NPAs- ONE way to treat them

NPA. A very vexatious issue. What is terrible is that loans get written off or there is some Crony Debt Restructuring (CDR) and it is business as usual again. There are companies like Indo Count Industries etc where the banks have made sacrifices and all the upside after the loan waiver has been to the promoters.

My suggestion is that whenever there is a loan waiver, the banks should be issued a mix of Preference Shares and Equity Share Options at par equal in value to the amount sacrificed. The options could have a ten year expiry.  All these options can be pooled in to a separate investment vehicle that is managed by professionals in an SPV that belongs to the GOI. This will ensure that the the banks also get some share in the upside.

The preference shares can have a put option at the end of 3 years or so and banks can get it back. The preference shares should carry a dividend  and there should be a condition that preference dividend will get priority over equity dividend and the rate cannot be lower than the equity dividend. Similarly, if there are any stock splits or bonuses, or any other dilution, the bank must be compensated.

It is tragic to see the promoters laughing their way to riches after looting the public money from banks. As it is the public bear the brunt of farm loan waivers. While one could probably attribute that to socialism, this corporate debt write offs has a rich mix of fraud and corruption.

I know my suggestion will not be liked by the business community, but I am sure that any rational human being would support it.

Now, which side of the coin do the politicians, the PMO, the RBI fall? Are they on the side of the businessmen or are they rational?

Yes when there are genuine business failures, there is no impact. But this scheme would work like a pooled insurance. I recall the old days when the development institutions had a compulsory conversion clause for a part of the loan. This kept institutions like IDBI/IFCI alive for years beyond their practical death

PRESERVATION OF CAPITAL- IN A BULL MARKET

(This appears in today’s Deccan Chronicle-  http://epaper.deccanchronicle.com/articledetailpage.aspx?id=8319913

We generally take it for granted that in good times, we can buy a rupee worth of tomorrow’s products, by paying more than a rupee today. As the noise escalates, so does our imaginary gains.. Then …)

PRESERVING CAPITAL

Markets have reached a stage where nothing seems to deter a buying idea. Neither a dubious past, not dubious promoter seem to matter. The momentum in the small and mid cap space is so great, that a mere mention of a stock name on the social media is enough to set fire to its price. Everyone is a hero. And some serious investors too do not mind going along, as there is a big fear of ‘being left out’.

 

If I am an ultra HNI, with no financial worries, I can speculate on the thinnest of reasons. Losing some part of my money is not material to me. The excitement of always having to make a trade is sufficient compensation.

 

In this market, most of the ideas or recommendations that are now popping up, have the one or more of the following traits:

 

  1. Absurd valuations being justified by optimistic expectations;
  2. Poor quality of promoters overlooked and justified on price;
  • Commodity stocks getting valuations like pharmaceuticals used to get;
  1. Forgetting the debt on the balance sheets;

 

 

In general, the nature of trades that are being done now, put your capital at risk. You have to be absolutely swift in taking money off the table. In investing, there is something that is called as ‘potential’ rewards.  It generally is an inverse of popular sentiments. In other words, when I am buying at a high valuation in a bull market, my return depends on the same conditions persisting or improving when my stock has to be sold. Should sentiments turn, then price can be dented severely and even the recovery of principal can be a big issue.

 

Thus, it all boils down to risk management at a personal level. At this juncture in the stock markets, the risk reward is clearly unfavourable. It does not mean that you sell everything and go. Keep high quality in to your investment portfolio and treat the not so high quality as opportunistic trades. Play the market according to what you can afford. Also, remember, in the midcap space, buying is a lot easier than selling. When a small stock trades a couple of hundred shares a day, the price moves up rapidly when a few buyers emerge. On the flip side, when people want to sell, you will see the Lower Circuits in operation for many days.

 

So, how does one address the issue of investment risk in these uncertain times?

