Tuesday, April 20, 2010

Attacking inflation- Central Banks know it all

The Reserve Bank of India did the expected. Tinkered when it is not required. Still under a delusion that it can control inflation by simply moving some ratio by a quarter of a percent.
The RBI fails to recognise that the real issue facing the Indian economy is one of a supply constraint. Across industries, the capacities have not moved up to cater to the growing consumerism fuelled by loose monetary policies.
Across service industries we have the phenomenon of high levels of attrition caused by 'salary' shopping done by the young urbans. For them, a couple of thousand rupees a month means a change in lifestyle. And in a land where quality of manpower is in short supply, job hopping is the order of the day.
Easy money, credit write offs and schemes like the NREGA are putting in enormous spending power in to people's hands. The increase in money supply is simply chasing the stagnant supply.
In such a situation, even if RBI were to hike interest rates by a few more percentage points, it will not reduce consumer spending. And with consumer activism to the fore, it is no longer a shame to default, with courts also taking the sides of the defaulter. To be a lender, is to put oneself in a very weak position. Whether you are lending to a large corporate or to an individual. Defaulters are looked upon with sympathy and given shelter.
In such an environment, simply making money costly is not a solution.
Maybe, the RBI ought to rethink on selective credit pricing. Maybe an infrastructure project can be funded at a lower rate. Maybe a personal loan can be made more costly. Maybe loan recovery is not perceived upon as a 'sinful' activity.
Alas, the central bankers live in their own paradise surrounded by pillars of history.
The RBI says that it expects inflation to come down. So am I and so is everyone. If it is true, what is the point in a cosmetic change of a quarter of a percent? And that too at a time when the Indian banks are sitting on a few thousand crore rupees of excess liquidity that is parked in to liquid funds, with mutual funds? The bankers are shy of lending. We will soon come to a half way mark, where the bank chairmen will start pushing their people to meet their 'loan' targets. And lending will become reckless. Nothing changes.

2010-20- The lost decade for equities

My latest piece in the forthcoming issue of MoneyLife. I wonder whether the decade of 2010-20 will deliver any returns for the general investor in equities..


Monday, April 19, 2010

In Land we trust, to hell with stocks...

"As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.”—Adam Smith, moral philosopher of the 18th century.

Men have waged war with kin and kith over land; countries have invaded others for territory. Battles have been fought over land and families have disintegrated over disputes over land. In fact, I guess that land and property is the cause of at least half the disputes pending in Indian courts.

What is it about real estate that fascinates us all? Recently, I met a host of people in southern India who spend a lot of time in managing their own investments. They all seemed extremely happy with parking their wealth in real estate. A few of them, in fact, went on to say that in the last decade, stocks had given far lower returns than real estate.

What is it that makes us comfortable with real estate and sceptical about financial assets? One, you can touch and feel land but not your part-ownership of a company. Two, land is not traded every microsecond, like financial assets. We are forced to be patient with real estate and forced to be impatient with financial assets. Long-term investors in equity keep checking stock prices every day! They never venture to go out and check the price of the flat they bought or of the parcel of land they acquired on the fringes of some city. Even if they hear about a land deal at a lower price in the neighbourhood, they console themselves with the thought that their land parcel is better located, in better shape, etc. The noise from the silly talking heads (I confess that I too am a part of the noise creation) on the same-sounding business channels have converted financial assets into gambling chips.

The other major difference is that while buying land, investors do far more homework. Since it is a large chunk of money for a single deal, they make their own enquiries and then take a decision by themselves. With regard to financial assets, they can buy a tradable security for a few hundred rupees. And, they do not understand what determines stock prices, so they tend to go along with either a trusted financial advisor (not that an advisor understands, I suspect) or their friend or cousin. Thus, they have someone on whom the ‘blame’ can be pinned.

Of course, you can also lose on landed assets if you do not do your homework.
In real estate, options are available to buy land or a flat or an office or a warehouse, etc. You can buy an asset yielding revenues of 6% and above. In stocks, the yields are far lower. As regards appreciation, you will perhaps get the same returns over a decade or two; but real estate may appear the surer bet.

Choice of financial assets can make a huge difference to returns. Here, the knowledge of the investor as well as the advisor is limited and subject to the company in which an investment has been made surviving, making money, etc. Land is not subject to such vagaries. Of course, property prices can behave erratically depending on the location and the changes happening around.

However, in such cases, the investor feels far more sanguine about it. He simply does not show the same tolerance when it comes to financial assets.

Without taking sides, my view is that both have their place in an investor’s portfolio. It depends on the size of your fortune and the level of your comfort with financial assets. But one thing is clear. If you want to buy financial assets, you must imbibe the approach of real-estate investors. If you want to create wealth from financial assets, think of the long term and stop looking at stock prices every day.

