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Category Archives: Asian Nations

CHINDIA – AS I SEE

The news of Chinese Army PLA moving, 19 kilometers deep, inside the Indian territory is old one. Now the new and important development is that since 1930 Hrs IST they started vacating their positions and till now (i.e., when you may be reading this article) would have nearly vacated.

I was always certain and specially turned more confident of my views on CHINDIA since 2001 onwards.  I saw the fact as if it were the destiny that were conspiring to keeps these two nations on the same side.

Though, I am not going to write much, so I am just attaching three separate comments and analysis I presented in response to two news items published 11 days ago, and one just 03 days ago. I knew that masses will not agree with my view point, but then this has been a history now. On the other side masses have never agreed with any one individuals. My comments/ analysis are serially numbered (in the way they were posted) at news sight:

 1.

Sometimes I doubt that Chinese army really has any bad intentions towards India, as this is something that will prove costly and lasting adventure for PLA. As India despite of lack of very good connectivity to borders via road and rail has the capacity to surprise Chinese Forces by its huge number alone, though cost of transportation may be higher for Indian when compared with that of China. The important aspect and insight that I am getting is, is that Chinese now want to block the infiltration of Uyghers and other trained militants from Pakistan. If this is the case then they should take Indian authorities into confidence and ask for a safe passage to execute its intentions. Any kind of mis-understanding would not alone dent Chinese Might (roughly 2/3 of India) and USA and Pakistan will stand to gain from it. If the issue is something else then I need to analyze further. Consequently one of its allies North Korea too will be slaughtered by South Korean Forces with various kind of aid from USA. Chinese should try to considered the border pact that too place between Indians and then Chinese Emperor in 1840 (approx). Hope Chinese are not deaf and idiots at same time. If they are then they should have an emergency plan (in case their forces engage with India) to take care of democratic revolt that would get a unfettered access and control at Tianmaan Square.

 2.

The militants trained by Pakistan after having turned Frankenstein monster for them, have also attempted to threaten Chinese sovereignty, specially vides on an ancient trade route connecting Ladakh to Yarkand in Xinjiang, China. Now its better for China to seek India’s co-operation in controlling the religion of terrorism and militancy, than thinking itself to be almighty to do what they want. Those 50 malnourished men of PLA are not being made to land in Jails in India for ever ( I do not suggest shooting those 50) due to patience and also due to it being a responsible power. As Chinese army (approx 8.5 in number) is no match for India’s (approx 16 soldiers). Anyway I do not want to talk this language till all the options are not exhausted, as even sacrifice of our one soldiers life is much costlier to their 50 and is no match in value terms. Chinese may be fed up with their population but Indians are not. I suggest them to recall preachings of their scholar who earned knowledge from Nalanda and Takshshila besides preachings of Prince Mahendra and Princess Sanghmitra about Buddhist ways of life.

 3.

Though it would be better for the Government of India starts considering bilateral relations between India and China in present context. If required Salman Khurshid should cancel his proposed visit citing the posture of PLA as reason. Government may further consider about not allowing the Chinese Premier enter into Indian Airspace or Ground Location based on such developments. It would be better to communicate it to Chinese at earliest time. Please do not use force immediately, as tensions between India and China on border issues will give USA Army and Navy a good advantage in case when it comes to tackling by North Korea, creating advantageous position in Yellow Sea, beside providing them with opportunity to promote and protect the heirs of Chinese Emperor (who was forced to flee by PLA in 1948) and provide them with all the support required to take control at least of Taiwan and Hong Kong. This would be in addition to funding of support required to be extended to Democratic Movement in China. China will automatically learn that how international diplomacy is handled.

I would love to hear the comments from audiences…

 

                                                                                                             …………… Always Yours — as Usual — — Saurabh Singh

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One Percent versus Ninety Nine Percent: A Debate

INDIA DOESN’T NEED FDI IN RETAIL TO GROW — Joseph Stiglitz

Nobel Laureate of 2001 in Economic Joseph Stiglitz (who shared it with two more), presently Professor at University of Columbia, is  credited with starting the “1% versus 99%” debate. The Columbia University professor talks about his latest book, “The Price of Inequality”, in which he argues that economic inequality leads to instability

• The title of the book reflects a view that counters the right-wing argument that inequality may be a bad thing but to do anything about inequality is to kill the goose that lays golden eggs. Inequality is bad for economy, democracy and society. Much of the inequality in the US arises out of rent-seeking —monopoly, exploitive practices by banks and corporate exploitation of public resources. In the Indian context, you will call it corruption but we call it corruption American style, where you give away natural resources below market prices. India is doing it now but America has a long history of doing this.

There is a clear association between inequality and instability. People at the top don’t spend too much, they save a lot but people at the bottom spend everything. So you redistribute income from the bottom to the top and demand goes down. That makes an economy weak. That is what happened in the US. We would have had a weaker economy, but the Feds stepped in by creating a bubble that created more demand to offset the demand that was going down. Of course, creating a bubble was creating instability.

• Stiglitz confessed that both the IMF and the UN commission that I chaired came to the conclusion that inequality was one of the major causes for the crisis. It is not the direct, precipitating cause that bad lending was, but bad lending was a result of deregulation and the interest rates that were itself a result of inequality. If we don’t improve inequality and don’t do something else, it is going to be hard to get back to robust growth and prosperity. We are likely to have another housing bubble.

• He further opines, that in the presidential debates none of the candidates have mentioned the word ‘inequality’ as American politics is money-intensive and money-driven. Each of the candidates is expected to spend a billion dollars. When you spend so much, you have to go where the money is, and money in America is at the top. Therefore it is not a surprise that in the campaign you don’t hear a lot of discussion about inequality and the 1%. You don’t bite the hand that is feeding you in the middle of an election.

