Saturday, March 24, 2012

Does ownership matter (or why I dislike PSU stocks)

( This article appears in the latest issue of Moneylife)One thing that is clear to all of us now is that when selecting stocks, a conservative investor has to look at ownership as well as the nature of business as two primary selection points. Of course, we have all the fundamental and technical analyses that one is comfortable with, but to me, these two factors will form the basis for primary inclusion or exclusion. As regards nature of business, there are many measures and I will simply state that I like companies that have business which is not vulnerable to regulatory fiats and are in the top two or three of their industry. Also, I prefer businesses that are consumption driven (FMCG, Pharma, Housing Finance etc) rather than a business to business model. For me, more important is ownership. The thing I will avoid is government of India ownership. This may sound surprising given the fancy for stocks like PSU Banks, BHEL, Coal India and its likes. I am comfortable not having any of these in my stock portfolio amongst my core holdings. Government of India ownership is an issue with me because the business focus is simply absent. There is no continuity in a business plan as the CEO’s keep changing frequently and no one person is allowed to have a long range vision and carry it through. Perhaps the concerned ministries do have some kind of plans for companies in their fold, but it is subject to the personal whims and fancies (apart from political pressures) of a particular minister. And none of the considerations could actually be helping the company to earn more money. If one says that the role of a PSU is to look beyond profits, then my submission is that these companies should be delisted. Let the government become the sole owner and do what it pleases. Once an outside shareholder is included, the main obligation is to create value for the shareholder. And this can be done only by generating more profits. This means that companies like the public sector banks, should be free to lend where they want. They should not be compelled to lend to any group or sector which the government directs it to do. As a shareholder, my concern is that the bank is being forced to lend in to high risk areas and not at the best possible pricing. I know this sounds very commercial, but investing in shares is a commercial decision and not a patriotic act. I can write books about the flaws in the public sector management capabilities and delivery, but in short, I will skip investing in shares of companies belonging to this promoter. Having excluded the public owned companies, we are left with the private sector companies. By no means are these saints. In fact, in most cases, I am hesitant to even shake hands with the promoters, for fear of losing my fingers. Most promoters use the companies as their personal fiefdoms, providing money plucking opportunities to kith and kin. The shareholders get what is left. The returns that come to the promoter shareholders and the others shareholders are two different things. However, over the last few years, most promoters have realised that long term wealth creation (by having high share prices) is also important, the other shareholders also gain. For instance, if I own 70% in my company, I may prefer not to siphon out a couple of crores since the increased reported EPS would help to increase market capitalisation by a greater amount. This goal is in sync with the other shareholders. Personally, I put my investments in Indian promoter companies under ‘speculative’ rather than investment category, simply because I cannot take anything for granted and want a higher level of alertness. I never know when a promoter may sell the business, take a personal ‘non compete’ fee and then use the money to do a strange business. For most Indian promoters, other shareholders are nothing but ‘nuisance’ value, albeit essential. So, when I get in to private sector promoter companies, I know the risks, but am betting on the fact that a higher share price is the common goal. I also know that the promoter is going to take home something far higher than what other shareholder gets, but I look at it as the price one pays for entrepreneurship. Of course, in the private sector, there are also foreign owned companies. Here I am a bit more comfortable since they are all focused on remitting as high dividends as possible. The flip side is the transfer pricing and royalty leakages which happen. However, by and large, most MNC companies listed on our bourses (HUL, Colgate, Nestle etc) have been great investments and as a universe, surely score over Indian family owned companies, from an external shareholder point of view. There is another category of ownership, where there is no single group of person in control of the shareholding. These are mainly run by professionals and are focused on business growth and profits. To name a few, these include companies like HDFC, CRISIL, L&T, ICICI, Infosys etc., It is possible that in these companies, one person may have an overbearing presence, but these companies will live beyond the individual. Here I am more comfortable that the family ownership model. It would be great if all family owned companies ultimately transform to this model. It looks very unlikely in India, where ‘family’ is important- whether it is company or country.

