likely to be priced at a far more "reasonable" level when the company is incurring losses than when it becomes a cash cow. If anything, the promoter should be worried about diluting his stake at such low levels.

Hence, to ban an IPO of loss-making entities is to miss the woods for the trees. Equity investments, by nature, are risky. You can perhaps ban such loss-making companies from raising public deposits (which are unsecured). Don't ban them from raising equity capital. Let the retail investors participate in the development of the nation and reap the rewards in due course - albeit with a bit of risk in the process.



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Wednesday, 28 March, 2012

The rise of Regulatory Raj

The rise of Regulatory Raj

One of the most disconcerting aspect of the 2012 budget is the scant respect shown to the law of the land. By the Finance Minister, representing the Government of India. Headed by a Prime Minister who was the architect of the famous reforms that started the initial downfall of the Licence-Permit Raj.

When we enter into a contract - oral or written, we agree on a basket of terms. When we violate those terms, the other party can (and often will) take us to court. Normally, the courts will hear both sides out and come to a conclusion and pass a judgement. And after all appeal options are duly exhausted, the matter rests. This is the single-most vital aspect of any functioning democracy. The sanctity of the rule of law. One of the most important tenets of any law is that any enactment comes into effect on a prospective basis. And NEVER on a retrospective basis.

It is like one team having finished batting its quota of 20 overs in a T20 cricket match, and when the other team comes in to bat, the team batting second announces that the game has been converted into a 50-overs match, and they will have 50 overs to achieve the target! To any normal cricket fan, this will sound so crazy that it will be considered beyond the realms of possibility.

When a thief or a rogue scamster or a criminal breaks the law, it is only to be expected. And he / she is perfectly aware that if and when the law catches up, he/she will pay the price for it! However, when the persons who are supposed to uphold the sanctity of the law in high esteem do precisely that, we're beginning to wonder what's happening to our democracy.

Unfortunately, our "otherwise extremely wise" Finance Minister has chosen to do precisely that in his 2012 budget.

Apparently, our FM has broken all previous records when it comes to the number of retrospective amendments. And many of them are in a manner increasing the "discretionary" powers of people like Income Tax authorities. Considering the prevailing moral standards, this obviously would lead us to believe that rent-seeking would increase (in a layman's language, bribe-seeking would increase).

Take a look at this nice article on the subject by Haseem Drabu, a well-known economist and an ex-banker:

For those of you who want a sample, don't just think of Vodafone, the most obvious one. An interesting sample of retrospective amendment is that in certain specific cases, the FM has authorised the Income Tax authorities to reopen the Income Tax returns of upto 16 years. Yes, you heard that right. Sixteen long years! Till the other day, the corresponding figure was less than half that duration.

I've got a hypothetical doubt (which may not be so hypothetical for many of you):

Suppose that a particular individual has chosen to destroy all his Income Tax-related records which are over 10 years. If this individual's case is taken up for the aforementioned scrutiny and if the IT authorities wish to go through the last 16 years records, what are the options before such an individual???

To my mind, it is obvious. Unfortunately, the obvious solution is not within the realms of what's considered legal or ethical. The legal or ethical option, of course, would be to go to the courts. And the individual may well die of old age before he comes out of the case!



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Thursday, 22 March, 2012

Interesting thoughts on Post-Bubble performance of stocks

Interesting thoughts on Post-Bubble performance of stocks

The long-term price movement of hindsight-driven bluest-of-blue-chip stocks in a post-bubble scenario is most interesting.

Take a look at this one:

I'm sure that we ought to learn a very careful lesson from the above when it comes to booking profits (our cutting losses) at the end of any major bull run.

According to experts, we're just entering the next major bull run which is likely to last a few years, or till it reaches index PE Ratio of 25 and beyond. While we ought to enjoy the bull run by accumulating blue chip companies, we should constantly remind ourselves of the importance of what happens to stocks after the bubble eventually bursts!



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Tuesday, 13 March, 2012

Expectations from the Railway Budget

Expectations from the Railway Budget
(Realistic Expectations & Wishful Thinking)

After a long while, we're going to have the budget excercise in March. Tomorrow, we'll have yet another "Trinamool" Railway Budget.