 

For the mutual fund investors, I would think that this is a good time to be in to Balanced Funds. The automatic cap on the equities will ensure better risk management. It will give you some upside of a raging bull market, while protecting you from a big fall. And I am not even betting on a decline in interest rates. If you are having to invest a large amount, I would urge caution. You may not always be lucky in the midcap stock that you buy. One way to check your risk in a new idea, is to see how the price of a stock has behaved over the last couple of years. If most of the rise has been in the last one year or so, then your potential upside is low. Most of the jump COULD have already happened. Yes, of course, there would be some exceptions, but I would still err on the side of caution.

 

Fundamentals of investment do not change. Valuations are a function of market moods and momentum. As an investor, I like to buy when things are to my advantage. I have yet to see any market that has run away forever. In the late 1980s, the Japanese stock markets ran away as if there was no tomorrow. The Nikkei (an index of Japanese stocks, like our Sensex) was in shouting distance of 40,000. Just have a look at where it is now. In nearly four decades, the index is nowhere near that peak. Of course, not every stock would have done it. But the odds are that most of the stocks would have followed a similar fate.

 

People tell me that I am too negative on the markets. I am simply paranoid. I see risk at every corner. I am happy to preserve my capital and put money when I am happy with MY assessment of risk and reward. Remember that if something loses half its value, it would have to double from there, to come to status quo (not to mention time value of money).

 

 

 

 

Stock Markets- A bull on steroids

(This column appears in today’s edition/s of Deccan Chronicle- The Markets are firm on the surface. But the churn that is happening beneath the surface is often the thing that impacts many investors.  http://epaper.deccanchronicle.com/articledetailpage.aspx?id=8214344 )

Opportunities Knock

Company results for the quarter ended March 2017 and the full year 2016-17 are tumbling in. Corporate profits are still very poor. Growth in sales and profits seem to be anemic.  And of course, the analyst population has now started to justify its absurd price targets on FY19 earnings!! When they could not forecast three month trends, they expect us to believe a two year in to the future vision.

 

I also see that companies have raised record amounts of debt and equity in the first four to five months. Most of the debt has gone to simply replace maturing debt.

 

If you were one of those investors who kept his wits around you in the last six to twelve months and pursued your hobbies, you might consider shifting your attention back to the markets. No. Do not spend all your monies. But start looking around and keep a list of high quality stocks and their prices handy.

 

When the weak hands panic, the first things to get hit will be the poor quality stocks that have run up (most of the mid cap stocks would fall in this poor quality). The panic will spread to the better-quality stocks also.

 

What will also help a long term investor is that in the last one year, all analysts upped their earnings estimates simply to justify higher price targets. This means that there is a slew of earnings disappointments across the spectrum. And in a market that is on steroids, disappointments are punished severely. I can see the punishment meted out to a stock like Cummins India, where the market seems to think that the company has lost its mojo. (disclaimer- I own a few shares). I make a distinction between this kind of price fall and price fall in the pharma company stocks where the issues are ethical in nature. Of course, corporate crimes are forgiven and if we subscribe to that, maybe the stock prices will recover one day or the other and go back to its old glories. On the other hand, the market seems to love small growth in companies like HUL, which seemed to have been forgotten till a couple of months ago. Now investors seem to be willing to go back to proven quality names.

 

The other thing that I hope will happen is that the large stocks will go in to a listless mode. There will be bouts of disappointment which will bring down prices. All of this makes for a good environment in which to invest.

 

At the point of investing, I am not bothered about the ‘market returns’. My aim is to beat that handsomely. That I can do with minimum risk only if I can evaluate the ‘prospective’ return on my investment. That is, if a stock normally trades in a range of twenty to forty times earnings, our prospective returns are related to the earnings multiple at which we buy. Here, what can distort our analysis, is one instance of earnings failure. So let us use a combination of P/E and price relative to book value. Using both these, we could probably improve our odds.

 

Another factor that will be disruptive to corporate earnings and balance sheets will be the introduction of GST. It will create bumps in earnings as companies try to game the apparent rate differences and the procedural complexities. To me, it is another event that could provide price falls in stocks. In adjusting and managing the new environment, large companies will manage transition better than the smaller ones, who will find the compliance costs daunting.