• He say that this debate may last or  may remain a phrase, he is not sure of, but it will be a part of America unless the problem of inequality gets addressed. It is just not that the top 1% get three to four times more that what they got in the 1980s, but the middle class today is worse off. When you have this degree of stagnation in the middle, there will be an expression through the political process.

• Stiglitz feels that GDP is not a real measure (or say per capita income) of development. he says that, I haven’t looked at India exactly, but it has strong implication for every country. In the case of China, if you take into account the environmental degradation and resource depletion, growth is much less than what it seems. You need that debate in India. Your GDP is going up, you have per capita highest number of billionaires but at the same time you have many people in poverty. So the GDP per capita doesn’t capture what is happening. In India, the progress in the middle and at the bottom has been less than what GDP in itself would like you to believe.

• When asked about the current issue in Indian Economy, that is FDI in retail, he puts it this way.  The advocates of FDI have probably put too much emphasis on it. India is in a different position than a small, developing country. You have a large pool of entrepreneurs. They are globally savvy, have access to global technology and they have a lot of wealth. So, if there were large returns to large-scale supermarkets, the domestic industry would have supplied it. Not having access to FDI is not an impediment in India. Wal-Mart is able to procure many goods at lower prices than others because of the huge buying power they have and will use that power to bring Chinese goods to India to displace Indian production. So the worry is not so much about the displacement of the small retail store but displacement further down the supply chain.

When an argument that ‘But big chains may create more jobs’; he told that  some of the profits of companies like Wal-Mart come from free riding on our society. They don’t provide healthcare benefits and assume that the spouses of the workers get healthcare benefits from their other employees or through some other mechanism. They might not be a good employer.

Always Yours — As Usual —- Saurabh Singh

Source: TOI

State of the World Economy

Backdrop
The IMF believes that global prospects are gradually strengthening after the setback during 2011, though downside risks remain.  This is mainly due to improved economic activity in USA during the second half of

2011 and pursuance of more effective policies in the euro area which have reduced the threat of a sharp global  slowdown. Accordingly it is expected that there will be a weak recovery in the major advanced economies  while  there  will  be  relatively  more  solid  support  from  most  emerging  and  developing economies.

Fundamentals

Global growth is projected to drop from 4% in 2011 to 3.5% in 2012 because of weak activity during the second half of 2011 and the first half of 2012. However, growth is expected to revert to the 2011 level in

2013 when hopefully the pending issues are ironed out successfully especially by the developed nations. Policy  has  played  an  important  role  in  lowering  systemic  risk  such  as  ECB’s  three-year  longer-term refinancing operations (LTROs), aggressive fiscal adjustment programs, and the launch of major product and labor market  reforms. This has to an extent helped to stabilize conditions in the euro area thus relieving pressure on banks and sovereigns.

The euro area is still projected to go into a mild recession in 2012 as a result of the

o  sovereign debt crisis and a general loss of confidence,

o  effects of bank deleveraging on the real economy, and,

o  pressure of fiscal consolidation in response to market pressures.

Overall growth is expected to turnaround in 2013, while 2012 will remain a year of cautious uncertainty given the risk factors involved. Advanced economies as a group would expand by about 1.5% in 2012 and by 2% in 2013. This would be an improvement over the 2011 level too. Italy however, is expected to still be in the negative territory  with the recession getting protracted for another year. Japan on the other hand is to take lead in terms of growth in 2012 along with USA, but slowdown marginally in 2013.

Real GDP growth in the developing economies is projected to slowdown from 6.25% in 2011 to 5.75% in

2012 but recover to 6% in 2013, helped by easier macroeconomic policies and strengthening foreign demand. Both China and India are expected to slowdown in 2012 though the ASEAN group will continue to grow steadily in both 2012 and 2013.

Inflation  however,  is  expected  to  come  down  in  both  2012  and  2013  for  both  the  advanced  and developing nations, reflecting the tempering of commodity prices in the face of feeble economic growth  in 2012.

The recovery process

Markets have been worried about fiscal sustainability in Italy and Spain all through 2011 which led to a sharp increase in  sovereign yields. With the value of some of the banks’ assets in doubt there was apprehension on whether those banks would be able to convince investors to roll over their loans. This lead to freezing of credit which in turn resulted in erosion in confidence as activity slumped. Strong policy responses however turned things around. Elections in Spain and the  appointment of a new Prime Minister in Italy gave some reassurance to investors. The adoption of a fiscal compact showed the commitment of EU members to dealing with their deficits and debt. Most important, the provision of liquidity by the ECB removed short-term bank rollover risk, which in turn decreased pressure on sovereign bonds. Some of the reforms seen were:

o  The European Central Bank provided unlimited, collateralized three-year liquidity to banks which eased bank funding strains and contained the risk of illiquidity-driven bank failures.

o  Governments in several countries, notably Italy and Spain, worked to reduce fiscal deficits.

o  Ireland and Portugal made good progress in implementing their structural adjustment programs.

o  Greece came to a major agreement to restructure debt held by the private sector, and a successor program has been agreed with the European Commission, the European Central Bank (ECB), and the IMF, and approved by both euro area member states and the IMF.

o  Euro area banks are in the process of securing stronger capital positions under a European Banking

Authority (EBA)-coordinated initiative.

The concerns

There could however be two main brakes on growth: fiscal consolidation and bank deleveraging. While both are needed   today,  they  will  most  certainly  decrease  growth  in  the  short  term.  Fiscal  consolidation  is  being implemented in  most advanced economies while bank de-leveraging is affecting primarily Europe. While such de-leveraging does  not  necessarily  imply  lower  credit  to  the  private sector, the  evidence  suggests  that  it  is contributing to a tighter credit supply.

