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:

• The rise of Regulatory Raj

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!

Regards,

N

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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:

• Performance of Microsoft, Intel and CISCO after the dotcom boom and bust!!!

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!

Regards,

N

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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

PASSENGER FARES

• 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".

PRIVATE INTER-CITY RAILWAY CORRIDORS

• 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.

PRIVATISING STATIONS AT ALL STATE CAPITALS

• 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.

CREATING 400 URBAN CENTRES

• 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!

Regards,

N

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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.

Regards,

N

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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!

Regards,

N

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