 

One other thing we will notice now is that transgressions by companies will start getting punished. In a bull market, investors are very forgiving. It is a myth that institutional investors are fussy about governance. There are two kinds of companies-  One set that is known to be unfair and unethical. There is another set that we do not yet know. No company can be presumed to be ethical and fair for ever. Somewhere, the pressure to perform at the stock markets has compromised the way people would behave. So, choosing management quality helps to minimize the damage.

 

All these are symptoms of a nervous market, looking for excuses to correct prices. Yes, it is also possible that prices may be range bound, for a long time, waiting for earnings to catch up.

 

Once again, do not invest all your money. Spread it out over the next two years. And augment your cash balances by getting rid of those impulsive purchases you made, if you think the valuations are high. A nervous market also corrects our valuation metrics. Stick to your processes and do not rush in. Opportunities will keep coming. If we want to buy five stocks at a reasonable price, it makes sense to prepare a list of ten. We cannot chase every opportunity and not every one on our list may come in to a buying price range.

 

 

 

GST- Speed-breakers to growth

GST is finally about to see the light of day. As an investor, please understand that GST does not give any sustainable edge to any one company over another. Any small savings that happens, will certainly get eroded gradually. You will, in the days and months to come, be reading about ‘GST winners, GST losers’ etc.

 

There could be marginal shifts in the burden of tariffs due to the changeover from the existing structure of taxes on goods and services to the GST regime. However, any gains or losses on this account will be nothing more than transitory. Competition will ensure that gains/losses are passed on to consumers. Thus, GST by itself is not going to impact the profitability of any company.

 

GST may bring two broad things- Immediate chaos because changeover problems. This could last for a year or more. And contrary to what should have been a single body administering GST, we have every State Government and the Central Government enthusiastically participating in this and making compliance extremely complex. Let us hope that corruption is reduced. What the government has NOT done so far, is to take away all ‘discretion’ away from the executive powers with administration. IF they do not do so, then corruption will not come down, but rather increase. Small businesses will have a tough time.

 

The governments (State and the center) will in all probabilities collect a higher revenue under the GST system, as evasion becomes difficult and people are unable to claim their full set offs.

The big blow that has been slipped in is the huge rise in Service tax rates from fourteen to eighteen percent. Probably, this will ensure that the tax collection of the government shows a sharp rise.

 

We still have the state governments acts on various products. Many cities will lose out on their Octroi collections. The good thing is that transport of goods would perhaps become cheaper as lower bribes will be paid. However, the bureaucracy seems to have armed itself with the onerous documentation requirements that are so complex, that any assesse will gladly pay a bribe to escape the unknown. The E-way bill will ensure that the time saved by Octroi is subsumed and no real benefit happens to businesses.

 

As it is, I can see the ‘undecided’ items like Gold & Jewelry falling in to a separate bucket. While logic says that they should be in the five percent or higher bucket, the trade lobby is so strong with the politicians that they will get away with a rate as low as one or two percent. Just think. I would have put these at 28%. These are wasted consumption and simply add to the balance of payments problems.

 

When GST was conceived, it was supposed to be a single point tax, with no role for the state governments. From my experience, I can tell you that business is not as much bothered by the rate of taxes as much by the corruption and harassment by the state governments. Thus, this GST has been a big letdown. GST is also supposed to be a single rate across products, except perhaps some sin products like liquor, tobacco and gambling. That would have been a great thing. However, with so many slabs, the politicians will each year keep shifting products from one band to the other, for some consideration or the other. So, my view is that corruption is going to be same or higher under GST as compared to the present system.

 

I also think that the 20 lakh rupee limit for applicability is going to be a gold mine for evasion. Why should any one be exempt from GST? If everyone can have an Aadhaar card, they will be connected enough to pay GST. There are enough stories of road side food stall owners being worth crores and crores and not paying any taxes. And if the consuming public are paying MRP for everything, why should anyone be exempt from GST?