How about emerging economies?

Emerging economies are not immune to these developments even though it does appear that they are decoupled in terms of pace of growth. Low advanced economy growth has meant lower export growth for them. Further financial uncertainty, together with sharp shifts in risk appetite, has led to volatile capital flows impacting their balance of payments and  exchange rates. However, it has been observed that generally these countries had enough policy room to maintain stable growth. But, some countries need to watch overheating, while others still have a negative output gap and can use policy to sustain growth.

Major risks

Some of the risks that the global economy faces are quite different from the normal ones.

o  Geopolitical tension affecting the oil market is the obvious and known risk. An increase in these prices by about 50 % would lower global output by 1.25%.

o  Another acute crisis in Europe is an unknown one and given the developments that have taken place in

2011, can never be ruled out. Further escalation of the euro area crisis will cause output to decline by 2%

and 3.5% over a two-year horizon.

o  Balancing  the  adverse  short-term  effects  of  fiscal  consolidation  and  bank  deleveraging  versus  their favorable long-term effects. Excessive tight macroeconomic policies could push the major economies into sustained deflation or a prolonged period of very weak activity.

·    In the case of fiscal policy, the issue is complicated by the pressure from markets for immediate fiscal consolidation. Markets ask for fiscal consolidation but react badly when consolidation leads to lower growth.

·    Deleveraging can lead to a credit crunch, either at home or abroad. Partial public recapitalization of banks does not appear to be on the agenda anymore, but perhaps should be.

o  A latent risk could be the disruption in global bond and currency markets as a result of high budget deficits and debt in Japan and United States and rapidly slowing activity in some emerging economies.

Policy thrust

Measures should be taken to decrease the links between sovereigns and banks, creation of euro level deposit insurance,  bank crisis resolution, and introduction of limited forms of Eurobonds including the creation of a common euro bill market. These measures are urgently needed and can make a difference were another crisis to take place soon. In the euro area, the recent decision to combine the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF) is a good pragmatic move which will strengthen the European crisis mechanism and support the IMF’s efforts to bolster the global firewall.

In the United States and Japan, sufficient fiscal adjustment is planned over the near term but there is still an urgent  need  for  strong,  sustainable  fiscal  consolidation  paths  over  the  medium  term.  Also,  given  very  low domestic inflation  pressure, further monetary easing may be needed in Japan to ensure that it achieves its inflation objective over the medium term.

How about the developing countries?

Developing  economies  continue  to  reap  the  benefits  of  strong  macroeconomic  and  structural  policies,  but domestic vulnerabilities have been gradually building. Growth has been supported by rapid credit growth and high commodity prices.  To  the extent that credit growth is a manifestation of financial deepening, this has been positive for growth. But in most economies, credit cannot continue to expand at its present pace without raising serious concerns about the quality of bank lending. Further, commodity prices are unlikely to grow at the elevated pace witnessed over the past decade, which means that fiscal and other policies have to adapt to lower potential output growth.

The challenges  are  to  counter  the  impact  of  downside  risks  from  advanced economies,  ensuring that  their economies  do not overheat, control credit growth, tackle volatile capital flows, and have policies in place to counter inflation.   Monetary policymakers need to be vigilant that oil price hikes do not translate into broader inflation pressure, and fiscal policy must contain damage to public sector balance sheets by targeting subsidies only to the most vulnerable households. This will hold in our own context too.

Fiscal indicators

The performance of governments across the world has become an important concern today in the light of the sovereign  debt crisis that pervaded the euro region. The genesis lay in high unsustainable debt levels of the government that could not be serviced.
The table below gives the Government debt to GDP ratios for a set of countries in both the advanced and developing nations groups.
Table Containing GDP Data
Debt levels remain at a higher level for the advanced countries relative to those of the developing nations. These levels are not expected to change significantly for the advanced nations while those for the developing nations would be tending to move downwards.

A similar picture is obtained also on the fiscal deficit side (ratio of government balances to GDP), where levels are higher  for  the  advanced  nations,  which  however,  are  expected  to  move  downwards  on  account  of  fiscal consolidation (in Table -3 above). India’s fiscal balance is on the higher side within the set of developed nations covered here and is comparable with that of USA, Japan and UK.

—-Compiled and Presented [from Respective Sources for wider non-commercial circulation].

——————————————-Always Yours — As Usual —- Saurabh Singh

……..and Markets Came Tumbling Down ……..an attempt to explore the Cause..

……..and  Markets Came Tumbling After

Perhaps, both Dr. Manmohan Singh as Leader of Ruling Party in Power and Mr. Pranab Mukherjee, as Finance Minister went up there, this budget session, to specially put the Indian GDP in higher growth trajectory. Probably all went in vein. All accepted; but then what could be the reason at the route of it? Is anyone interested and involved in finding out the route cause or all are merely trying to make the smart, logical and rational guesses.

Many experts have been found blaming it on the variety of issues, and the sum of these issues is much larger number than all the experts giving their opinion put together. It signals an impression that now a doctoral thesis should be presented on ways of identifying that the individual, who is well dressed and has somehow made it to a position of power and claiming to be expert of domain, is really an expert or a garbage vomiting biological machine.

Pictorial Representation Market Crash

Market Crash of Two Different Centuries     1930 — &–2008

The reasons forwarded by expert for any wanted or unwanted oscillation in the national economy has as much probability of being found in few phrases mentioned below, as much is for any oscillation happening in mood of markets, in next day trading session.

