October 31, 2012

bravo, rbi

The central bank and banking regulator of India, Reserve Bank of India, came out with its FY 2012-13 (April 2012 to March 2013) quarter review of monetary policy.I contributed an editorial on the RBI review for the newspaper I work for.

Here is what I wrote:

Bravo, RBI

By maintaining status quo on policy rates RBI has rightly looked at long-term benefits for the economy

In the prevailing atmosphere over the last many months the government, mostly through its finance ministry, has been able to successfully bulldoze its way in several areas of the Indian economy and financial system in order to prove a point or two to its detractors in the domestic industry and vested international circles that there is no economic policy paralysis in the country. From speeding up policy initiatives such as foreign direct investment to prodding financial sector regulators such as Securities and Exchange Board of India and Insurance Regulatory Development Authority to accede to demands made by the mutual fund industry and the insurance industry, the government has been able to get what it wanted. 

What stands out, and we are glad it does so, is that enormous pressure being put on the Reserve Bank of India by the finance ministry in recent weeks to cut policy rates did not bear fruit on Tuesday when RBI announced its FY13 second quarter review of monetary policy. It maintained status quo on the repo rate retaining it at 8 per cent level but cut cash reserve ratio by 25 basis points from 4.50 per cent to 4.25 per cent. 

The RBI governor, D Subbarao, while appreciating the downside risks to domestic growth from further deterioration in global macroecnomic conditions, was emphatic that the monetary policy had to focus on doing its bit to reign in the un-relenting high inflation levels which RBI has no doubt is not conducive for investment climate and consumer confidence without which no high growth can be had in the medium-term.

Despite the fact the CRR cut will enhance liquidity in the banking system by upto Rs 17,500 crore and the CRR has been bought down sharply by RBI from the 6 per cent level of last year, the finance minister expressed his disappointment at the lack of a repo rate cut. Such un-fettered expectations of the government from the banking regulator does not augur well for the independence. It is understandable for the industry associations to demand the lowest interest rates on the bank borrowings by their member companies but the same demand made subtly but surely by the government does not jell.
The government has itself done hardly much on the real macro-economic problems of high fiscal deficit and high current account deficit. Raising diesel prices by a meagre Rs 5 and putting a cap on subsidised domestic cooking gas cylinders will hardly make a dent in the rising fiscal deficit. These measures too came belatedly after all earlier political compulsions arising from state elections and presidential elections had expired. 

A fiscal roadmap laid out by the finance minister on Monday is welcome but without detailed plan of action on individual subsidy items it is only a promise and meaningless at that since the approaching 2014 general elections will soon give re-birth to political compulsions. Moreover, an actual implementation of the fiscal measures will translate into short-term pain of higher inflation as prices will be tuned to market forces. 

The RBI has, therefore, done right by not cutting the repo rates at this juncture. Capital investment by corporate borrowers will surely if rates are cut and lead to better economic growth but it will, if inflation does not subside, diminish the inflation-adjusted real rate of return for savers. 

India has perhaps the highest number of savers in the world and this fact should not be under-appreciated. It is not wise to assume that the long-term worst-case scenario of severe fallout from a very high fiscal deficit can be reasonably averted if economic recovery happens in the short-term by through low lending rates

October 29, 2012

mukesh ambani's reliance's unhealthy influence in cabinet reshuffle seen...

I share below a message received in my mailbox from a coalition of civil society groups on the unhealthy influence of Mukesh Ambani's Reliance Industries (RIL) in the latest round of cabinet reshuffle in the central government of India.