Sunday, March 18, 2012


(This appears in today's Deccan Chronicle/Asian Age) The budget changes nothing as far as our investment strategies or themes are concerned. If anything, it reinforces the tried and trusted routes. First let me talk about a couple of supposedly new things that this budget talks about. A new scheme called Rajiv Gandhi Equity Savings Scheme is proposed. The scheme would allow for income tax deduction of 50 per cent to new retail investors, who invest up to Rs. 50,000 directly in equities and whose annual income is below Rs.10 lakh. The scheme will have a lock-in period of 3 years. We have to wait and see what the ‘permitted’ equities that this scheme will cover. It is very unlikely that this deduction will be allowed for any universal investment. For, if it is so, I will happily buy shares or Infosys or HDFC or HUL or ITC and laugh my way. I can buy every year. So, I think they will limit it to either IPO’s or shares in PSUs or some such things. To me, if they let us invest in any share, it is a bonanza. Imagine buying quality shares at a meaningful discount! I only hope that they do not make it like the ELSS in mutual funds. It is unfortunate that the ELSS schemes have done poorly as compared to open ended diversified schemes. One would think that a three year lock in would help the fund manager to take a better view, but our fund managers seem to be at a disadvantage when they get money that is medium term, with no calling back for three years. The other interesting thing that stands out to me is the clear superiority of buying gold in the ETF form rather than physical. This budget imposes many financial burdens on buying jewellery. The budget proposes a tax collection at source on purchase in cash of bullion or jewellery in excess of Rs. 2 lakh. This looks like it is aimed at curbing black money, but my feel is that people will continue to buy in cash without an invoice. For those of us who would like to invest in gold, physical gold now becomes less attractive and the ETF route becomes a winner again. This has no TDS, no ‘making’ charges and no excise duty etc., In fact, one of the fund houses has recently launched a gold ETF where you can get physical gold in exchange if you have more than 10 grams equivalent in the ETF. Wonder what the authorities are going to do to this mode. Technically, one can beat the TDS route by redeeming for less than Rs.2 lakh worth in one transaction. In jewellery, it may not be possible to split the bills if a single piece costs more than two lakh rupees. A small reduction in the Securities Transaction Tax does not make too much difference to anyone, since the absolute amounts are going to be miniscule. It may help someone who is a compulsive “Buy Today Sell Tomorrow” punter. The one big negative thing for retail investors is the imposition of TDS on debenture interest when the interest payment exceeds Rs.5,000/- in a year. If one has a lakh of rupees in debentures and the annual interest is Rs.10,000/-, there will be deduction of tax at source. The present rate is 10% and maybe this would apply. This will be a big negative for the retail bond investor. Many senior citizens I know are within the taxable income limit and put substantial money in to bonds because there is no TDS. Now, they will have to live with lower returns. Yes, they will get a refund if they file returns and wait for one to three years. Most senior citizens I know will have a problem filing returns since they will have to find a consultant and spend money on it. I hope the government has a relook at this and like in Fixed Deposits, let the investor file a form for non deduction of tax at source wherever applicable. On the one hand, the government talks about broadening the bond markets and here they create operational problems. This budget will of course make many things expensive for us. The benefits that we have got are miniscule. Our hope and prayer should be for reduced inflation and lower oil prices. Do not lose much sleep over changing investment strategies or philosophies. R. Balakrishnan March 17th, 2012

Saturday, March 17, 2012

Vodafone vs the GOI

The Vodafone affair is now a much debated one. There are many who want to see the 'foreigner' paying his due on a massive chunk. And there are those who think that the government is being foolish in its pursuit that will only deter new investments. I am totally opposed to this 'retrospective' announcement that the GOI is talking about. Hopefully, the Supreme Court will knock it down. What is the sanctity of a commercial deal, if you have the threat of post facto governmental action at a distant point in the future? Is the move of government a well thought out one or is it one more weapon in the armoury of certain politicians to get at some targets? Intriguing. The Vodafone case is funny indeed. Vodafone did not make any money. They bought the business from Hutchison Essar combine. So, if anything, money is made by Hutch/Essar. According to the government, Vodafone is guilty of not deducting tax at source on the payment they made to Hutch/Essar. Now, did the government even try to ask for money from Hutch/Essar who actually sold the business and made their money? Apparently, the government feels that it has no hold on Hutch and so cannot pursue Hutch. Vodafone is an easy target because they have business interests in India which can be put at risk by the government of India. To me the issue is not one of losing out tax revenues. It is a question of how legislation ought to be drafted and what is the comfort that even an Indian can have in his own government. And what about Essar, which should also have made some money from the sales? Has the government approached them for collecting any money? I have no idea, Sir. The government also had a requirement that any tax payer can be asked by the tax authorities to revisit his records for the past eight years. Now, they have increased it to sixteen years!! So much more business for document storage companies and so much more avenues for pre emptive bribe collection .