An Attempt:

1. Probably this is an outcome of policy paralysis at the level of Government…

2. It is due to fear being felt by FIIs due to the possible provisions of GAAR on P- Notes…..

3. This is being reflected as the Rupee is getting weaker……

4. It is due stubbornness being shown by RBI Governor by not easing interest rate…

5. It is an outcome of inflationary pressure…..

6. Because European markets opened on lower side…

7. Euro zone crisis is having its impact felt… as all the economies are networked these days….

8. Prices of Crude Oil are moving northwards due to possible stance of USA on Iran’s nuclear issue..

9. The monsoon has cracked a joke on us….

10. The quarter -1 , 2, 3, 4 data for industrial output were not promising….

11. There is a growth being noticed in unemployment rate in USA….

12. Forecast of Chinese economy has taken the fizz out of the market….

13. All this is due to the nation’s money lying in the tax heavens abroad….

14. The growing fiscal deficit is responsible for it….

15. It is the burden of subsidy that is killing the government…..

16. Investors’ are fearful of risky assets and they going for Cash or preferring cash..

17. The Greece crisis has taken its toll….

18. The Spaniards are going uncontrolled……

19. It is due to the Vodafone issue..Where FM wants to put a tax with Retrospective effect..

20. Rupee falters on rupee outflow fear…..

21. Now markets are waiting for first signal of Mr. Hollande, the new President of France.….

…..

 

 

,,,,

 

                                                                                                                   

////

 

 

…..

N. The grocery seller was saying that Fed is in for an interest rate hike…..

N+1. I heard my taxi driver telling to someone that it is being stage managed by the government…

N+2. There is a foul smell of some foreign hands behind it…….

This is not the end of the list, and therefore just an illustrative one has been put up. Please feel free to add your suggestions. The names will be sent to Nobel Committee which supposed to announce the Current Years’ Nobel Prize Winner in Economics by conducting a free and fair lucky draw from it…..

                                                                                                                     Always Yours— As Usual —– Saurabh Singh

PARTICIPATORY NOTES OR P-NOTES – A CHAOS; CONFUSION; TREACHERY OR SOME THING ELSE?…..A JOURNEY ….

P – NOTES – AN OVERVIEW

Perhaps, since Mr. Pranab Mukherjee, the present Finance Minister of UPA government (2009 – 2014) has presented his finance bill on March 16, 2012, the Term “P – Notes [Participatory Notes]” has transformed or metamorphosed in an instrument of mass massacre at Indian capital markets. Probably in current era we do not have Black Friday but probably a new kind of day, i.e., P – Note day, though the common term “Black Monday” is associated with these P – Notes. Even a rumor on the issue of GAAR and P – Note is good enough to create an epic blood bath in Indian Capital Markets these days.

The class of investors suffering maximum burnt are ‘the new breed of retail investors’, and I feel this to be the worst impact of the event, as this phenomenon may turn the retail investors chary and scary both. Consequently the flow of money to capital markets may decline significantly, rather it may get once again get diverted to safe heavens, i.e., to nationalized bank in India, out of which majority are in cash plus state. This mean the capital that was meant for capital markets will get locked into banks and simultaneously these banks will have to shell out more amount as interest on these deposits; without getting any returns on them (as there are no borrowers available in market, who may love to pick money from bank in the regime of sky rocketing interest rates).

Participatory notes can be found making it to news headlines every alternate day, but due to all bad reasons. They have been in the root of biggest fall witnessed at capital markets in current era. The apex regulatory bodies of Capital Market and Money Market,, i.e., SEBI and RBI are also making it to the headlines of pink paper these days, as they are found issuing notices and warnings to the parties using this instrument.

The financial analysts and experts dealing in or related to Capital Markets are neither concerned nor worried about this instrument, as Indian Investors do not and cannot use this instrument. At the same time they do not have a say in the issue, as it is the government which is supposed decide the fate of Participatory Notes. The P – Notes come into prominence when the deliberations are regarding or related to Foreign Institutional Investors [FIIs].

But what are Participatory Notes [P – Notes]

This as question is circulating in the conscious or sub-conscious part of mind of every individual or retail investor. They are a confused lot due to probably two reasons. First being that till a few months ago they had neither heard about any such instrument nor had they thought that something unknown may throw all their investments plans hay ware. Whereas, the second reason is their failure to comprehend that why it is they, who are paying the cost for something not known, and why the government and market regulators are working towards saving their interests.

An Attempt to Explain what P-Notes Are:

Just like any other derivative ‘Participatory Notes’ too are simply ‘derivative instruments’ that is used by investors not registered in India or Mauritius to trade in Indian markets

Numerous FIIs, which are neither registered nor they wish to get registered with SEBI, but are interested in getting exposure to Indian Securities, place their orders through brokerage houses that have Mauritius-based FII accounts.

These ‘P-Notes’ are generated as a consequence of the action of brokers who buy or sell securities on behalf of their clients on their proprietary account and as a result of the transaction, issue ‘notes’ in favor of such foreign investors. It is these notes which are called in profession of securities trading as “Participatory Notes”. The brokerage houses then repatriate the dividends and capital gains back to these entities, which are generated as a consequence of such trade. In this case, the broker acts like an exchange: it executes the trade and uses its internal accounts to settle the trade. They keep the investor’s name anonymous.

Somehow, anonymous investors are not liked by the regulators of Capital Markets. The recently out, Lahiri Committee Report, also lays emphasis on participatory notes, its role and functioning.

 Functioning of Participatory Notes Depicted Diagramatically

Exhibit – 1: Functioning of Participatory Notes

P-Notes, down the line exhibit properties of Hedge Funds. Although SEBI, as a regulator had issued KYC (Know Your Client) guidelines, which include that, FIIs must know all the requisites details about their client and be able to furnish the details of the same, as and when demanded or asked by the regulator, to which there should be strict compliance, failing which the regulator may sentence them to very harsh punishments or even capital punishments, as was done by SEBI in case of UBS Securities. SEBI barred UBS Securities from trading in Indian markets on this premise only as they could not succeed in furnish the information regarding their clients. Though, finally SAT reversed the SEBI’s order.