In this post, I plan to have two simple sections - Realistic Expectations & Wishful Thinking. Here goes:

Realistic Expectations

  • Announcement of new trains, especialy to / through West Bengal and election-bound states. Gujarat could be a googly.
  • Meaningless tinkering of passenger fares
  • Promises of extra allocation for Safety, only to be surely forgotten
  • Announcement of a few tokenistic reform measures (to please the "reform-oriented" PM for what it is worth)
  • Demand for an enormous amount of funds from the Finance Minister to actually execute the announcements made in the railway budget and to "make both ends meet"

Wishful Thinking


  • Introducing a three-tier system of passenger fares for second class passengers:
    • The least level of passenger fares (pegged at a level 10% - 20% below the current fares) - These fares will be applicable for all really poor "below poverty line" BPL card-holders (who will have to produce their BPL cards as proof of identity for travelling with these fares
    • A "middle-level" but-still-subsidised set of passenger fares (pegged at a level 10% - 20% above the current fares) - These fares will be applicable for all "Ration-Card-Holders" who have actually bought any items from the ration shop within the last 3 months preceding the date of booking of tickets - After all, anybody who buys anything at the ration shop is at best belonging to the "lower-middle-class" or truly cost conscious. They ought to be provided with a reasonable subsidy - perhaps for a few more years
    • A "cost-based" fare fixed on a "No-profit-no-loss" basis for all other passengers
  • Announce Privatisation of ALL air-conditioned compartments in all trains. These air-conditioned compartments can be sold on 3-5 year leases to the private operators on the basis of public auctions - "Uneconomic routes" can be bundled together with "attractive routes" while auctioning, so that the private operators are encouraged to cover the entire existing railway network across the country. The successful bidders would be expected to recover their investment by pricing their tickets in any manner they deem fit. The government will be free to introduce a maximum of 50% additional air-conditioned compartments in any route "on grounds of public interest". Rules pertaining to the minimum number of passengers to be accomodated in each air-conditioned compartment can be laid down prior to auctioning these additional air-conditioned compartments that are introduced on account of "public interest".


  • On a pilot basis, a maximum of 10 "Bullet Trains" travelling at a speed of "Not less than 300 KM per hour" to be run by private operators can be started. The railway tracks for this purpose will be created by the private operators who will get a long term lease of, say, 25 years to operate these routes. Based on opinions obtained from an expert panel, these routes can run parallel to existing tracks or underground or on elevated tracks well above the existing trains - Let me not attempt to guess what's optional - let the experts decide.
  • The passenger fares for these bullet trains will be completely market-determined with no intervention from the government. The private operators will be at liberty to create any innovative revenue streams. They will be free to determine the frequency of trains.


  • The Primary Railway Stations at all state capitals can be let out on long-term lease of not less than 25 years on the basis of a "Build, Operate, Transfer" model. The existing space that is presently being utilised for railway stations can be used by the private operator, with the right to create enormous high-rise buildings which may be used by the private operator for any legal commercial / residential purposes - with the clear understanding that it will be for a period of the long-term lease. Whether he'll have retail malls or offices or theatres or residences will be the choice of the operator.
  • User Charges for the railway stations (like platform tickets, parking fees, etc.) will be fixed at pre-determined levels which will be part of the terms of the agreement between the private operator and the government.
  • Each Railway Station operator will be identified through a two-step global tender - First step will be to identify competent players based on financial clout, commitment for user charges, technical knowhow on handling such large-scale projects, etc. The top 5-7 players thus identified for each station will be asked to participate in the second stage of the tender through a public auction.