Fudget 2012-13

Maybe we have become used to budget watching. The budget did not create any of the usual excitement nor did it arouse any anger or passion whilst being presented. I guess all of us knew the backdrop in which the budget was being presented and also about the political environment in which it was being presented. This budget is a clear cut evidence of the helplessness and the lack of will on the part of this government to do anything that may jeopardise their staying in power for the full term. So, they have let the accountants do the budgeting rather than use the budget to propel growth rate or take corrective action in the realm of subsidies, inflation etc. The Ponzi accounting continues. No one knows once the year ends, numbers are revised. Live the moment. The brouhaha over the railway budget had left all of us expecting nothing from the budget. All of this worked to the advantage of the Finance Minister, who presented a budget that had almost an excel spread sheet like approach. A bit up there, a bit down here was all there was to it. The excise duties were jacked up given that they had been lowered in 2008 to combat a perceived threat of a slowdown (that never happened). Hopefully, this excise hike will lop off some of the heat on the demand side that has been the primary cause of an uncomfortable level of inflation. The widening of the service tax net is a welcome one, though the ‘negative’ list is something that is debatable. Now we just have to wait till the service tax is raised to the promised level of 16%. There has been the usual passing of favours to obscure sectors in the form of rebates and concessions. I recall something like ‘branded’ silver jewellery segment receiving some largesse. On the imposition of the Direct Taxes Code and the GST, there appears to be some delays (expected, given the political fractions). Strictly speaking, this is an event that will be triggered outside the budget. The talk of a “White Paper” on Black Money seems to be laying the grounds for a Voluntary Disclosure Scheme, which will enable laundering money for the politicians, traders and businessmen. There seems to be lesser number of new ‘welfare’ schemes this year bearing the Nehru family names, except for a modified ELSS scheme that has been given Rajiv Gandhi’s name. I do not know the details yet, but do not like the framework.. The fiscal deficit numbers have lost their meaning. The government now proposes to amend the Fiscal Responsibility legislation. Similarly, no one believes the promise to bring subsidies down to 1.7% in a span of three years. Cleverly, in the talk of this number, the subsidy on petro products has been left out. There is also some clever arithmetic. For instance, there is talk of capitalising banks through a holding company, which would raise money by itself. So, the government has washed its hands off the funding. This holding company can easily raise money from the PSU’s (including banks) and rescue the government. No complaints. Better than directly telling each PSU to buy in to another. Given the muted intents of this government, the targets look like a pie in the sky. A minor slippage in the fiscal deficit targets could happen if oil prices derail the arithmetic. And in any case, there is always a slowdown in the planned spending across various projects, which could help in the end. The markets can go on as usual. Let the foreigners digest the government announcement to change income tax laws retrospectively since 1962! Where else can the FII or FDI investor have so much excitement created by the regulator! It clearly demonstrates to the world that India is a different cup of tea. Now you like me, now you don’t. Who cares.. R. Balakrishnan