The Bigger Issue

The bigger question needs to address the debate on hedge funds and why regulators like SEBI and RBI are wary of them….. ? That will be another topic of discussion with some other headline. For the time being the deliberations stop here.

Photograph of Author or Compiler of this Post

Author

Always Yours — As Usual — Saurabh Singh

Economic Growth- But No New Jobs:Later Half of First Decade of 21st Century India

Have 20 years of economic liberalization been kind to the poor? In particular, how have India’s Scheduled Castes and Scheduled Tribes fared since the country opened up to the forces of economic reforms? Already politically empowered, have they also been economically empowered by liberalization?

Already politically empowered, have India’s Scheduled Castes and Scheduled Tribes also been economically empowered?

An important new study by economists Viktoria Hnatkovska, Amartya Lahiri and Sourabh B. Paul examines the economic performance of SC/STs by analyzing a large mass of data from five successive rounds of the National Sample Survey from 1983 to 2005.

The study is among the first to examine the behavior of wages, consumption, education and occupation choice for SC/STs compared with the rest of the population, exploiting the large and rich NSS data.

The study’s three principal findings are striking. First, it finds significant convergence in educational attainment and occupational choice over the period of the study. In 1983, non-SC/STs had, on average, 3.62 years of schooling, against 1.41 for SC/STs, a discrepancy of 157%. By 2005, non-SC/STs had 5.6 years of schooling on average, while for SC/STs it was 3.2 years, so the percentage gap had closed to 74%. Non-SC/STs still dominate white collar employment, which tends to be higher paying than blue collar and agricultural work, but the gap has narrowed from almost three times as many non-SC/STs in 1983 to about 1.5 times as many in 2005.

Second, the report finds a “statistically significant” movement towards convergence in wages between SC/STs and everyone else. A statistically significant finding is one in which we can have confidence that the results are genuine and not an artifact of measurement. In particular, the authors find that the “wage premium” – a ratio between the wages of non-SC/STs relative to SC/STs— has steadily declined from 36% in 1983 to 21% in 2005. To put things in perspective, the corresponding wage premium for white males over black males in the U.S. has stayed constant around 30% for the last several decades.

Third, the authors find that convergence in wage levels has been caused in large measure by educational attainment of SC/STs slowly catching up with the rest, although a gap remains.

But what explains these trends? Are wages converging principally because the education gap is closing (perhaps through caste-based reservation), or are other factors such as a lessening of discrimination against SC/STs responsible?

The authors show analytically that the majority of the wage gap can be explained by demographic characteristics, such as age, experience and whether people live in a rural or urban area. But the single most important determinant of the wage gap is the gap in educational attainment, the most important demographic difference. The implication is that the narrowing wage gap is indeed a result of the narrowing education gap.

The study also finds that caste-based reservation had a “negligible” effect on the wage gap. Because of its potential policy significance, this finding must be interpreted with caution. The finding is that reservation by itself cannot account statistically for much of the narrowing wage gap.  But that, of course, doesn’t mean that reservation isn’t important. One cannot rule out that reservation indirectly has led to a narrowing of the wage gap, working through the effect of allowing SCs/STs to catch up in terms of education and occupation choice.

There is corroborating evidence on the importance of reservation. For instance, the Indian Express reported recently that SC representation in upper-tier government jobs has increased almost eightfold, from 1.64% to 12.5% in the last 45 years. ST representation has grown almost 20 times. These figures reflect, in part, reservations of 15% and 7.5% for SCs and STs, respectively.

What lies behind these optimistic results? Leaving aside the debate about how big or small a role caste-based reservation has played, there are other market-based explanations that have played an important role, which the study highlights.

The most natural explanation, which is close to the heart of every free market economist, is that 20 years of economic liberalization have reduced the importance of caste and accentuated a move towards “market meritocracy,” where wages and incomes better reflect differences in education and other characteristics, not caste.

This reflects an idea proposed by the Nobel economist Gary Becker a half-century ago, that discrimination in any form becomes costlier when the market becomes more important, and so we will see less of it.

This is a plausible explanation but isn’t the only possibility. The study also flags the increased importance of community-based social networks bringing together SC/STs. Closer integration may lead to what economists call “network externalities,” so that every member of a group benefits more from interacting with their peers than if they were on their own.

The bottom line is that there’s convergence between SC/STs and everyone else, but convergence doesn’t mean they’ve completely caught up. Nor does it mean that caste-based reservation has not or will not continue to play a role.

 

Always Yours — As Usual — Saurabh Singh

Source: http://blogs.wsj.com/indiarealtime/2011/11/28/economics-journal-are-indias-poorest-catching-up/tab/print/

 

 

A FICTION: NOT FAR AWAY FROM RECENT FUTURE REALITY

A FICTION: NOT FAR AWAY FROM RECENT FUTURE REALITY

In late evening, when I had just pressed the shut down button of my workstation, a colleague of mine entered the office chamber (Officially allotted to me to work).Hello, was the first word uttered out by her and before I could ask the purpose, she herself expressed that she planned to have my company while walking back to home, at least the part of distance that was common to we both. I welcomed the idea and also thanked her for the same. Thus the journey homewards started. While on walk the momentary silence was done away by my colleague, when she requested the permission to ask question that was coming to her mind. I agreed to help her to the limited capacity of mine.Image- Bricks of Gold

 Probably it was the prices of yellow metal that were troubling her and my colleague wanted to know, where the prices are expected to move in future and why. This I am inferring from the talks that continued.