 

Procedural compliances are going to be engaging everyone for the first couple of years. The government machinery has created another weapon of terror and harassment, with the number of forms to be filed at different intervals, with multiple authorities.

 

When the government came to power, they promised ‘ease of doing’ business. Unfortunately, it seems to be true only if you are a foreign portfolio investor. For Indian businessmen and service professionals, the processes will be a big negative.

Emotions in investing or How to get lower returns from stocks

(This appeared in the Deccan Chronicle of 14/5 & 15/5 – About waking up too late and then worrying about markets and stocks)

TIMING THE MARKETS

 

One of the readers of this column asked this question:

 

“I am a follower of your thoughts on investments, being long term, but when do v start buying when markets start correcting, how long should v wait to buy, i understand experts say don’t catch a falling knife, we do not know when will markets stop, then how to buy?”

 

This line of thinking presumes that there is a lot of things to buy and once the ‘market’ starts to fall, we can buy. Buying is so easy. One can buy whenever the mood seems favourable. Or when the noise is so high that everyone around us seems to be buying and selling stocks. Everywhere there is talk of IPOs and Warren Buffett. It is as if all it takes to make money is to simply buy some stock and then sell it at a higher price.

 

When money starts to burn a hole in our pocket and we succumb to the noise, it is probably the path to rags from riches. To buy something in the stock market, we must know what we are going to buy. It is not like going to a restaurant and choosing at random from a menu that is handed over to you. Not all stocks will give us similar returns.

 

Once we identify a stock that we like, the question is when should one buy it? Ideally we should be buying at a price that can give us good returns. Thus, lower the better. Easy to say. But the stock keeps going higher and higher, you say. Are there any measures that we could use to put our finger and pull the trigger?

 

It is logical to presume that so long as a company keeps growing, its stock price will keep going higher and higher. In a steady state market, where everyone is perfectly logical and rational, prices will keep moving up steadily, in line with the earnings. So you take a measure of past earnings growth and take a call on whether the growth rate will be sustained or not.  In my last column we talked about using the Balance Sheet check to see if the company is healthy or not. Fortunately, our markets are not rational and hence they are always in a zone of over optimism or pessimism.

 

So, we do not have to be bothered with the Index per se. Yes, if everyone is negative on the economy and on the stocks, all shares will decline in price. In a normal market or in a bull market, everything goes up. Some go up faster than the others. So, in essence we have to bank on gyrations in the market to ‘time’ our buys or sells. The markets keep getting pushed by institutional investors who believe that money is given to them to ‘invest’ and hence will buy stocks for over ninety percent of the money they collect. However, an individual is under no such compulsion. We can wait for our time.

 

The precondition for shortlist is good fundamental analysis. Now, we have to buy in such a way that our downside is minimised and upside is maximised. I do not recommend using High/Lows as a tool. Simply because as the earnings grow, the valuation also rises. A good proxy to use is the Price to Earnings (PE) ratio. If we take a long history, for instance, I can see that a stock like Hindustan Unilever has traded between PE ratios of 25 to 50. This is a wide range and offers enough actionable space. Thus I will buy this when the PE is closer to 25 rather than 50. It is possible that the PE may never touch 25 or could even go below. For me, it is just one trendline that I use as a support. Similarly, when choosing a stock to sell, I would pick the one that is closer to its historically high PE. While there is no guarantee that this will predict the tops or bottoms, it gives us a process that eliminates our bias and preferences. We may see a market index swinging between a PE of 15 and 24 or so, but each stock will have its own swing range.

 

It is useful to remember that there is no perfect tool to measure the ‘fair’ value of a stock. It can be only a range. Precision is simply not possible, since the market is a sum of expectations rather than a precise measure of historical earnings. Thus, by using some yardstick, we are able to ‘time’ our buys and sells, with reference to valuations rather than a mere number.

 

Having a process, helps us to keep our emotions at bay. Emotions generally work to reduce returns from our investments.

 

 

 

 

Who wins? The businessman or the Investor?

