Sucheta Dalal :Bailout Binge (MONEY LIFE Issue 4th Dec 08)
Sucheta Dalal

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Bailout Binge (MONEY LIFE, Issue 4th Dec 08)  

October 31, 2008

Bailout Binge

From airlines to realty, the Indian government has practically announced that almost every industry, even if it is in trouble because of its reckless expansion, will be bailed out at taxpayers’ expense. With just a few months to go for the general elections, the Congress-led United Progressive Alliance has no qualms about using taxpayers’ funds for loan melas to corporate India. Its task has become easier with BJP, the main opposition party, demanding more bailouts for industry rather than less.


Naturally, the worst-affected sectors have little interest in getting real about the economy and want their fat margins to remain untouched. Realty is the main culprit; the Prime Minister's Office (PMO) reportedly plans to accord it industry status making bank credit easier by splitting inflated land costs from high construction finance. That realty barons refuse to accept ground reality was evident at a recent Advantage Maharashtra conference in Mumbai where most builders were adamant about not reducing property prices that have trebled and quadrupled in the past two years. Some builders have, indeed, dropped prices by 20% but with new properties sold at a loading of nearly 50% to 60% over carpet area, they are still unlikely to attract buyers.


It is the same in Delhi. Consider the foolish moves that DLF has made so far. Oblivious of the global financial crisis, it tried to staunch its falling share price (down 80% from its peak) by announcing a buyback, when the promoters already held over 88% of the equity. Chairman KP Singh then wanted the government to drop interest rates to 8% and increase the floor space index (FSI) in metro centres to make his business more secure. “I would say the FSI should be at least 400-500(%) in India,” he is reported to have said.


Singh is not alone. In early November, Sobha Developers had not bothered to reduce prices. Ashish Purvankara of Purvankara Developers was also out of touch with reality. He told the media that customers in the south are not concerned with rates, only ‘volatile’ interest rates. He also wants a reduction in interest rates, never mind that customers want a reduction in prices.


Clearly, realty developers are not even aware of their customers’ needs. Private sector executives, who doubled their paychecks by changing jobs, are now learning to be grateful for being able to keep their job or get away with a 20% pay cut and no bonus. In short, the buyers for super-expensive, luxury apartments have all but vanished. But who will get developers to face the truth? One of India’s top bankers tells us, “I believe a little more nudging is required for the rates to, well, come down to earth!” Clearly, PMO officials  should be helping this process instead of chalking out bailout plans based on realtors’ demands.

Lobbying Rights

In 2005, SEBI (Securities and Exchange Board of India) plugged loopholes in the preferential allotment rules by introducing a stringent three-year lock-in and regulating the price at which preferential equity/warrants could be offered. This ended promoters’ self-enriching game of giving themselves equity at a discount and making a profit by selling existing shares. But it didn’t matter. We were in the middle of a ferocious bull run and investors, especially foreigners, were eager to pay a huge premium to participate in every fanciful corporate plan. Indian companies, especially in glamorous sectors such as media, retail and realty, have become used to availability of easy funds based on market valuation and projected expansion rather than performance and profitability. With their high cost of operations looking increasingly unsustainable, they are fretting at what they claim are constraints to ‘capital formation’. This has led to an urgent demand to dilute the rights issue regulations. The argument is that rights issues are made to existing shareholders and must, hence, be free from delays in issuance. The examples cited are those of Tata Motors and Hindalco. The truth, however, is that in one case the ‘existing shareholders’ of the blue-chip company did not have the funds to subscribe to the issue. Sources say that group companies first raised money by issuing debentures to an insurance behemoth and only then subscribed to their portion of the rights issue. What happens when not-so-blue-chip companies begin to access the same route of funding? Will we have another Unit Trust of India (UTI) like debacle where taxpayers’ money is endangered by bleeding a public sector institution?


A rights issue in a severely depressed market has two objectives. One, it allows promoters to enhance their holding very quickly at a low price and, two, bypass the annual 5% creeping acquisition limit. For instance, the promoters’ stake in Tata Motors increased nearly 9% following the rights issue. Second, it can bring in outside shareholders through the rights renunciation route, while their existing investors are too beaten by market conditions to subscribe to additional shares. Nearly 25 companies have lined up rights issues and are pushing the regulator for faster clearances. It is all very well for promoters to use this opportunity to increase their stake, but there is no need to dilute regulation to help them along.




In the bailout season, why should stockbrokers be left behind? Over the past several years, the Association of NSE Members of India (ANMI) has become used to a personal audience with the finance minister. They met him again in November with their own list of demands for tax concessions. More importantly, they asked for “a Sovereign Wealth Fund (SWF) to pull up the plunging stock market.” Old-timers on Dalal Street will tell you that brokers always encourage a client to trade, because they make money – no matter whether prices are rising or plunging. Well, ANMI too is protecting its business by ensuring that the sovereign fund keeps the trading counters ticking!


Funds Up for Sale?


Sometime in the middle of October, when mutual funds, especially fixed maturity plans (FMPs), faced huge redemption pressures, the market was rife with rumours about the serious problems faced by several fund houses. Lotus Asset Management quickly exited the mutual fund business by selling out to Religare Enterprises. Asset management companies are valued at a percentage of assets under management (usually 5%-6%) but owners of Lotus had to sell their asset management business managing Rs5,000-odd crore virtually for free. Our sources say that the company has even provided a guarantee to indemnify losses. This could not be confirmed with Lotus sources, since we were told that nobody was in a position to answer queries. Media reports suggest that AIG is also looking at an exit from India after its parent company has literally been nationalised in the US.


Others who are the subject of persistent rumours are the South Korean Mirae, Principal, ING and Taurus. Most of them deny sale plans and dismiss the takeover talk as mere rumours. However, newly licensed asset management companies as well as existing ones are actively scouting for acquisitions. Industry sources expect more exits as the performance of individual schemes becomes clearer. Cases of wide divergence between the stated objectives of the fund and actual investment may even lead to litigation and allegations of cheating or fraud. Not all funds that were hit by such allegations may find a buyer – some may simply be forced to close down. All this pertains only to the fund industry. Even the capital market regulator is clueless about what has been happening in the unit-linked insurance plans (ULIPs) of all the insurance companies. These funds were never asked to disclose large institutional purchases (unlike mutual funds) by SEBI. The insurance regulator has only recently started collecting information about them.

Last modified 18 Nov, 2008
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-- Sucheta Dalal