Thursday, March 15, 2012

Budget 2012-13- Last chance UPA

(This appeared today on the Moneylife website) The budget is the last hope for the market run up to continue in 2012. Almost all of a year’s gains seem to have materialised in the first two months of the calendar. And being the fools that we are, we think the budget is the sole instrument of change. Personally, I do not see anything material in this forthcoming budget. Numbers, in terms of fiscal deficit being here or there, are good for debates on television. The unchangeable truth is that India will continue to run trade deficits for the foreseeable future. A consumption led demand push has kept growth buoyant as aspirations of the burgeoning upper middle class take wings. Liberal lending by banks and NBFC have helped create this demand pull that has resulted in the domestic economy being on a high. Even with a slowdown, we are still talking about growth upwards of six to seven percent. This growth is there, in spite of our politicians and the Central Bank. Neither have the ability to take it to the next higher platform (like China, which has pursued growth with single minded focus). Barring some irrational hold on sectors like Oil, Banking and Telecom etc the government has kept its nose out of industry and commerce. Minor irritants in the form of tariff adjustments should not make a material dent to industry at large. Also, the government has displayed a singular lack of will in pushing through creation of infrastructure, which in turn is the single biggest hurdle for accelerated growth. So, irrespective of the government’s worst efforts, it is reasonable to assume that growth will not slip below six percent or so. As a rule, it pays to keep out of stocks that are vulnerable to governmental action/interference. What keeps these shares in demand is the HOPE that government will let go. Good luck to those who have this hope. The government will not let go of what is not yet freed because it is their last few tickets to stealing fortunes. The Ugly combination of inflation and continuing trade deficits will ensure that India always has this issue of piling debt and continuing erosion in the value of the home currency. It keeps getting propped up by a combination of remittances by overseas Indians (which also includes some money laundering), loans from foreigners, FDI and portfolio flows in to debt and equity. Our growth rate ensures that we are like the one eyed amongst the blind and the foreigners’ compulsion to invest (as they need to find new places to grow the markets) will keep FDI and portfolio flows happening. We can also expect Indian government succumbing to foreign pressure and open up whatever sector is still closed to them. Only those sectors where the politician is directly impacted (real estate and agriculture) at personal levels, FDI or portfolio flows may not be allowed. Allowing FDI/FII in to any sector means increased demand for transparency and that is not welcome. So, in the budget, I do not look for anything. Fiscal deficit (any new definitions like “Primary deficit” by the clever people at North Block notwithstanding) will be closer to double digits if we take in to account the State governments’ shortages. Socialist policies introduced by the Nehru family will ensure that money is wasted on schemes that permit leakages to the politicians. Do not look for reason or rationale in their benevolence to some obscure tinkering which favours some relative of some politician. This budget CANNOT propel India to the next level of growth. So, if the budget is veneered with bold statements of apparent intent, ignore them. The political cauldron will NOT let change for good happen. It is certainly a matter of belief rather than of logic as far as I am concerned. If there is a big rally and talk of a dream budget, exit if the rally takes the market beyond 6300 on the NSE or above 20000 on the BSE. I also hope that the budget stops the practice of favouring some industry or section of society with sops that come at the expense of revenue collection and being impartial to others. For instance, it would be great if the IT exemptions to SEZ/ IT are totally withdrawn. One has been abused by the realtor gang and the other has gone to fatten companies like Infosys, Wipro and TCS. In this world, businessmen will invest so long as there is an opportunity and profit. A few thousand crores of tax concessions to a handful of companies means that the gains go to line the pockets of these company promoters alone. Instead, however much we may argue against, it is better to spread it amongst a larger group of people by reducing the tax rate. Any support that is given financially to any section of society is never constructive. For instance, it is my personal experience that something like NREGA has actually destroyed the will/need to work in some pockets that I have been exposed to. Instead, if the government had used the subsidy money to set up a power plant, however small, it would have been of greater benefit. However, in reality, I expect many more schemes of populist nature to dot the budget. Tightening the belt is unknown to our politicians who use the budget as a tool to supposedly win votes. Of course, the result of the UP elections would mean that the government has prepared two sets of budget and may choose an option that seems politically expedient post the result. Do not get swayed by a hike in some income tax exemption limits, unless it is significantly large enough to boost consumption. If so, be prepared for higher inflation also. Even if the government wakes up and pushes some supply boosting measures, it would be two to three years before the supply actually increases. I am afraid that the UPA government will become more left than the leftist and lead us on the path to a lower growth trajectory. I hope my pessimism is misplaced and that the Finance Minister will present a budget that does not favour some particular business alone. I hope that he reduced the subsidies on fertilisers, diesel and power. R. Balakrishnan ( March 4th, 2012

Wednesday, March 14, 2012

Railway Budget- Fare Hike A good thing.

