Poor governance can stop the bulls

A downward correction on profit-booking has been anticipated for sometime, but has been staved off by some impressive foreign buying. On Friday, FIIs were net buyers of Rs 2,685 crore, and on Monday, Rs 1,125 crore. So far in calendar 2005, they have invested over $10 billion.

In addition to foreign buying, a large portion of domestic household savings are being diverted from traditional fixed-interest investments to equities, because of favourable tax treatment. So long as the favourable tax treatment continues, domestic flows would continue surpassing foreign inflows.

With increased inflows, comes a shift in valuation judgements. Our attitude to money and to investing changes with the amount of money we have. Consider a person making, say, Rs 10,000 a month. For him, a meal in a fancy restaurant once a month would be a luxury. If he were making 10 times the amount, his attitude would change so dramatically that he may well start considering it a necessity. What seems highly priced then becomes reasonable.

What can slow the bull, then? Well, for one, governance issues. Investors, whether foreign or domestic, need to be assured of good governance and pay more for it. But when Parliamentarians are taking payment to ask questions, one shudders to think about the quality of the polity. Would they be able to make sensible economic decisions that would provide jobs and growth?

China, which is able to pass laws much easier, has grown to become the sixth-largest economy in the world, with its concomitant political power. In textiles, unfettered by opposition, such as from our Left parties, its growth has been explosive since the multi fibre agreement (MFA), providing tens of thousands of jobs.

Another expose was the funds allotted to MPs to use at their discretion for developing their constituencies. Some of them are being misused. There are several schemes with laudable objectives that fail miserably, and use up public money, because of lack of oversight. Perhaps deliberately? Uncontrolled and wasteful expenditure leads to fiscal deficit, which now (including the states) has crossed 10% of the GDP. Failure to control this is another probable cause for investors to stay away.

Owing to this fiscal deficit, the government may be able to convince its Left partners to sell its residual stake in companies like Maruti, Balco, IBP, VSNL, CMC and IPCL.

Having said that, the corporate sector, both private and public, is confident. ONGC, through its fully owned subsidiary ONGC Videsh Ltd, has partnered with China’s CNPC to successfully bid Rs 2,700 crore for a 38% stake in Sudanese oilfields.

This, again, is where governance issue comes in. If, thanks to wasteful expenditure and misdirected subsidies, companies like ONGC are asked to bear a burden on subsidising LPGkerosene, they would have so much less for acquiring oil assets.
The subsidies, meanwhile, would go not to the really deserving as to the trucking industry for adulterating diesel and lowering road transport costs. This, in turn, undermines the railways.

GAIL is likely to move upstream through an acquisition, for which it has a $500 million war chest ready. Air India is going in for a huge fleet expansion, at a cost of $8 billion and has raised a $492 million loan to meet downpayment, since its slated IPO has been delayed. Another governance issue?

Governance also includes penalising those who attempt to, or succeed in, beating the system. Our legal system needs a complete overhaul. Last week, the Bombay high court convicted four people in the 1991 securities scam, a delay of 14 years, for a case involving Rs 15 crore.

That is not the end of the legal road. This has got to change. We need to be both swifter and stronger in penalties; let us see whether the scamster in the Yes Bank IPO is sufficiently penalised to deter others.

The Sensex went up from 9248 at the end of last week to a all-time high of 9427 mid-week, on the strength of the strong foreign buying support pointed out earlier. It then fell, on profit-booking, to end the week at 9256 for a weekly loss of 27 points. A bigger correction is needed; it may, perhaps be triggered by a cabinet reshuffle, slated soon. Buy into the correction.

What can slow the bull, then? Well, for one, governance issues. Investors, whether foreign or domestic, need to be assured of good governance and pay more for it. But when Parliamentarians are taking payment to ask questions, one shudders to think about the quality of the polity. Would they be able to make sensible economic decisions that would provide jobs and growth?

China, which is able to pass laws much easier, has grown to become the sixth-largest economy in the world, with its concomitant political power. In textiles, unfettered by opposition, such as from our Left parties, its growth has been explosive since the multi fibre agreement (MFA), providing tens of thousands of jobs.

Another expose was the funds allotted to MPs to use at their discretion for developing their constituencies. Some of them are being misused. There are several schemes with laudable objectives that fail miserably, and use up public money, because of lack of oversight.

Perhaps deliberately? Uncontrolled and wasteful expenditure leads to fiscal deficit, which now (including the states) has crossed 10% of the GDP. Failure to control this is another probable cause for investors to stay away.

Owing to this fiscal deficit, the government may be able to convince its Left partners to sell its residual stake in companies like Maruti, Balco, IBP, VSNL, CMC and IPCL.

Having said that, the corporate sector, both private and public, is confident. ONGC, through its fully owned subsidiary ONGC Videsh Ltd, has partnered with China’s CNPC to successfully bid Rs 2,700 crore for a 38% stake in Sudanese oilfields.

This, again, is where governance issue comes in. If, thanks to wasteful expenditure and misdirected subsidies, companies like ONGC are asked to bear a burden on subsidising LPGkerosene, they would have so much less for acquiring oil assets.
The subsidies, meanwhile, would go not to the really deserving as to the trucking industry for adulterating diesel and lowering road transport costs. This, in turn, undermines the railways. GAIL is likely to move upstream through an acquisition, for which it has a $500 million war chest ready.

Air India is going in for a huge fleet expansion, at a cost of $8 billion and has raised a $492 million loan to meet downpayment, since its slated IPO has been delayed. Another governance issue?
Governance also includes penalising those who attempt to, or succeed in, beating the system. Our legal system needs a complete overhaul.

Last week, the Bombay high court convicted four people in the 1991 securities scam, a delay of 14 years, for a case involving Rs 15 crore.

That is not the end of the legal road. This has got to change. We need to be both swifter and stronger in penalties; let us see whether the scamster in the Yes Bank IPO is sufficiently penalised to deter others.

The Sensex went up from 9248 at the end of last week to a all-time high of 9427 mid-week, on the strength of the strong foreign buying support pointed out earlier. It then fell, on profit-booking, to end the week at 9256 for a weekly loss of 27 points.

A bigger correction is needed; it may, perhaps be triggered by a cabinet reshuffle, slated soon. Buy into the correction.