  • 400 Railway stations will be identified across the entire country which will form 400 "CENTRAL STATIONS" of the future.
  • A "Group of Statesmen" including the Railway Minister, Finance Minister, Urban Development Minister, Leader of the Opposition, a representative of each Chief Minister will be appointed to study the proposal and come up with a plan of action within 90 days.
  • They will identify a suitable method by which the entire land area sorrounding each of these 400 stations (within a radius of x kms from the station) will be declared to be "Model Urban Centres". The existing land-owners will be allowed to either continue their present activities or will be encouraged to start any business activity of their choice. Meaningful tax incentives will be created for this purpose. Both at the individual level and for corporates.
  • Business leaders will be encouraged to "Adopt" each of these "Model Urban Centres" through a similar basket of incentives
  • Any new school, college, hospital, theatre, etc. that comes up in any of these 400 "Model Urban Centres" will be offered a similar basket of incentives
  • All these incentives will be directly linked to fresh investments in these 400 "Model Urban Centres", and will be subject to independent audit
  • The Railways already own vast tracts of land in different parts of the country, and probably in these 400 "Model Urban Centres" as well. The railways will identified actual gaps in investment in each of these "Model Urban Centres" and lease their land parcels to fill such gaps. For instance, if a particular "Model Urban Centre" does not receive a proposal to start a high quality primary healthcare centre, the Railways will create one using their "sphere of influence".

I'm intentionally not going into other "specifics" which are part of the usual suspects of any Railway Budget.

If, however, any Railway Minister who actually follows all the above suggestions, chances are bright that he and his party will reap extremely rich electoral harvests. And, if I may add, the Railway Minister will, in due course of time, go on to become our Prime Minister in the years ahead. Just like Manmohan Singh built on his successful stint as the Finance Minister who brought back India from the brink to go on and become the Prime Minister of India.

I've consciously titled this portion as "Wishful Thinking". If wishes were horses, this one ought to fly!



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Saturday, 10 March, 2012

Interest Rate Cycle Peaks

Interest Rate Cycle Peaks

Hi Friends!

The Reserve Bank of India has just cut the CRR - without even waiting for the review due on March 15, 2012. That too by a "more-than-expected" 75 basis points.

This indicates a few interesting points about the thought process of the RBI:

  • RBI thinks that the liquidity situation is quite tight.
  • RBI feels that due to the Advance Tax payments next week, the liquidity situation will become even worse in the immediate future.
  • RBI feels that the danger of slowing-down of GDB growth rates is very live and real. Enough to act, and act decisively.

While this may not result in an immediate reduction in the interest rates for home loan borrowers (and other borrowers as well), this is as powerful and as strong a signal as any that the Interest Rate Cycle has peaked in India. There's no doubt about that.

How does this impact us? A few ways in which it is likely to impact us:

  • Market performance of interest-rate sensitive companies (like banks, automobile companies, infrastructure majors, real estate & construction companies, etc.) should do well in the months and quarters ahead. Hence, every dip in share prices should be used to load up shares of such companies. Obviously, we should focus on those that have been beaten down the most while the interest rates were moving up.
  • Loan rates are certainly unlikely to go up significantly any longer. On the contrary, the interest rates on loans should start inching lower in the quarters ahead. Home-loan & Car-loan customers can heave a sigh of relief.
  • Those who are planning to take a loan in the immediate future MUST take only a floating rate loan (even though, I'm sure, many banks would love to tempt you with supposedly attractive fixed rate loans). After all, once the interest rates start going down, they are likely to keep going down at least for a few quarters before taking a turn upwards.
  • Those who are having fixed deposits (or planning to open fixed deposits) should use the presently prevailing high rates to lock-in their money in fixed deposits for as long a duration as possible. There are some good public sector banks which accept deposits for a period as long as 10 years. This would come in handy especially for recently retired senior citizens.
  • Growth is likely to be back for Indian corporates - After tightening the belt for almost 4 years, chances are bright that you'll see smiles on the faces of CFOs. This should, hopefully, indicate increased job opportunities - both for freshers and for people looking forward to switch jobs to greener pastures.

Let's wait and watch the budget - and see if the Finance Minister also gives us reasons to cheer.



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Friday, 9 March, 2012

Kingfisher - Fit case for "Breaking the Corporate Veil"

Kingfisher - Fit case for "Breaking the Corporate Veil"

There has been a major hue and cry over whether or not to bailout Kingfisher.

In the entire discussion, an important aspect has been broadly ignored by one and all. Certainly by the Government of India.

Kingfisher has apparently been deducting taxes at source (TDS) but has conveniently chosen not to deposit it in time with the Income Tax authorities.

Income tax authorities have frozen a few bank accounts of Kingfisher airlines and are awaiting settlement of their dues.

