Sucheta Dalal :Wrong Signal - (MoneyLIFE Issue 23 Oct 08)
Sucheta Dalal

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Wrong Signal - (MoneyLIFE, Issue 23 Oct 08,)  

October 6, 2008

Exclusive news, the stories behind the headlines and the truth between the lines

Wrong Signal

Indian companies hate the fact that current regulations give retail investors a say in ‘discovering’ the delisting price through the reverse book building (RBB) process. Ever since the delisting rules were framed, companies have lobbied incessantly to drop the price discovery process. Later, they began to adopt tricks such as passing board resolutions even when the RBB process was on to push investors into tendering their shares at their price. One tactic was to announce a buyback while the RBB process was on, with a cap on the repurchase price. For instance, Bosch Chassis India capped its buyback offer at Rs600 while.


GE Capital Transportation Financial Services announced it at Rs110. Many retail investors are misled into bidding at that price in the RBB process as well. Some investors, including stock-broker Anil Jindal, who are active participants in the RBB process, have complained to the Securities and Exchange Board of India (SEBI) about companies announcing share buyback programmes to send price signals to investors during the RBB process. They make another interesting point. The RBB guidelines mention three kinds of prices – the floor price for the bids, the discovered price and the exit price. But companies have been coming up with their own constructs, such as ‘indicative’ price, to nudge ignorant investors to bid at a price that they would find acceptable. Will SEBI react?


Re-rating Rating

Globally, credit rating agencies are in the dock for sanitising and issuing high credit ratings to toxic debt, once it was packaged as Collateralised Debt Obligations. Leveraged deals to pile up such debt are considered to be the root of the global financial crisis. Meanwhile, Indian rating agencies are working zealously to downgrade Indian debt at any sign of trouble. At the end of September, Canara Bank’s rating outlook on long-term debt was revised to negative. Next on the agenda are short-term ratings of foreign-owned finance companies which attracted large investments from fixed maturity plans (FMPs) of mutual funds as well as equity-linked debentures, whose yields were guaranteed by corporate entities. Both instruments are beginning to look rather shaky since the global ownership and future business direction of the Indian entities look cloudy; in fact, the market also fears the possibility of defaults. This could wipe out the returns or even part of the principal in FMPs (see Sucheta’s Solutions).


Meanwhile, the finance ministry is finally working towards eliminating conflict of interest in the rating business which has worried investors for several years. The ministry has called for inputs in reframing the rating rules. Its first attempt is to bar rating agencies from providing advisory services and other consultancy to companies whose debt is being rated by them. The move is long overdue, especially since credit ratings are also key to investment decisions by the pension and insurance sectors.


MoneyLIFE believes that it is time for India to stop aping global practices and to frame regulations suited to the Indian environment. The government must recognise that he who pays the piper calls the tune; all conflicts arise from this simple fact. That is why investor associations had insisted that grading of initial public offerings (IPOs) must be paid from the few hundred crore rupees of investor protection funds available with the Ministry of Corporate Affairs and stock exchanges. Investor groups wanted an automated process for assigning IPOs to various rating agencies for grading. The finance ministry and SEBI decided to ignore these demands while clearing mandatory IPO gradings. Ironically, there is now a move to re-examine the grading process, without public discussion of the merits or failures of the process. The same must apply to rating of debt instruments as well, although rating agencies may argue that offering a menu of services gives them better insight into a company and are offered through subsidiary companies. However, with all rating agencies focused on quarter-on-quarter earnings growth, it is hard to believe that there will be effective Chinese walls between different revenue earning businesses.


Struggling MCCB

Despite Ketan Parekh’s unquestioned earnings and repayment of a massive Rs396 crore to Madhavpura Mercantile Cooperative Bank (MCCB), the Bank is still struggling for survival. Of course, Parekh siphoned off over Rs880 crore from the Bank, causing it to collapse when the bull run of 2001 ended in a mega crash. According to MCCB, he still owes the Bank over Rs800 crore after interest and other calculations.


The Bank still has to pay over 10,000 account-holders. Media reports say that its management is at war over whether the money it has received must go to its depositors or to the Deposit Insurance Credit Guarantee Corporation (DICGC), which forked out Rs one lakh each for investors. The entire handling of the MCCB case is unusual, including the conditional bail that allows Ketan Parekh to earn or find the money to repay the Bank in instalments. Ostensibly, he is not making money from trading because SEBI has barred him from being associated with the capital market in any manner whatsoever for 14 years. However, none of the revenue or enforcement agencies of the government has bothered to ask him the source of his huge funds or about the income tax paid on the money.


Affordable Payment System

India seems finally set to follow China in creating its own national payments systems, with the setting up of the National Payments Corporation of India (NPCI). A few public sector banks will together hold a majority stake of 51% (paid-up capital of Rs100 crore) and the Reserve Bank of India (RBI) has lined up State Bank of India, Union Bank, ICICI Bank, HDFC Bank, Citibank and HSBC as initial shareholders. If NPCI takes off smoothly, it would provide an alternative to Visa and MasterCard, which are the world’s two most powerful payment systems. India would be in a position to drastically reduce the cost of some transactions like debit-card payments, micro-credit transactions in rural areas and even payments through mobile phones and make them more affordable. The key is for NPCI to get all major banks to integrate their clearing houses and take off smoothly. This will happen if it gets State Bank of India on board, without permitting it to dominate decision-making at NPCI.


Ideally, RBI should have set up and run NPCI for a couple of years, got all banks on board, ensured systems efficiency and reliability and then handed it over to the Indian Banks’ Association (IBA), which is now leading the effort. RBI could have cracked the regulatory whip to get things moving, while IBA will have to use persuasion, which is a much slower process. NPCI’s success will depend on whether it is able to provide a cheaper and efficient alternative to Visa and MasterCard while working with them to provide smooth switching and transfers. India needs a fail-safe payments mechanism for affordably transferring money from one account to another all over the country.



-Sucheta Dalal

-- Sucheta Dalal