Sucheta Dalal :Succinct analysis
Sucheta Dalal

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Succinct analysis  

May 28, 2006

One of the causes for the market crash was the tax department’s circular about capital gains tax that had investors worried. But for a more succinct and complete analysis of what prompted last week’s mayhem in the capital market, let us listen to Nomura of Japan. It says: ‘‘Market consensus has acknowledged that the Indian equity market was in need of a ‘healthy correction’. While the macro problems of running both a deteriorating current account deficit and a fiscal deficit have yet to be adequately addressed, private sector credit has become increasingly dependent on fund flows. With a negative basic balance of payments, the credit system appears much more susceptible to an external shock. At the same time and apparently unknown to investors, the degree of financial leverage (open interest of derivatives) relative to equity market capitalisation has risen from five times to 20 times over the past 20 months, creating considerable systemic risk for investors in an economy with an open capital account. We feel investors are being betrayed by high earnings growth projections and macro risks are being ignored. Equally, the large issuance of equity by companies looks set to dampen Return on Equity — normally a good indicator of a peaking in equity markets’’.


Banking Ombudsman


Reserve Bank of India (RBI) deputy governor Usha Thorat has some good news for bank customers who have been sending complaints against deficient banking services including credit cards to various Reserve Bank officials including the RBI governor. Such investors have been receiving a short acknowledgement of the complaint and are not quite sure how to follow it up. We are told that not only has the function and authority of the Banking Ombudsman (BO) been enlarged under the 2006 scheme, but the BO’s office takes on record complaints forwarded by the RBI without requiring the customer to approach him separately. If the Ombudsman concludes that a particular complaint is not within his jurisdiction, it is then sent to the concerned regulator or supervisory department. Complaints are given unique reference numbers to enable them to track the disposal of complaints. According to the RBI, the high complaint redressal rate had encouraged customers to approach the Ombdusman directly, instead of the customer grievances cell of their own bank. Our readers’ feedback suggests that the BO’s office is overloaded with complaints and does not have sufficient infrastructure to tackle the mass of complaints. Here again, the RBI says that it is sensitising banks to strengthen their customer grievance redressal machinery.


Switching times


Investor U. Chaudhari writes to say that two unconnected Mutual Fund agents advised investors to be ‘‘safe rather than sorry’’ by switching their older, appreciated investments, to ‘Floaters and Liquid funds’ — specifically from the Fidelity Equity Fund to its own Multi-manager Cash plan. While both advisors emphasised the safety issue after the market had corrected savagely, Fidelity seems fairly complacent about its agents inciting its investors to flip their money — that only generates commissions for the agents and loads for the fund. After repeated and persistent queries to Fidelity, we were told that it is ‘‘not our policy to comment on another entity’s business’’ (in this case a distributor of its own funds) and that its ‘‘business strategy is based on encouraging long term investing,’’ which is emphasised in all its ‘‘communication with our business partners and investors’’. In short, Fidelity is unconcerned when investors are being frightened into flipping their investments to liquid plans within the Fidelity fund family.


Scraped through


The expensively priced Air Deccan IPO (Initial Public Offering), which was caught in the middle of the stunning secondary market volatility and the savage correction, has barely scraped through after extending issue closing time and dropping the price-band. Part of the reason is that the community of market intermediaries realise that an IPO failure at this point of time will kill the ambitious and often greedy fund raising plans of scores of other companies, especially those who plan to ride the realty and construction bubble. But the regulator needs to look at some worrying firsts in the Air Deccan case. For instance, why did the five lead managers listed in the Red Herring prospectus — JP Morgan, ABN, SBI Caps, ICICI Securities and Enam drop to just two in the final prospectus? This must be a first in Indian IPO history. At least one of these managers told us that they walked out because they did not agree with the valuation and pricing of the IPO. As we now know, the high price of this loss making company (Rs 118 crore for the eight month period-ended November 2005) was a problem. Primary market regulations today do not allow the regulator to intervene so long as there are disclosures tucked away in prospectuses that are never read. Companies and their lead managers know this for a fact. That is probably why investors’ demand to have some sort of IPO rating process, that will at least flag the risks for investors, has made no headway at all even in the form of a pilot project. Sebi will certainly have to answer some tough questions when the IPO bubble finally bursts, especially if the high priced realty issues hit the market with their exaggerated valuations.


-- Sucheta Dalal