The proposed modest increase in rail fares, is a move in the right direction. It is possible that this may cost the Minister his post, if media reports are anything to go by. Unless he is the chosen one to be the scapegoat. Keeping public utility prices unchanged for years, when input prices and other costs in delivering them are galloping, is suicidal and destroys it. Our electricity boards are in a pathetic shape, only because of free supply to so many people and below cost delivery in many states. People do not mind paying full prices for any utility, whether it be power or it be water or it be transport. Yes, a high level of subsidy can be afforded by sovereigns that have revenue collections in excess of expenditure. Maybe the OPEC countries can afford it. A country like ours, cannot progress without infrastructure. And the problem with infrastructure is that unless there is adequate recovery of running costs, infrastructure cannot be renewed or added. This is something even a kindergarten student should be able to dig. Our state and central politicians have been used to populist policies of living in denial. Refusing to hike prices for so long that the service provider collapses. Recently, when J Jayalalithaa became the CM, one of the first things that was done was revision in milk prices and bus fares. The state was looking at costs and revenues and these two hikes have been taken in stride by the people. Yes, we will have shouts and protest engineered by politicians, but people at large are not going to crib about the railway fare hike. Yes, we all hate to pay more, but inflation also puts some increasing amounts of money in everyone’s pockets. I hope the same thoughts will extend to the diesel and petrol prices. In fact, if the government were to give up a little on the exorbitant taxes (central plus state), both diesel and petrol can be sold at the same price. Lower than the current price of petrol, surely. This will also stop leakage of diesel to people driving Mercedes and Toyotas with diesel engine. The farm lobby will protest, but in reality, diesel expenditure is a small part of all other costs. Same goes for fertilisers and pesticides too. Perhaps, the government could go for a calibrated increase. The NDA had started the process of bringing petrol and diesel prices to market determined prices. Unfortunately, the last year of its term in office was destructive and it just stopped changing the prices. In fact, at that time, people had started getting used to changing prices of petrol and diesel. The Manmohan Singh government has nothing to lose. They will continue to remain in power, thanks to a divided opposition. Mid-term polls are unlikely. Let them repair the finances of this country.

Tuesday, March 13, 2012

Coal India - Some FII is angry-

According to a report in Moneycontrol ( The Children's Investment Fund is miffed about the company not standing up for the rights of its minority shareholders. TCI is another FII, who seems to not understand how our public sector companies work. We have a SBI, which is used to distribute largesse to some perceived poorer sections of society, ONGC, BPCL, HPCL etc are constantly screwed by the Oil pricing policy of the government. Each and every PSU has been established with a view to providing a tool to the politicians (read government) to either line their pockets or to win populist favour. I can ask TCI if they are merely upset with the pricing policy intereference alone. Does the fund know that the accounts are not fudged? Does TCI know whether the inventory reported in the books are real or not? So many questions to ask and TCI ends up asking irrelevent questions. For example, do we have any FII ever asking questions (or being worried about ) the level of interference in SBI or ONGC or HPCL or any other PSU? If they dont ask and are happy with what the promoter shareholder does to the company, how can TCI dare to ask? The report says that TCI owns some piddly one to two percent shares in the company. The promoter holds near about ninety percent. So, tell me, whose rights are more important? If TCI does not like what the owner does to his company (in every private company also, the promoter does what he wants. Diversification, appointment of children to offices of profit, buying and selling through family owned agencies, private aircrafts etc etc etc), they are free to sell what they own. No one compels them to own shares in a company which is so important to politicians and ministers. The TCI chap also seems upset with the owner's decision to supply coal to private sector companies at low prices. Now, listen buddy. If India's private sector funds the political parties, does so many favours, is it not fair that the government reciprocate in some way? And, look at it this way. This act of low priced sales of coal will ultimately help the cost of power to be supplied by the private companies low. So, if something benefits so many people, who the hell are you to ask questions. Obviously, you do not have any knowledge of how the world works. Maybe the fund is called The Childrens Fund. I hope that you are an adult, who is aware of ground reaiities. I am sure you had at some point invested in great companies like Enron, WorldComm etc., We no longer care about what american bankers or investors tell us. Look at the mess they are in and look at the problems they have caused us. So, TCI, you can like it or lump it. Coal India is a Navaratna and the government of India has absolute monarchy over its affairs.