She started the conversation by posing her curiosity as ahead: “Where do you see the price of gold going in the days to come?”

Since, at that moment, I was not exactly focusing on ‘investment advisory’, so I responded by saying that “on a broad level, the price are supposed to continue their northward journey.”

It seems that my response confused her a bit, as she soon came up with another question that “what I mean, when I say a broad level.”

I got the point and then explained to her that “the prices of any commodity do not move in a straight line. When I say on a broad level, it means that the prices will keep moving northwards, but in between they may drop as well, but they will pick up again, and thus will continue to scale up.”

It seems, that she was not ready to buy anything that I said, therefore, she questioned that what lay behind my confidence, which she visualized while I was answering her first curiosity.

Suddenly I realized that majority of investors; rarely scan the external and vital economic variables that are often of political nature. This made me aware that now I need to go bit detailed and also in a manner that she could easily comprehend.

“Well, I was just reading through some material and I realized that there is another solid reason for gold prices to go up,” I told her.

“Is it something other than all the money printing that is happening and is likely to happen in the days to come, all around the world?” she asked.

“Yes”, I answered.

“So what is this new reason?” she was now more curious.Image - Gold with a Medival Painiting in Background

Now I started by posing a question as ahead “Ever heard of Hugo Chavez?” Pat came the reply, “nope” with a supplementary question that now who’s he?

He is the President of Venezuela, a country in South America.”                                

Probably she got a bit more confused and said that she knew that, but expressed her surprise on the issue that what “Venezuela” has got to do with the price of gold.

This made me aware that now my job was to explain history, international polity, and international trade, cost of transaction and accounting to her, and all this in very limited time of few minutes. I knew that I may be bombarded with whorls of questions.

 I started with letting her know that Venezuela has the 15th largest gold reserves in the world amounting to 401.1 tonnes. A lot of this gold is lying abroad in bImage - Golden Fairyanks in New York, London and Zurich.

“But why will a country keep its gold overseas?” she interrupted.

 I started to introduce her with history. I said that “a part of the reason comes from history. Till August 15, 1971, the world was on a gold standard. Paper currencies were ultimately convertible into gold. This meant that countries had to settle their deficits in gold.” I followed this by giving an instance from international trade. I asked her to assume that England and Germany are exporting and importing goods from each other. At the end if France exports more to England than England to France, there is a deficit.” This means that England had to pay France. This payment was to be made in gold. A look at her face made me feel that she has now started picking up what I was attempting to explain. I carried on by adding that “now this meant that gold had to be physically moved from England to France, which of course was a pain. Movement meant cost of insurance as well as security.”

Image - Gold being Transported via Air

She was prompt in asking that “what was the way out?”

 I added for these reasons “a lot of this gold is simply stored overseas at the Federal Reserve Bank of New York (a part of the Federal Reserve of the United States, the Central Bank of the US).”

“How do you think this is going to help?”

It’s simple; I added and just narrated what Peter Bernstein writes in his book “The Power of Gold”. For example, if England lost gold to France, a guard at the Federal Reserve had merely to bring a dolly to England’s closet, trundle the gold to the French closet, and note the change in the bookkeeping records.’

She got the point, and allowed my request to take her back to Hugo Chavez.

The deliberations continued further, certainly with some statistical inferences. Estimates suggest that nearly 211 tonnes of the 400-odd tonnes of gold that Venezuela has are with banks abroad. Chavez has asked this gold to repatriated back to Venezuela.”Image - Hugo Chavez Nationalises the Gold Mines

Now this brings a twist in the story, and the discussion to follow will also attempt to answer possible reason for Hugo Chavez’s such an act.

 “Chavez has had an anti-US stance for years and may feel that because of that Venezuela runs the risk of its gold being seized.”

“Gold Seized? Why would such happen and does the possibility of such an act exist?” was the latest in series of questions.

“It sure is. I explained the same by making her aware of the ongoing Libyan foreign exchange reserves crisis, which happens to be an outcome of its foreign reserves being seized by allied nations with declaration of war earlier this year.”

 “But what has all this got to do with the price of gold? To me it’s as simple as me wanting to have gold in my own locker rather than the bank locker.”

I agreed to her statement, while continuing to explain by adding that all is not that straightforward as concluded by her, though to some extent she was correct. The straight forward part of transaction would be limited to 99 tonnes of total 211 tonnes lying abroad, as this 99 tonnes are deposited with the Bank of England in London. Repatriating that back to Venezuela would be a straightforward process.”

Image - Gold Jewellary at Display

 Now comes the not so straight forward part, which happens to be of the tune of 112 tonnes of the gold and same is lying abroad with what are known as bullion banks. J P Morgan is one of them. Estimates suggest that Venezuelan gold worth $807 million (or around 450,000 ounces of gold) is lying with it.”

 She was instant, and argued that this should also be as straight forward as it is in the case of Bank of England, London, while simultaneously her facial expressions conveyed me that she wanted to know, if I dare to differ from her opinion. Certainly, I had to differ, and added that things are not always as simple as they seem to be. The statistics again came handy in quoting that “estimates suggest that the total amount of physical gold with J P Morgan currently stands at around 338,303 ounces (1 troy ounce equals 31.1 grams).”

Now, it seemed that she was out of reasons, as she expressed her ignorance about having to come across any news in media regarding, such a huge bank robbery in which approximately 1,11,697 ounce or 3473.8 kilo grams worth gold was looted.  I had to instantly chip in by saying that, this is not a case of bank lifting, but a way of functioning of financial system in general and banking sector in particular. Let me add an example to illustrate it? I sought her permission. The phenomenon goes as explained ahead [the attempt was to explain the process by making it as easy as possible, so that even a novice can understand].Image - Gold of Merchants in Various Weights put at London Central Bank

“Central banks around the world had a huge amount of gold lying in their vaults, not earning any return. The end of 2007 witnessed the stock of gold with central banks around the world rising to 32,000 tonnes of gold.”