(A brushed up and improved version appeared in Moneylife ..  Just thought I would share this-  How times have changed and perspectives have changed in the capital markets)

WEALTH CREATION – AN UNEQUAL BATTLE

 

Capital Markets are reformers. As more and more people realize it, the game changes. If I go back to time till the early nineties, the stock markets were very benign. Valuations were very moderate. Interest rates were in their mid to high teens. And given licensing and corruption, company growth rates were modest.

We also had a set of archaic rules where even a promoter could not pay himself a salary that was limited by law.  Our economy had the proverbial “hindu” rate of growth. Agriculture was two thirds of the economy. Services was not an officially recognized sector to make a dent.

 

This naturally meant that there was a big incentive for a promoter to siphon off money from the company. Stock markets were so archaic that a government babu who worked on a book value formula fixed the MRP of a share. Thus, a good company had no incentive to issue shares. Many companies got listed merely for tax reasons. Shares in a private limited company were subjected to ‘wealth’ tax whereas shares in a listed company were not. So many good companies listed. However, they made sure that application forms were distributed to select target groups. Thus, we see that many promoters had holdings between fifty and ninety percent or more.

 

This sarakari babu also helped in creating immense wealth when he forced companies like Colgate or Lever to issue shares to Indian public based on their formula. Imagine if you had got a 100 shares of Colgate Palmolive at the issue price of Rs.26 (face value Rs.10/-) in 1978 in an IPO that was like the Sikkim Lottery? In the first two years, you would have got dividends and bonuses that would have made the shares free and by now you would perhaps be owning close to a lakh shares! That is, provided you had serendipity on your sides and did not sell out. Hundreds of similar ‘investors’ will be there, but there will be thousands who sold out too soon. Very few investors actually piled on to the secondary markets and made it big.

 

Promoter wealth creation had to depend more on siphoning money out of the company rather than by building wealth in to the company. The cruel tax structure plus the wretched state of the capital markets led to this promoter behavior. Greed is dormant in all humans. Capital markets brought this alive.

 

Then came liberalization. And the abolishment of the MRP system for share issuances led to a new paradigm.  Then in trooped the institutional investors and a spread in knowledge about shares, share prices, research reports etc. A liberalized economy brought in with it a flood of capital that also structurally brought down the interest rates. And the government also freed things like promoter salaries etc.

 

Now, the promoter started to think. He realized that a rupee of additional EPS meant a few more crores added to his wealth. So, stealing from the company was not as remunerative. Of course, there are many whose DNA cannot change. But then the next generation is as smart as their parents. They also have the advantage of an open economy and enlightenment about the capital markets. They know that it is important to show as much earnings as possible, so that the share prices remain high. And yes, one can play games with shares. Private placements, QIP issuances, non-disclosure of promoter holdings in full etc have opened a world of excitement.

 

The present generation is clued in on the capital markets. So if you think the DNA has changed, think again. It does not. The gene is the same, but the manifestations are different. The entrepreneur dresses up his business to present a façade of attractiveness.

 

I now see a breed of young investors falling easy prey to the second-generation entrepreneur. The young investor is brash and their crowd is large enough to create a short term ‘self fulfilling’ prophecies when it comes to share prices of small companies.  Gen-next is sharp. They know the key to riches lies in the capital markets. And they have ready accomplice- Investment bankers hungry for fees, institutional investors with other peoples’ money and brokers who know how to lure investors to stocks, no matter how bad. The stock markets are a magnet that draws every participant in to its folds.

 

As a fly on the wall, there are a few things that strike me. One is that the entrepreneur is as sharp as he was. No one can mess with him. Investor is more aggressive, but more gullible. The regulator has left the field open. Like the Keystone Cops, they will provide the laughs in the end.