My Dear Finance Minister.. (and the PM too)

Dear Finance Minister, It is that time of the year when you execute the wishes of your political bosses in the matter of distribution of money that you do not earn or own. It is in line with the so called socialistic approach of the Congress party under various members of the Nehru family. You take away money from honest tax payers and give it away to sections of society who you think are relevant. You say that you are alleviating poverty, but I have a right to think that you do this in order to try and protect or grow your vote bank. Sir, your rulers have destroyed and defiled the constitution to an extent that we now have sections of society fighting and protesting to get ‘notified’ as ‘backward’. Nowhere in the world would someone fight to be classified as being backward. I have no issue with this on you. I am resigned to the fact that you will dip your hands in to the pockets of citizens who earn and pay taxes. However, what I want you to do is to stop enriching some sections of society. You are well aware that no one joins politics for the legitimate salary that it offers. A family could make a decent living out of the wages that politics offer, but hardly build legitimate fortunes. Yet, each time we now see the ‘declared’ assets of politicians who stand for elections, it is obvious why they love all your expenditure schemes as well as the authority given to them, which is obviously on sale at a price. I agree you will not stop fellow politicians from getting rich through illegitimate means. We can only hope that one fine day, the law will catch up with them, once law itself is cleansed. You do some more arbitrary things that need to be stopped immediately. Stop giving concessions to lobbies of industries. By giving a tax rebate to IT industry, you are only lining the pockets of a few businessmen. It is because of your selective favours that we Indians have a unduly large share of 4% of the world’s top 500 richest persons. Of course, in this 500, politicians are not counted. We do not want you to give tax concessions to builders, who in any case corrupt the system and have made housing in to an unaffordable word. We do not want you to give any breaks to any industry, for it simply lines the pockets of a select few. For a moment, please step back and estimate how much of revenue sacrifice is made by giving huge concessions to a handful of businessmen. If the same amount were instead passed to the poor (here you can classify them whichever way you want since you need the votes next time around) there would be better distribution of money that you dob from the tax payer. I do not buy the argument that any business needs ‘incentives’ to survive or thrive. Entrepreneurs are hungry and clever and do not build businesses solely on government protection. They merely use government protection to multiply their returns. You do this because you obviously ‘collect’ something in exchange for the party you represent. In effect, you are using the revenue sacrifice by the citizens and sharing it between the party and a handful of businessmen. I have nothing against ‘subsidies’ that are passed through diesel or fertiliser. By all means please increase it. You can easily do this if you simply stop giving concessions to select industries each year. If you scrap the plethora of exemptions that are available, tax collection and compliance would become easier. I do not understand why the Income Tax Act cannot be written in under ten pages, in simple clear and unambiguous language. Do this one reform and you will bounce back. Scrap each and every exemption or deduction. No one wants it. They only create illusions of growth and employment. For example, Infosys or TCS would still be around even if you did not give them any tax breaks. They would have created exactly the same number of jobs that are there today. So, please do not give in to temptations of collecting money for your party and give concessions. In any case, you have sufficient spending under various development programmes and infrastructure projects, which contribute significantly to accumulation of wealth by certain persons. And the Indian citizen accepts graft in many things as a way of life, whether it is speed money or grease. What I say above goes against my grain. I am a fan of meritocracy and capitalism. However, I have realised over the years that it is futile to expect the world to be run on merit. Parasitism is for real and people like you are there to propagate it in the name of socialism and alleviation of poverty etc. I cannot change the politician. What I am seeking from you is just a better redistribution of what largesse you misappropriate. You do not care for your next generations because your station in life has permitted you to be secure for the next few generations. Unfortunately, some of us on the other side are not so blessed. It would be a good gesture if you left something on the table for the meek (only in the holy book do they inherit). R. Balakrishnan ( March 10th, 2012