From: NAPM India
Date: 28 October 2012 17:37
Subject: Press Release 28th October, NAPM condemns UPA reeling under Reliance Pressure, Challenges transfer and pricing of Natural Resources against Nation’s Interest
To: napm-india , napmconveners

 National Alliance of People’s Movements (NAPM)
National Office: A Wing First Floor, Haji Habib Building, Naigaon Cross Road,
Dadar (E), Mumbai – 400 014 Phone - 9969363065;
Delhi Office: 6/6 jangpura B, New Delhi – 110 014. Phone: 9818905316
E-mail: napmindia@napm-india.org | Web: www.napm-india.org

Press Release                                                                         28th October 2012, Hyderabad
NAPM condemns UPA reeling under Reliance Pressure

Challenges transfer and pricing of Natural Resources against Nation’s Interest

No Privatization of Minerals and No forcible Acquisition for Private Projects

The news that the Petroleum minister Jaipal Reddy is again to be replaced by someone else, repeating the incidence that took place few years ago when Mani Shankar aiyar was replaced by Murli Deora, Ambani’s childhood friend. The very fact that Jaipal Reddy was the one who questioned the irrational demand by Mukesh Ambani’s Reliance Industries Limited (RIL) on escalating the prices of natural gas ,irrespective of the decision and agreement by the union government and RIL on the price to be steady till 2014,  this is one more example, just one of many related to RIL, one of the largest corporates in the country, pulling strings to change the player in the political domain that challenges its activities ,especially huge or even vulgar profit making.

NAPM condemns this, as an evidence of politician-corporate nexus and joint crime against people, who are left deprived when not the State exchequer but the corporates’ accounts are filled and swelling. It is Shocking and disgusting that even when the congress and NCP leaders are challenged at the center and in states, for their involvement in illegal allocation and transfer of land and other resources, at the cost of the public interest; they still have guts to take such an action mainly to give the Ambani’s a clean field. A stratergy to counter this will be worked out in its upcoming National Convention (9th biennial), from 17th to 19th November, at village Kiraloor, 15 Kms from Thrissur, Kerala.

While the loss that would occur if the price hike was accepted is quoted to be $ 6.3 billion, with the undue spread and spell of the RIL across the country and the sectors ranging from Oil & Gas to Infrastructure, telecommunications, theatres, retail, health, education.. right up to Satyamev Jayate, there is no doubt that it may go much beyond even the DLF’s swell, already exposed. It is the wicked game of acquisition of lands, with minerals attached to land, allocation of deep sea blocks, or transfer of the richest of our Nation’s Natural Resources to these private players; that is the worst and the highest level of misappropriation by the present rulers.

The millionaires such as Ambanis have been putting all undue pressures either through PMO, Minister or even through media, seeking concessions; while farmers without subsidy are compelled to commit suicides. It is high time that country demands total nationalization of our mineral resources, the only wealth that is luxuriously expended without any concern, neither for the State’s earning, nor for the environmental impacts and loss of livelihoods to the local populations of farmers and fish workers.

The Krishna Godavari basin issue was distortedly and deliberately presented as if the RIL were to limit its extraction of Natural gas worth approx $ 3 billion dollars, very recently. The fact is that on one hand this has been the tactic to get higher and higher price for their “Natural Product”, while on other hand it is the high incidence of subsidence (sinking of land) in the KG basin that should have compelled them to do so. Resulting in the sea ingress and destruction of paddy lands, as also threatening the habitats and livelihood of millions of people in the Basin, such an ecological impact should have been monitored by the Ministry of Environment and Forest. MOEF, just as other ministries have also been relying upon not laws or policies, nor public hearings but the RIL to plan its targets and profits, violating the laws.

Other examples of this include the power projects granted to Ambani, one in the name of Common wealth games and others without checking the economic feasibility and environmental sustainability, in fact the Reliance work in a threatened eco system of KG basin must come to a halt and this giant monstrous corporate must be prevented from any further investment and favours to facilitation for adding to its unconstitutional wealth, that is costing crores of toiling citizens in the country, destitution, malnourishment, unemployment to homelessness and hunger.

In this regard the Supreme Court can if it wishes to take a suo moto cognizance of the CAG reports to media reports, even in the frame work of its own judgment on 2G spectrum and beyond. If it does not, the People’s Movements that are fighting for no forcible acquisition of natural resources by the State for the private and PPP projects, simultaneously questioning pushing of plans and projects that transfer the resources from people to profiteers; will have to raise voice against “Unreliable  Reliance”.