 

Let me close this out with the story of a commodity-based company from Western India. In the eighties and nineties, the earnings used to stagnate. The promoter did not like paying excise duties so most sales proceeds used to be pocketed. Earnings would always disappoint.  Today, newspapers talk about ‘re-rating of the company. The second generation is in control. They have spared no effort to shore up the earnings. And now they talk management jargons. They are now considered as a ‘retail’ brand. Over the decades, public awareness of the brand has been high. But now, the analysts and fund managers are becoming aware of this brand. This is because the investors and analysts have never been to a market to shop for their household. So they believe in the ‘brand’ getting more reach because of advertising campaigns etc. The analysts, if they go beyond their topline and bottom line growth, will find out the true growth story.  However, they are now busy planning their investment in a QIP. Once the QIP happens, the cash will go out of the company and then the stock would perhaps become a ‘bargain’.

 

Information age? You decide for yourself. Yes you get a slew of information. But that one piece of right information will not come your way. You have to go dig for it. In this battle between the entrepreneur and the Investor, there can be only one winner. Look at the Forbes List. Are there more investors or are there more businessmen whose wealth has been given to them by the capital markets? Choose carefully. Do you want to be an entrepreneur or an investor?

 

To be an investor, you need money to seed your ideas. On the other hand, if you have an idea, you can seed it with venture capital money and then use the capital markets to create your wealth. And you can exit before anyone finds out whether your business is a winner or a loser.  Ideas for business create wealth of a magnitude far greater than wealth that may be generated by investment ideas.

 

BALANCE SHEET- KEY TO STOCK PICKS

(This appears in some editions of Deccan Chronicle today. It is amazing to see stocks now being bought on EPS, rumours and future house of cards. I think this is a great time to study companies. Of course, if you are a CAT investor (with several crores in the bank) it hardly matters)

“BALANCE” SHEET

In understanding or analyzing any company, the most commonly used document is the annual report. The annual report has, among other things, a ‘profit and loss’ account and a ‘balance sheet’ . The P&L tells us what happened in the period under review (typically a twelve-month period or a Financial Year as is commonly referred to) in terms of sales, the costs incurred in reaching those sales and the resultant profit or loss. A balance sheet gives you a position of what the company owns (machineries, land, vehicles, receivables, inventories, investments, bank balances and other ‘assets’) and what the company owes (share capital and reserves, loans, creditors and other ‘liabilities’).

 

A strong balance sheet can help a company weather a couple of bad years on the P&L. However, a weak balance sheet is like a fair-weather friend. In good times, it makes things look brighter and in bad times, it can sink you without hopes of a recovery.

 

In a bull market, most people look just at the bottom line or the profit numbers and some related things like EPS etc. The balance sheet is ignored. When the tide turns, those companies that have weak balance sheets, will tend to implode. Most research reports from brokers will simply talk pages about market shares, profits and not talk much about the cash flow or the debt on the books. Their analysis is heavily dependent on the P&L account.

 

One important health indicator in a balance sheet is ‘debt’.  Once a company is mature, it should be logical for a company to keep reducing its debt and become debt free. It’s profit generation should be sufficient to wipe out debt and keep growing. It does not mean that it will come to raise equity capital every year. If we look at great companies like Nestle, Colgate, Bajaj Auto, Hero, Asian Paints etc, you will understand what a healthy balance sheet means. These companies are market leaders in their businesses and highly profitable. They will not have debt on their books.

 

A company with no debt has greater freedom to take risks and explore new options. A company laden with debt does not have this luxury. Take the case of the ‘infrastructure’ companies. In the heady days of 2007-08, they took on loads of debt and were banking on continuous placement of equity at huge premiums, to finance their business. Soon, they lost everything and collapsed under the burden of debt. A couple of them, with no debt to very low debt, survived and are now in capitalizing by being able to execute new orders. Same is the case in the real estate sector. Those builders who borrowed and got stuck with unsold inventory, are in a soup. Commodity companies with wafer thin margins and high debt also became victims of poor balance sheets.

 

I like to look at the net profit of a company in relation to its total debt. If the total debt of a company is higher than four to five year’s net profits, then I think that the company is very high risk. One turn in the business and they will default. These companies have to raise fresh capital to keep going or keep finding new debt to replace the old. Such companies are high risk opportunities.