(If you are lucky enough to be a US citizen, you should explore this option for estate planning) This article appears in the latest issue of Moneylife ( magazine INSURANCE- AT LAST........ It is good to see a host of life insurance companies actually ‘advertising’ their insurance products. So far, their high decibel and celebrity starring advertisements were used to shove investment products down the throats of gullible investors. Right from pushing insurance for children (an investment product with high commissions supposedly meant to create a corpus for education and/or marriage, the basic product of ‘life insurance’ or pure term policies were kept hidden from the investors. IRDA, the regulator cum trade body of the insurance industry has been a genuine supporter of the industry, unlike AMFI which has been undergoing an identity crisis over the last decade or so. Finally, Religare insurance let the cat out of the bag by launching a product by passing the agents and offering a pure term policy at a very affordable price. It is heartening to see this product being pushed actively by companies like ICICI and HDFC Life. This is perhaps the only insurance policy that a person needs. This is a pure cover that pays out a known sum of money to the dependants in the event of the insured passing away before he/she could have fulfilled financial obligations. To get this comfort, one pays an annual cost. This is very much like medical insurance. So far, even when you ask the agent about such a policy, he typically dissuades you by saying “But Sir, you do not get anything back” and why don’t you look at something else. Commissions on this product are very low, so the agent naturally gravitated towards selling of investment products. Do not worry about getting ‘money’ back when it comes to life insurance. Does anyone look at getting money back when taking house insurance? Or does a corporate look at money back when insuring their assets? Life insurance is expenditure. However, the pure term policies can be improved. Some of them offer cover only for thirty years. Of course, if we start this age 20 or 25, by the time the thirty years are over, we should have overcome the continuing need for it, if we have done financially well. Today, most people start their working lives after age 25 and marriages tend to happen after thirty. So, by the time their children are through with their education, the earning members could well be in their late fifties or early sixties. Thus, one may have to rework a term policy, once additional dependants get tagged on. It would mean discontinuing the old one and taking a new one. Of course, the annual outlay would go up since the new policy would start at a higher age. I have seen a policy from LIC ( I am sure some other companies also have such policies) which gives cover till age 80 and a guaranteed payout at that age or death (whichever is earlier). I am sure the premium for this is higher, but the advantage of this is that it can give you some way to plan an estate for your children / dependants. Ideally, one would like a policy which covers you to death and offers a guaranteed payout to the nominee / assignee / beneficiary ONLY on death. This is ideal for estate planning. In one of my very early articles(February 1, 2007 MoneyLife) , I had talked about this kind of policies being ‘tradable”. This means that if I have such a life policy, I can actually sell it off to an investor at any stage, at a negotiated price. The investor would have to take a call on my likely longevity, estimate a return on his money for the period the money is locked in (till he gets the final payout on my demise) and arrive at a price to pay now. This kind of an instrument would be fantastic. I would be able to sell this policy at a stage in life where I can provide for myself to battle inflation and a few uncertainties in life. If I am single and thanks to modern medicine I live beyond my useful shelf life after my income stream has dried up, this kind of a policy can come to my rescue. This kind of a ‘tradable life policy’ (TLP) is common in many parts of the world and meets a genuine need. It also provides a Triple A rated investment opportunity (the only difference being that the time of payout is uncertain) for those who do not mind the morbidity factor associated with this investment. (If I were an investor, I would perhaps be praying for early death of all my subjects covered by the policies I hold). This factor apart, tradability provides an essential and useful feature to the insured, helping him to face the uncertainties of prolonged existence and without depending on a third party. I hope IRDA will bring this about and the ministry of finance will encourage this by enabling favourable tax treatment and creating the required framework to legally enable this. Life insurance is serious business. Let us not mix it with investments. And IRDA can help by guiding the insurance companies to sell pure life and perhaps sell the investment cum insurance products through the mutual fund vehicles. That will truly put things in their proper perspective. I only wonder if the regulators have the courage to look at the interests of the public at large, who help the industries thrive.