The new Bill soon to be put up before the parliament is another attempt to continue the forcible acquisition for the private corporates and builders; bypassing the unanimous report by the all party parliamentary Standing Committee on Rural Development. This needs to be questioned and plans of, not only Ambanis but of Jindals, Tatas, Mittals, Adanis, Hiranandani to DLFs all are to be curtailed.

In Place of a weak Land Acquisition and Rehabilitation Bill; National Alliance of People’s Movements demands a Democratic Development Planning Act following the constitutional frame work of local self governance.

Medha Patkar              B.Ramakrishnam Raju          Saraswati Kavula         Shashank Rajwadi

For Details contact Madhuresh - 09818905316
National Alliance of People’s Movements
National Office: Room No. 29-30, 1st floor, ‘A’ Wing, Haji Habib Bldg, Naigaon Cross Road, Dadar (E), Mumbai - 400 014;
Ph: 022-24150529

6/6, Jangpura B, Mathura Road, New Delhi 110014
Phone : 011 26241167 / 24354737 Mobile : 09818905316
Web : www.napm-india.org
Facebook : www.facebook.com/NAPMindia
Twitter : @napmindia

October 28, 2012

unwise safety net for ips

A month ago, a proposed safety net for IPOs was in the news. 

I wrote about it then in an editorial for the newspaper I work for. I share it below.

A net full of holes
The proposed safety net framework for IPOs is not a good idea

There is no dearth of props in the financial system and more so in the current economic situation fuelled by the government's pursuit of high growth, aggressively cheerlead by financial market players. Yet another one is being sought to be given to them. This time, the capital market regulator, Securities and Exchange Board, has moved ahead in its earlier consideration of a mandatory safety net mechanism for initial public offers in the capital market. 

This new measure aims to protect retail investors from a large dip in the price of an IPO in the first three months after its listing. Not only is the idea of a price protection regressive in modern financial markets as it distorts the natural price discovery process in the market, the convoluted nature of Sebi's proposed safety net mechanism will make the distortions only more worse.

In the past couple of months, the primary market advisory committee followed by the Sebi board have given their approval for the safety net measure and after formalising its broad framework Sebi, late last week, made public a discussion paper on it  on their website inviting comments from investors and other parties in the capital market before October 31. The discussion paper is just three and a half pages long and while length need not be an issue, for a measure which will be the first of its kind for primary market issues in the last 20 years. 

Earlier, before the 1991-92 financial market reforms abolished the Controller of Capital Issues, the central government had administrative control over price and premium of shares in IPOs. It was direct and full price management then and now, under the proposed new safety net measure, it will be indirect and partial. If, and only if, a couple of conditions are met will small retail investors be eligible for the safety net. In all of the three months immediately after the listing of IPO-issuing company's shares, the volume-weighted price has to be more than 20 per cent lower than the issue price and the gap between this fall in the company's price and that in the fall of either of the broad market indices, S&P CNX 500 and BSE 500, is also more than 20 percentage points. 

Effectively, it means the fall in the post-listing price fall should be at least 20 per cent and 20 percentage points over and above the general fall in the market. Once this  happens, then as per the other complex conditions set out by Sebi's proposed safety net framework, the actual cost for the promoters will range from just 1 to 7 per cent of the issue size. To make matters worse, as per yet more conditions, eligible retail investors could see only one-seventh of their allotted shares receive the benefit of price protection.

The convulated conditions will ensure that the final objective of restoring the diminishing confidence of primary market investors on account of fall in post-listing prices of IPOs is never met. Sebi and the finance ministry who is subtly applying pressure on Sebi to do this would do a better job of protecting investors' interests if they empower the retail investors with the discerning ability to choose the right IPO for investments. IPOs thrive only when secondary market is in a bull run and their pricing is inflated since most secondary market share prices are also inflated. 

Hefty commissions paid to lead managers and distributors during IPOs are the root cause of badly timed, aggressive mis-selling of IPOs at inflated levels. Coming down hard on these commission levels would automatically lead to retail investors being left alone to choose the right IPO.