Just like debt, there are companies that are stressed for cash. Their current assets (debtors and inventories) grow faster than their sales do. Which means that the business is too competitive and they are likely to face a cash crunch plus debt write offs in the future. A business that is ten years old, ought to manage cash flows in a manner that the total debt actually reduces in absolute numbers and finally gets extinguished.

 

Yes, there are companies which like to grow furiously by taking on new projects year after year. They are living dangerously and are banking on the friendly banking system to support them in bad times.

 

It is true that leverage (debt) helps to boost shareholder return. However, that can happen only when the business earns a rate of return that is significantly higher than the cost of borrowing. If a company can do it successfully, year on year, then the cash thrown up will make it debt free! Just look at the ROE of debt free companies like HUL or Colgate or Nestle and compare them with any company with debt.

 

For long term investments to pay off, the one sure test is a balance sheet test. Do not forget the balance sheet and the cash flow. These two analytical tools can help keep you away from potential disasters. The P&L is only the dressing on the salad. And quarterly numbers are even more of a dressing than the annual ones.

 

 

Morals in investing? Honesty in advertising?

Two trustees of the Tata Trust have suddenly discovered that it is immoral to invest in shares of companies making cigarettes. I do not know what motivated them, after years, to make an indirect attack at ITC. Instead of sponsoring litigation for damages against cancer patients- They also manager/administer a cancer hospital.  And there is an old saying that  tells us that if we life in glass houses, we should not throw stones at others.

 

https://advisor.moneylife.in/blog/stocks/article/will-indian-hotels-stop-selling-cigarettes-and-cigars/2232.html

 

Make in India, LIST in India

My friend, Umesh Kudalkar is someone who I respect and admire. He is outstanding at investment analysis and has deep views on the subject. He is also an active member of the global CFA Institute. He has penned a letter to the PM, which I have pleasure in reproducing below.

Problem

Pensioners, Savers and Investors in our country don’t have sufficient number of investing options that beat inflation. With government pensions going away, the retirees are at the mercy of their children in old age because Bank Fixed Deposit rates don’t beat inflation. Moreover, the high quality stocks that are usually bought by mutual funds are being quoted at very high Price to Earnings Ratios. Their prospective returns may again not beat inflation.

Solution and Proposal

PM could extend his slogan by saying that ‘Make in India and List in India’…. India has the best capital market system in the world. The finance ministry (through SEBI and Stock Exchanges) should call the officials of the leading global companies that sell their products and services in India for a meeting and put forth a proposal for listing their stocks on National Stock Exchange in India if they wish to continue to sell their products and services in India.

For example, we have many multinationals that are listed in their home countries, New York Stock Exchange, London Stock Exchange as well as Indian National Stock Exchange e.g. Nestle, Bosch, Hindustan Unilever.

When we have such a precedent, why not make listing in India compulsory for these global high quality companies such as say Samsung? Even though, these companies would not need any money to be raised in India, the listing of global high quality companies (MNCs) should be made compulsory for the benefit of Indian Citizens.

In addition to the above, the government should also take steps to prevent formation of private subsidiaries in India by listed global multinational companies. This is because, if they list in India, they should not divert value out through private companies shortchanging the Indian minority shareholders.

The logic behind compulsory listing

All of these global companies derive part of their market capitalization value in their home countries because 130 crore Indian consumers consume their product and services. What do the Indian consumers get in return other than the product or service they buy by paying money to these companies? …. Absolutely nothing.

Benefits of the proposal

Pursuing this logic, if these global multinationals are made to list in India, then Indian Pensioners, Savers and Investors would be able to invest in these high quality businesses thereby probably beating inflation and live a dignified life in retirement.