Saturday, March 10, 2012

L&T- The Myth of the "Independent" Directors

The hunt for succession at L&T is over. The Chairman has decided that he is the best and no one can replace him. He has perhaps laid the path ahead for all the continuing supine professionals in that company. L&T under the present Chairman is proof that professionally managed companies without any owner, are as bad as family owned companies, when it comes to governance. I recall a friend of mine having to quit one of the L&T subsidiaries because of ‘retirement’ age being sixty. However, this does not apply to the Chairman and directors. Wonder who made this relaxation? Yesterday’s announcement of the CMD post being split in to two is a joke on the shareholders. The Chairman has ensured continuance of his own tenure by another five years! A rubber stamp board of directors has enthusiastically approved this. In essence, the present CMD continues to be in the same position as before, till he reaches a geriatric age of 75. And bringing cronyism to the fore, he has picked up a 67 year old guy to be the “Managing Director”. However, the guy who is appointed to this position is appointed only till he completes age 70! The website of the company discloses that it has nine non executive directors. These are presumably respectable individuals who have been achievers in their fields. All of them have merrily approved this extension to the Chairman who was widely expected or believed to be in the process of appointing a successor. Obviously, he has found no one good enough to fit in his oversized shoes. The Chairman has in effect treated this company (an orphan with no one to answer to) as his personal fief. A sad commentary on professional management structure and shows the supine character of an ‘independent’ board also. Surely, the Board of Directors has some explaining to do. I wonder what kind of inducement was offered to them to approve this kind of a move. I will watch with interest the commission and other stuff that is being paid to the handful of executive directors (in FY 2010-11, a sum of Rs.70 crores was paid to them) and also relook at the stock options (the prices of options granted in the last ten years range from Rs.3.50 to Rs.600 per share) that keep getting gobbled by the executive “professional” directors. L&T is a company shouting for intervention in governance from the so called institutional shareholders. Unfortunately, LIC of India is the largest shareholder and will never do anything other than act in favour of the present Chairman. A Rahul Dravid knew how to retire. A Ricky Ponting had to be chucked out by the selection committee. Wonder if the Board of Directors of L&T have it in them to question anything at all. This company is prime example of so called “independent’ directors and their total uselessness in any board of directors’.

Monday, March 5, 2012

FOREIGN DIRECT EXIT (Bye bye to India)

Today’s piece in The Economic Times ( ) by Sugata Ghosh is brilliant. It should serve as an eye-opener, not just for the foreigner toying with the idea of entering Indian services sector but also for the Indian, who is filled with hubris. The foreign financial services sector is a classic example. The foreigner came in expecting dollar revenues and built up his costs accordingly. They came and screwed up the salary levels in banking and equities to a level that is unaffordable. Everything was seen as ‘relative to back home”. If any analyst was getting US$ 200,000 in New York, it was considered ok to pay half of that in Bombay. They never paused to think that they could have stuck to a figure of around US$ 25,000 and got the same talent. They did not mind paying higher rents in Bombay than in New York. Finally, when the dust settled, they realised that whilst they built up US comparable costs, they had grossly screwed up on their revenue estimates. The revenue came in Indian rupees, and in a scale that was very Indian. Transaction sizes, instead of being in multiples of 25 or 50 million dollars, were in multiples of 50 or 100 crore rupees. Do the conversions yourselves. Add to that, we Indians are more open than the US of A. Entry barriers are thin, resulting in a new industry getting crowded overnight. Intense competition ensures that deals are won on fees rather than on any perceived quality. It is quite common to see large deals for government owned companies being done at a fee of zero (typically a few thousand rupees) simply driven by an unexplained desire to get in to the ‘league table”. In the mutual fund industry, we saw a hyper active regulator dissolving the net retention for an AMC to virtually nothing. In the stock broking industry of a small size, the number of players exceeds the total players in US and Europe combined. And the total revenues are a fraction of what it is in the US, perhaps less than what a single player like a Goldman or Merrill may make in a very poor year. The potential in India is also tempered by the reluctance of Indians to pay high fees. In a country where pirated software, photo copies and ‘duplicates’ are the order of the day, it is best that the intending foreign investor come and do a physical study rather than depend on excel spreadsheets which co-relate everything to ‘per capita’! And often, here also the foreigner forgets that if Indians were to consume the same number of coca colas as the Americans do, there would be nothing left of the per capita income of the Indian to eat.