It is not good either for your health or your wealth. The only big question, to my mind, is whether equities as a class will deliver any returns at all over the next decade, from this point in time. That is a separate issue and I will take it up another time. Happy investing…

Real Estate Portfolio Management Schemes- Caution

I came across a ‘real estate’ scheme cobbled together under a Portfolio Management Scheme umbrella from an AMC. It was a plain product, where your money is invested in to residential projects under construction with builders, presumably at some agreed price and then the builder sells out the project and the profits are shared between the builder and the financier (the PMS scheme). The interesting thing is that the PMS scheme merely acts as a financier and hence there is negligible chance of making big money on this. The sales force promises fancy numbers but I do not see anything like that happening. The investors are asked to ‘commit’ amounts, with twenty percent or so paid up front. The upfront depends on the investment projects identified by the AMC. As they identify more investment opportunities, they make further demands from within the committed amounts.
As and when any project is exited, the AMC distributes the money to the investors.
Unless the PMS buys out a property outright, full profits cannot accrue. In the opaque real estate industry, I would not be surprised if the PMS managers also strike some ‘side’ deals, which by pass the investor. Each investment follows a different style. In some cases there would be outright loans to builders, in some cases it would be ‘right to buy’ flats on completion, at pre agreed prices and a series of ‘arrangements’ with builders. Most would happen to be builder friendly deals, with the AMC not having the expertise for exit. Many will also talk about investing in a “SPV” or investing in to a project by way of “Convertible’ bonds etc., The more complex the structure, the lower the chances of an easy exit. In fact, I do not understand why the AMC does not invest in a simple fashion? They could just enter in to a profit share or a pure debt with the properties mortgaged. Or simply buy out the project, engage a developer and carry on with life. These AMC’s are opting for ‘user friendly’ transactions with builders.
A typical ticket would be for a minimum ‘commitment’ of around Rs.25 lakh. The terms would call for immediate payment of anything from twenty to twenty five percent of the commitment. The balance of the commitment would be ‘called’ in a time frame of anything from a year to more than that. The scheme would typically have a life of five to six years, with loophole to extend it further.
The AMC makes its money through the following routes:
i) A ‘management’ fee of around two percent per annum, on the committed amount!
ii) A ‘profit’ share of around twenty percent of the total gains made by the investor;
iii) Sometimes there is a ‘hurdle’ rate. What it means is that the AMC will not take a profit share unless the investor makes a return equal to the ‘hurdle’ rate. This ‘hurdle’ rate is kept at a ridiculously low level like ten percent or so.
These are the legitimate ways where they make their money. It does not mean that an investor would get everything else. That depends on the integrity of the AMC. Since it is real estate, exit prices could have cash components which never come to the investor. Similarly, some of the property can be sold at below fair prices to friends and associates of the AMC or the borrower.
In many cases, the AMC would not have the knowledge or the expertise to understand what is going on. For instance, in one of the schemes floated recently, I saw that only one person had some experience in an industry associated with real estate. All the others were either accountants or lawyers. And this scheme was targeting a total collection of nearly thousand crore rupees! I would steer very clear of such schemes, where the manager has no background. Real estate laws and practices vary from state to state and call for a high degree of experience and familiarity. Alas, the distributor does not give a damn. In a time where commissions from selling mutual funds are virtually vanishing, the real estate schemes are manna from heaven. Three to five percent upfront is welcome. Regulatory control is non-existent on launch of such schemes. This is a Greek tragedy in the making.
In a recent case, I had seen a distributor negotiating with the AMC for a share in the ‘profit share’ on exit. This used to be common in most PMS schemes. In this case, the response was interesting. The distributor was told by the AMC guy that they will not agree for this, but when there is an exit, they will sell him some property below then prevailing market prices, so that he could make some more money.
One more scam in the making, where even the regulator has absolutely no clue about the industry as well as the dynamics. These kinds of schemes come under the ambit of PMS schemes, for which SEBI is a regulator. It is time that real estate investments get a separate regulator. Till then, it is best that such schemes be put to a halt. I am fairly certain that most of the real estate scheme investors will come to grief as the number of schemes keep burgeoning. And burgeon they will, given the fact that distributors are now starved of businesses with significant selling commissions.

Monday, April 12, 2010

SEBI van Winkle- Bull in a China Shop

Finally SEBI has mustered courage to take on the Insurance companies (except fellow government co called LIC of India) in the matter of ULIP’s. Alas, it is very late, with ULIP’s having put in a big hole in millions of investors pockets. The only happy people were the ‘soliciting’ agents of insurance, who made fat commissions on every ULIP sale.
The main problem is that SEBI has made this move in a rather undesirable fashion. Insurance is regulated by IRDA. SEBI should have moved differently and avoid creating a confusion. Sure, millions of guys are invested in ULIP’s (proof that it is easy to fool people) and panic does not help. SEBI has woken up too late and is now trying stunts that can only create panic and confusion.