There has been a stunning silence from SEBI and the Ministry of Corporate of Affairs.

Let's look at the facts - They are quite simple:

  • Kingfisher Airlines has apparently deducted TDS while paying salaries to its employees (perhaps while making payments to its vendors as well)
  • Kingfisher Airlines has apparently failed to deposit the TDS so collected with the Income Tax authorities.

Let's look at a hypothetical scenario in a very small kirana store or a small scale industrial unit or a small transporter owning a couple of trucks:

  • Can any of them stop payment of salaries for a few weeks without the explicit knowledge, consent and instruction from the owner/promoter?
  • Cany they refrain from depositing the TDS collected with the Tax authorities without the explicit knowledge, consent and instruction from the owner/promoter?

Chances are exceptionally bright that no owner can ever claim ignorance of these situations. Nor can he/she wash of his personal responsibility and accountability on such serious acts of omission and commission.

My contention is that if TDS deducted has not been deposited in time with the tax autohorities by Kingfisher, it is very clearly a wilful, conscious act on the part of the top management, most likely with the explicit knowledge, consent and instruction from the owner/promoter. Knowing the hands on style of functioning of Vijay Mallya, my hunch is that he is extremely unlikely to have been unaware of the acts of omission and commission.

This obviously involves treating the money belonging to other legal entities (such as the individual employees, the tax authorities, etc.) as money belonging to Kingfisher Airlines (for running routine day-to-day operations).

If Vijay Mallya and/or his top management have chosen to ignore the sanctity of the distinct legal entities involved in the matter, the law enforcement agencies under the Ministry of Finance & Ministry of Corporate Affairs must, likewise, explore the possibility of looking beyond the corporate veil of Kingfisher Airlines. They must explore the possibility fo breaking the Corporate Veil. They must look at legal options of holding Vijay Mallya and/or his top management personally liable for the payment of TDS deducted but not deposited.

There is no excuse. The time to act is NOW!



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What ails the Airline Sector - and what should the government do about it?

What ails the Airline Sector - and what should the government do about it?

There has been a major hue and cry over whether or not to bailout Kingfisher.

There are two parts to the entire Kingfisher saga:

  • Macro issues pertaining to the airlines sector

Obviously, there is much that ails the sector - not just locally, but globally. After all, other than a rare Southwest Airlines, virtually no airline across the globe makes profits consistently, year after year. This can only be due to two reasons:

  • Improper pricing - If all the players of the industry choose a suicidal pricing strategy which makes their business model unviable, there's little that can be done about it
  • Cost management - Considering the glamorous nature of the industry, the players don't focus enough on the cost structure.

Considering the above, every government across the world has to take a call on whether the sector is a strategically important one for their respective country. If it is deemed to be strategically important, the concerned government should either provide enough fiscal incentives, subsidies, etc. to keep their airlines alive. Or they should nationalise their local airlines and run it themselves. If airlines are viewed as just another business which is not strategically critical, they should simply let go of any idea of micro management. Instead, they should encourage free entry of all global airlines into their country and enjoy the fruits of crazy undercutting by all the players. Just restrict their own roles to collecting reasonable taxes, ensuring passenger safety, enforcing rules for connectivity for the entire country in lieu of licences for operating in key business centres, etc.

  • Micro issues pertaining to Kingfisher

We must remember (and insist on remembering) that nobody forced Mallyas to start Kingfisher Airlines. If Vijay Mallya wanted to spend his money on running an airline, that's his choice. If shareholders chose to invest (or punt) in Kingfisher shares, that's their funeral. If banks have chosen to lend money, that's their headache.

If PSU banks have been "pushed" to lend, however, the government may consider protecting the banks in a manner that would be appropriate without any element of a moral hazard. For this purpose, the government may perhaps appoint an independent panel led by a banker of impeccable repute like a Deepak Parekh or KV Kamath. Ideas and recommendations generated by this panel could perhaps be used for protecting the interest of the PSU banks - to the limited extent of safeguarding loans that were given to Kingfisher under duress.

