Sucheta Dalal :Bailout sans Regulation
Sucheta Dalal

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Bailout sans Regulation  

December 16, 2008

DIFFERENT STROKES (MoneyLIFE Issue, 1st Jan 09)

Having shifted his unpopular finance minister, prime minister Manmohan Singh played Santa Claus with a ‘stimulus package’ for industry that was preceded by another rate cut by the Reserve Bank of India as well as a steep fuel price cut. Stock prices rallied significantly then, partly in line with a global surge in stocks. A victory in Rajasthan, Delhi and Mizoram has also added to the government’s confidence in facing parliament after the terrorist attack on Mumbai.
Apparently, it is going to be a good Christmas and New Year for the ruling government, but what about the rest of us? Will the stimulus package spur economic revival? Unlikely. But a government going into general elections has to be seen as having answers to all problems. Industry is taking advantage of the situation to push for bigger bailouts. But ordinary citizens must demand a clear-headed assessment about how much of our money can be used to save companies from what is often the consequence of their greed, reckless expansion and failure to assess true demand or purchasing power.
Unfortunately, every little bounce in the stock indices leads to fresh hope and false cheer. While a government cannot really protect jobs and salaries through a bailout, it can certainly use the opportunity to plug the glaring gaps in regulation that are exposed everyday.
Take, for instance, a press release from Credit Rating and Information Services of India Limited (CRISIL). For almost five years, former finance minister P Chidambaram gave significant tax breaks to mutual funds (MFs) (while income from fixed deposits were fully taxed) to push people to the capital market through them. At a meeting in Delhi in 2007, he sneered at the suggestion that the bull run would not last forever and regulation of MFs may also need to be closely monitored.
Well, CRISIL now tells us that the credit quality of most Indian debt MF portfolios is strong but a majority have “single-industry concentration (over 25% of fund investment), and many smaller schemes (38% of them) have single-company concentration.” It further says, “Funds with large and illiquid single-company exposures could be affected by redemption pressure.” CRISIL goes on to warn that single-company exposures could increase as the funds sell off more liquid assets to meet redemption demands.
CRISIL says that most debt funds have not compromised credit quality; 82% of them have invested in AAA-rated securities. This is hardly a solace when CRISIL and all its rating industry peers are furiously announcing downgrades everyday. Since CRISIL provides no specific details about individual schemes, its analysis of 800 schemes ends up only as a publicity
effort and is of little use to MF investors. All it says is that portfolio concentration is significant in the banking sector (which is relatively safe) and finance companies (which are hardly safe). It is for SEBI to act on this information, seek details and amend the hole in its regulations.
Single industry/company concentration negates the basic principle of mutual fund investment, viz., risk reduction through distribution of assets across companies and industry sectors. Also, investors pay their fund managers a fat fee to research, analyse and select the best investment options in order to maximise returns, not to lock them up in a single sector or a company. Templeton itself has done it in the past. This time, it is among the few funds which floated a fixed maturity plan to fund a single company – Reliance Capital. Every investor who suffers a reduction in returns or loss of original investment due to such concentration ought to demand that the asset management company make good the difference by bringing in its own funds. 
Addressing these issues ought to be part of the bailout agenda. After all, it cannot be only about industry demanding taxpayers’ funds to get them out of the mess they themselves often create. But it will only happen if investors and consumers get together and demand action by the regulator.

-Sucheta Dalal


-- Sucheta Dalal