The mutual funds ran a better and more transparent vehicle for investments, but the distributors made far lesser money by selling a mutual fund as opposed to ULIP’s. So, naturally, they pushed ULIP’s down the throat of their ‘customers’. These advisors never explained the economics of a ULIP. Even comparison of NAV’s was a fraud. It never showed the return on what money you actually gave the insurance companies. AMFI never bothered to point out the difference. The simple fact was that most fund house sponsors also have insurance companies. Their approach was simple. “If my fund house does not get you, then my insurance company will”. So, AMFI kept its mouth shut, in line with the wishes and designs of its major influencers. In fact, AMFI should have filed a complaint with SEBI and even gone to the extent of getting a legal stay on ULIP’s long back. The fact that it kept quiet, begs the question.
Now, it is interesting to see what happens. IRDA has been widely quoted as saying as under:
“The IRDA.. is satisfied that the order of Sebi...will bring the insurance industry to a standstill which would not be in public interest and would be detrimental to the interests of the policyholders and prejudicial to the interests of the insurers," the mail noted. Hence, IRDA "directed to note" all the insurance companies that "they shall continue to carry out insurance business as usual including offering, marketing and servicing ULIPs in accordance with the Insurance Act, 1938, Rules, Regulations and Guidelines issued thereunder by the IRDA."
I fail to understand why public interest will not be served should the insurance industry come to a standstill. Why is it that they should come to a standstill? And why should stopping a fraudulent product be “detrimental to interest of policyholders’? This is no reason why ULIP sales should be banned.
I also think that the media should wake up and expose the ULIP. So far, they have perhaps kept quiet for fear of losing ad revenue from insurance companies and been their willing partner in seducing the public at large (in the matter of ULIP’s).
It is time for AMFI to join hands with SEBI and approach the courts to get an immediate stay on sale of ULIP’s. If this opportunity is missed by the mutual fund industry, they have only themselves to blame. Perhaps, even a single MF, which does not have an insurance associate, can join issue on this.
In fact, to my mind, over ninety percent of business done by insurance companies is outside the realm of insurance. Whether it is ULIP’s or endowment policies or ‘money back’ policies, the element of investment is far greater than pure insurance. In fact, the only insurance product is a term policy, which the insurance companies are loath to sell. Try and go to an insurance agent for a pure term policy and see the effort that he will take to fob you off. I have personally tried to ask agents and they have always ended up showing me the middle finger to such a request. On a term policy their commissions are the least. Luckily, now you can go online to pioneering insurance companies like Religare Aegon and buy a term policy without going through a broker or agent. Your premiums are extremely modest and once you take such a policy, you do not have to worry about ever seeing the face of an insurance agent. More important, you are financially far better off.

Monday, April 5, 2010

SEBI- Lost in a maze


SEBI has changed the time period for listed companies to file quarterly and annual results, in order to streamline the disclosure of financial results.
Listed companies will now have to submit audited quarterly results within 45 days from the end of the relevant quarter, the Securities and Exchange Board of India (SEBI) said in a statement.

Currently, listed Indian companies submit unaudited results within 30 days from the quarter-end.

However, SEBI has reduced the period to submit audited annual financial results within 60 days from the end of the financial year, in place of 90 days currently.

The changes would encourage companies to submit audited results faster, a SEBI official, who declined to be named, said.

The regulator also said companies would have to report their asset-liability position along with their half-year results. Currently, companies disclose their balance sheet position only at the time of annual results.

The revised rules will be applicable with immediate effect.

This is certainly a good move, though one would have wanted the quarterly to go and the half yearly interval being enough for any investor. Unfortunately, the regulators have fallen prey to the broker demand, who need to create buzz as often as possible, to create trades where none are necessary.
My bigger concern is that now the auditors will have to compulsorily throw their hands up in despair. How many companies can an auditor handle? And how competent is he to do anything at all? Managements should rejoice, because more means less here.
Imagine an auditor certifying the quarterly results of a company like Reliance or a SBI. There is absolutely no way he would have a clue about anything.
The other interesting fall out is that the 45 day window between closure and declaration of results, gives a lovely window for the promoter to rig his shares. He has more time to plan and execute the play.
SEBI is now like a Bull in China shop. Killing the mutual fund industry, losing its grip and issuing a show cause to the insurance industry, missing the IPO grey market, and playing in to the hands of brokers and merchant bankers. Ignorance is bliss.

Sunday, April 4, 2010

The parasites- Burden on society

This article:


talks about how even those caught with tax evaded money, get away with no punishment. We never hear of any one paying huge penalties. The answer is obvious. There is a 'settlement' between the person who evades taxes and the tax officials.

This is how corrupt the system is. Since eons, law makers have been avoiding imposition of punishment for those caught. In fact, to my mind, the tax evaders are the real scum and parasite, who bleed the system and are a slap in the face of the honest tax payer or the salaried employee who has no chance to evade.

I think that each one of us knows many people who evade taxes and are rolling in black money. We should start boycotting the bastards. I also urge the finance minister to publicly announce a reward for those who help in recovering tax. For instance, if there is a ten percent reward to the informer, I will gladly give a list to the department.
The effing journalists also keep quiet on the tax evaders. Citing libel laws, they do not put the name of the tax evader. They also never follow up on their stories as to what kind of punishment gets meted out.
I maintain that India's corruption level is at its highest since 1947. And getting worse each minute.