 I requested her to be more attentive to whatever I was going to add now. Out of the 32,000 tonnes gold held, the Central Bank lent approximately 14,000 tonnes to Bullion Banks like J P Morgan. James Turk and John Rubino in their coauthored book The Collapse of the Dollar, have argued that “lending, for instance, involves the central bank transferring gold to a major private bank, known as bullion bank, which pays the central bank a small-but-positive interest rate, then sells the gold in the open market.”

In this manner “central banks convert the gold into cash and then deploy this cash, somewhere to earn some positive rate of return. This based on a very fundamental assumption that idle assets provide no return, and there is fair possibility that such assets may ultimately add up some cost to the holder.” These costs may range from cost of storage to cost of security. As per meaning conveyed by the operative word “lending”, since the gold has been lent, therefore, the central banks have all the rights to, and can demand it back, whenever they want.

She chipped in by adding that probably “this is what Venezuela is doing right now”; and thus conveyed me a feeling that she was sincerely following the every single word uttered by me. 

 I nodded in agreement and continued further by adding that, since, the bullion banks have promised to return the borrowed gold to the central banks so they will have to return the same. In prevailing situations these bullion banks are not having the volume of gold that was lent to them by Central Bank. In financial and monetary world, this position is conveyed by the term ‘short’, and this means that these bullion banks are ‘short’ gold.

Now comes a significant turn in events, that may work as catalyst to force the prices of gold to break the roof. As the situation deliberated above suggests that, in case, sometime in future, these bullion banks are asked to deposit the volume of  gold lent to them by central bank, they will be left with no choice and would be obligated to buy gold in order to repay the central banks’.”

“So, as I can get, it goes like, that in such a scenario the bullion banks like J P Morgan will now have to buy back gold from the market in order to repay the Venezuelan government, given the situation that Venezuela has around 450,000 ounces of gold deposited with J P Morgan, whereas J P Morgan at present has only 338,303 ounces of gold in its accounts/ record books,” she added.

Exactly, I said in agreement, and carried the deliberations forward by adding, that this buying will lead to the price of gold rising further. I knew that now she has got answer to her question, but then too, I continued it by saying that this is only one part of the story.

Much like a child, who is curious to know about everything, she was now eager to learn that what the remaining part of story was now. She requested me to unfold the other part of the story.

I continued by giving her a reference of a report titled “Thing That Make You Go Hmmm” , and told that this report points out, ‘Chavez’s move could set in motion a chain of events whereby Central banks who store the bulk of their gold overseas in ‘safe’ locations scramble to repossess their country’s true ‘wealth’. If that happens, the most high-stakes game of musical chairs the world has ever seen will have begun’,” I said.

“This sounds very scary”, she added.

Image - Gold derails the US $ and US Economy“Yes, you are very much correct while mentioning that the report further states that ‘any delay in repatriating Venezuela’s gold could potentially start a frantic scramble by central banks to claim their physical. God save the scenario, but if it actually happens, rest assured that gold price will be on fire. A scenario will take place, which has neither been seen in past, nor even imagined.

It will give birth to an economic tsunami of magnitude, which will turn the great economic recession witnessed by world or even the jasmine revolution and contribution of social media to same to seem dwarf.

Don’t be surprised if I that there is enough in media to believe U S Govt. Manufactured Fake Gold

Perhaps, there are only few who can imagine the magnitude of risk, specifically if they are not linked to foreign trade. Let me illustrate it. It’s one thing to counterfeit a twenty or hundred dollar bill. The amount of financial damage is usually limited to a specific region and only affects dozens of people and thousands of dollars. Secret Service agents quickly notify the banks on how to recognize these phony bills and retail outlets usually have procedures in place (such as special pens to test the paper) to stop their proliferation.

Image - U S Government Manufactured Fake Gold

This is the most sacred of all commodities because it is thought to be the most trusted reliable and valuable means of saving wealth.

A recent discovery — in October of 2009 — has been suppressed by the main stream media but has been circulating among the “big money” brokers and financial kingpins and is just now being revealed to the public. It involves the gold in Fort Knox — the US Treasury gold — that is the equity of our national wealth. In short, millions (with an “m”) of gold bars are fake!.Who did this? None, but the United States Government, as claimed by Chinese Authorities.

Background
In October of 2009 the Chinese received a shipment of gold bars. Gold is regularly exchanges between countries to pay debts and to settle the so-called balance of trade. Most gold is exchanged and stored in vaults under the supervision of a special organization based in London, the London Bullion Market Association (or LBMA). When the shipment was received, the Chinese government asked that special tests be performed to guarantee the purity and weight of the gold bars. In this test, four small holed are drilled into the gold bars and the metal is then analyzed.

Officials were shocked to learn that the bars were fake. They contained cores of tungsten with only a outer coating of real gold. What’s more, these gold bars, containing serial numbers for tracking, originated in the US and had been stored in Fort Knox for years. There were reportedly between, 5600 to 5700 bars, weighing 400 oz. each, in the shipment!

At first many gold experts assumed the fake gold originated in China, the world’s best knock-off producers. The Chinese were quick to investigate and issued a statement that implicated the US in the scheme.

 

What the Chinese Uncovered

Roughly 15 years ago — during the Clinton Administration [think Robert Rubin, Sir Alan Greenspan and Lawrence Summers] — between 1.3 and 1.5 million 400 oz tungsten blanks were allegedly manufactured by a very high-end, sophisticated refiner in the USA [more than 16 Thousand metric tonnes]. Subsequently, 640,000 of these tungsten blanks received their gold plating and WERE shipped to Ft. Knox and remain there to this day.