So far as Kingfisher is concerned, there should obviously be no bailout of Vijay Mallya. All shares belonging to the promoters should be taken over by the lenders at a mutually agreed valuation as part/full repayment of their debts. A professional management directly reporting to an independent board should run the new Kingfisher. The lenders should get a veto power on

  • Top managment compensation including variable pay
  • Dividend declaration by Kingfisher Airlines

Employees of Kingfisher should not be artificially protected or "propped up" in any way whatsoever. We must realise that unlike landless labourers working in farms or construction workers employed in the unorganised sector, at least 98% of Kingfisher employees will be well-educated employees who have consciously chosen to be employed by the airline. Kingfisher employees are obviously reasonably well-paid white collar employees. They are not innocent victims by any stretch of imagination. They will all have a well-studied employment contract which will provide the terms of their employment and termination. Any emloyee who is terminated should simply be "taken care of" in accordance with his/her employment contract. No tears should be shed for them beyond this. We must remember that we are not living in the days where the maximum corporate salaries are pegged at artificially low levels. If the employees have chosen to be part of Kingfisher, just like they enjoyed the benefits of a "full-sized life" during its heydays, they must bear the brunt of the logical downside when the company goes under. Sad, but that's the reality of life in a market economy.

The government's role??? Certainly not to protect Vijay Mallya. Just ensure that the law of the land prevails, as the laws exist today. If at all any laws are being changed to accommodate Kingfisher, the changes should be applied only prospectively and should be applicable for the entire sector. In fact for all other sectors as well. I'm sure that people like employees of all BIFR cases would gladly join the queue for a bailout.

We must certainly not have a situation that encourages private profit and let the taxpayer bear the losses. Not even once.



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Thursday, 8 March, 2012

A Collector of Gems - Views of Charles T Akre

A Collector of Gems - Views of Charles T Akre

Came across an interesting interview with Charles T Akre ... ... ...

A brief excerpt from the above interview:


Charles T Akre on trading in and out of stocks to catch the peaks and bottoms:

Will I be better off if I sold them at the top and bought them at the bottom? Of course! Am I able to tell when that is going to be? No. My life experience is that if the stock is at $40 and I think it is worth $25 and I sell it at $40 because I want to buy it back at $25, my experience is that it trades down to $25.05 and then goes to $300 and I don't ever get my position back. Therefore, we are always trying to make sure that we own the compounders.


Charles Akre may very well be a great investor, but in the Indian context, I'm forced to disagree. And disagree strongly. Perhaps if I knew about other markets, I may disagree about those markets as well.

My rationale and line of thinking:

  • Ordinary investors like you and me are likely to have a reasonably diversified portfolio and if we miss the Jilebi, we'll catch the Laddoo.
  • There is a broad range of Market PE within which the indices tend to move over a long period of time. In the Indian context, it tends to move between a PE band of 15-25 on a trailing basis. Hence, when the Index PE approaches 15, we ought to start accumulating and start getting out when the same PE reaches around 25. Just check out the Top & bottom of Harshad Mehta's time, Dot-com time, Lehman Brothers time, etc.
  • Even during the long period of consolidation in between, individual stocks tend to swing wildly within a very broad range.
    • We just need to have
      • a broad basket of shares - say, 8-10 shares
      • identify the broad range for each share within the overall index range
      • and keep going in and out of pretty much the same set of 8-10 shares
    • And ensure that we stick to our broad "Asset Allocation" at all points of time.

Listen to all the masters, learn their "style of operations", "line of thinking", etc. Finally arrive at your own individual strategy that suits you. And execute that strategy meticulously.

Happy investing!



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Friday, 2 March, 2012

Evaluating a stock based on different perspectives

Evaluating a stock based on different perspectives

Different people evaluate a stock using different parameters. After all, if there is only one model of evaluating a company, the share prices would not fluctuate on a daily basis. At best, it will keep changing once in a few weeks or months.

While browsing the net, I came across this wonderful write up illustrating the extent to which valuation differs based on one's perspective.

Take a look:

What's impressive is that the author has described things in a language that's easy to understand for anyone with a basic understanding of finance.

Thanks, Sanjay Bakshi. What's important for you is to actually take a look at all those balance sheets that you'll start receiving in a few weeks from now - Perhaps you'll find some gems among them. And some junk. You'll be far better off by dumping the junk and deploying any surplus funds in the gems.

Take care!



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