Few Examples of Global Companies that are not listed in India:

Toyota, Coke, Pepsi, McDonalds, Google, Apple, Microsoft, MNC pharma companies … the list in endless

Banks now spend from your account

(This appears in yesterday/today editions of Deccan Chronicle. Suddenly, we find the bankers hungry to eat in to our balances and what we took as freebies for ever now getting priced in. While I agree that there is a cost for everything, the prices should also be reasonable and transparent. A commercial bank should not be a tool for a government policy where one person pays for another one to enjoy. That is robbery)

http://epaper.deccanchronicle.com/articledetailpage.aspx?id=7897422

THE COST OF EVERYTHING

 

In the good old days, banks took your money happily, gave us Savings Bank Interest at four or five percent per annum. However, this was based on the minimum balance between the tenth and the last date of the month. In other words, if you kept a lakh of rupees for 29 days and withdrew Rs.90,000 on the last date, you got interest on Rs.10,000 for the full month. And that interest would be credited every half year to the account. We used our bank accounts to issue a few cheques, draw cash and ask for some remittances. Remittances were never free. We paid D/D or T/T or Mail Transfer charges. It took a few days for money to be moved in. Even if your account was with a bank that was across the street from my bank, it took two to three days for us to effectively transfer money between each other.

 

In the process, the banker used a lot of our money for free or at a very low cost. As consumers, we could not demand anything more as the practices were the same across the banks. Of course, if you had lots of money, the branch manager would give you special favours. Like allotting a locker, giving you some demand drafts free and personally attending to you.

 

Today, the change is revolutionary. The opening up of the sector brought in private banks like HDFC, Kotak and a host of others eager to grow. They introduced the latest technologies and focused on giving us good service and conveniences. We now take it for granted that physical location does not matter, money is transferred instantaneously and banks can provide us with any service relating to transfer or moving money in an instant. In the beginning, the banks offered all of these services and more for free. They stole the consumers from the old age banks on the basis of more conveniences and speed. However, in the rat race between themselves they also offered everything for free. The revenue they gave up was like the ‘customer acquisition’ costs for them.

 

By now, most of us have got used to our new private bank accounts. And today, the bank account is linked to everything from paying of a range of bills, linking our stock market and mutual fund investments, remittances, pensions, salaries etc.  So, if we must change bank accounts, there is a range of collateral actions that should be done. All of them involve some element of form-filling and spending time and effort. So, we have become ‘addicted’ to a particular bank account. Unless we are angry or upset, we are unlikely to change banks.

 

Now the private banks have their hooks in to us. So we are faced with a sudden imposition of ‘charges’ and ‘fees’ for everything. It is not that the private banks were not making any money. Given that they are all listed entities and most of them have given generous “Stock options” or “ESOP” to their key employees, there is tremendous pressure to keep profits growing. In the early days, banks like HDFC grew at a rapid pace and year on year growth was impressive. Soon they have reached a size, where the ‘rate’ of growth is getting smaller. Now they have to find newer ways to accelerate profits. Thus, we are seeing the introduction of ‘charges’ and fees for everything. For the bank, it is a simple exercise. For instance, a hundred rupee charge on a crore accounts implies an additional Rs.100 crore of revenue per annum on a recurring basis! So it is simple arithmetic at work. And the bank knows for sure that given the stickiness of the account number etc, it is unlikely that people will shift banks. And more important, I think all banks are now acting in unison. If everyone imposes a charge, do you and I have an option?

What is worrying is the manner in which the charges are being levied. Banks are simply sending messages (often hidden in some email) saying that your account will be charged some monthly or quarterly fee for some basic service. And they will put it in fine print that if you do not want it you can ‘opt out’. So, it is not a fee that we were aware of in advance or agreed to. It is simple arrogance. And the knowledge that as consumers, we have no options. Then, there are some other ‘relationship’ charges that banks impose in a similar manner. If you shout, they reverse the charge. But less than one percent of people shout, since most people do not notice small charges to their accounts.

 

The banks do not have a regulator that works to protect the consumer. RBI has not bothered to do anything about this. It is as if the RBI officials do not have any bank accounts themselves.

The banking “Ombudsman” to whom one can complain, is unlikely to do anything. He gets paid by the bank and will be loyal to them. Maybe it is time we woke up and took to the Consumer Courts.

 

R Balakrishnan