According to the Chinese investigation, the balance of this 1.3 million to 1.5 million 400 oz tungsten cache was also gold plated and then allegedly “sold” into the international market. Apparently, the global market is literally “stuffed full of 400 oz salted bars”. Perhaps, its worth is as much as, 600-billion U S dollars.

Always Yours — As Usual — Saurabh Singh

 RELATED LINKS FOR READERS WHO WANT TO GO IN MORE DETAILS TO BEFORE COMMENTING ON STORY
  1. http://etfdailynews.com/2011/08/17/venezuelan-president-hugo-chavez-sends-precious-metal-etfs-a-wakeup-call-gld-iau-slv-gdx-agq/
  2. http://philosophers-stone.co.uk/wordpress/2011/08/hugo-chavez-gold-runs-bank-runs-and-bank-holidays/
  3. http://profit.ndtv.com/news/show/chavez-officially-nationalizes-venezuela-s-gold-industry-174207
  4. http://notime4bull.com/aggregator/sources/13
  5. http://mikepiro.com/blog/as-chavez-pulls-venezuelas-gold-from-jp-morgan-is-the-great-scramble-for-physical-starting/
  6. http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/traders-brace-for-venezuela-gold-transfer/article2134031/print/
  7. http://www.bighaber.com/haber/chavez-to-nationalize-venezuelan-gold-industry-1072000.html
  8. http://www.advisorperspectives.com/commentaries/global_082611.php
  9. http://americasfinancialmeltdown.blogspot.com/2010/11/below-is-antiwar_4391.html
  10. http://mikepiro.com/blog/ron-paul-audit-federal-reserve-gold-stores/
  11. http://www.freedomsphoenix.com/News/061976-2009-11-26-us-govt-manufactured-fake-gold.htm
  12. http://www.the-boondocks.org/forum/index.php?t=msg&&goto=157202#msg_157202s

WILL The Buck Stop — May be This One Works

Olympic Gold Medalist of Corruption in recent olympics Mr. Suresh Kalmadi-led CWG fiasco became India’s shame; A Raja will have made the CWG affair look petty if it turns out that he has indeed caused national loss and brought global shame for India in the 2G scam as charged. Now B S Yeddyurappa and Janardhan Reddy are BJP’s A Raja, standing accused of being the shameful faces of mafia-like corruption. Now is the time to ensure that buck must stop.

The good news is that citizens are finally refusing to accept corruption as routine anymore and are demanding immediate accountability from those who they elect. Today, for the first time in independent India’s history five corporate CEOs, one IAS officer and several senior politicians find their new address as Tihar Jail No. 1. This could well be dubbed as India’s second  independence struggle, but this time it’s not against foreign rule, but for for freedom from corruption by our own rulers, and has begun in right earnest in 2010.

There are four immediate steps, which can be taken to control corruption.

First, the government must notify the rules for the confiscation of assets of corrupt officers in the Benami Transactions (Prohibition) Act, 1988. This will allow the state to confiscate properties into an escrowed account where no claimant shows up, and if he does, then the tax laws can be invoked to inquire into the source of income for purchase of the property.

 Second, India must enact strong anti-perjury laws to stop frivolous, false complaints under oath; this would be a necessary step to prevent witnesses and complainants from frequent retractions which one currently observes in court.

Third, reversing the onus of proof. The accused must demonstrate why illegal cash
or real estate suspected to belong to them is not theirs or face confiscation. Today, the standard of evidence followed is cumbersome. Taking cues from the US system, one must trace the money trail rather than paper trails of files of decision-making.

Lastly, posting the right man for the right job. When one outstanding officer, Bishwajit Mishra, was posted in Bellary, he disciplined Reddy’s minions and recovered dues of Rs 20 crore in 10 days flat before he was transferred out.

Justice Santosh Hegde, U V Singh, Vipin Singh and their team have done yeoman service. They have painstakingly sifted through voluminous bank records of over 40 lakh entries, reconciling millions of transactions from one benami account to the other, one benami company to the other, till it reached the eventual beneficiary, as is shown in the report.

It recounts how Reddy started the ‘zero-risk system’ whereby he would use government officers to procure permits for other mining companies, ensuring safe transport of illegally mined ore to a destination of their choice. For a payment of 40% of the prevailing global market price of iron ore or sharing an equal amount in volume, he had created a different kind of single-window system – for bribes!

Companies that initially refused were later forced to sign zero-risk contracts with Reddy. Rs 40,92,88,860 was the amount paid as ‘risk amount’, Rs 62,92,36,810 was paid for illegal iron ore trading and about Rs 2,46,62,377 was paid to 617 officials in just five years.

This apart, the report says Rs 4,79,03,917 was paid to “G J Reddy Sir” by cheque (and many times more by cash). Now, the time has come to use the fullest extent of various penal provisions of the law to recover the money. Thus, perhaps for the first time, actual value has been imputed to the extent of bribery in just one sector of the economy, that too in one state.

It also appears from the report that Yeddyurappa brought enormous transparency into bribe-taking by having his sons take the bribe by cheque into a family trust, turning a blind eye to the rape of the treasury by his colleague and his own family.

He was clearly told in writing on file by his outstanding team of officers including the chief secretary and others that denotifying land after a Section 16(2) stage of Land Acquisition Act is violative of Supreme Court judgments. Yet, he brazenly went ahead, denotified it, sold it back to the same mining company and received a ‘donation’ by cheque! Despite L K Advani’s repeated sane counsel and warnings, the misdemeanour continued for he thought the buck would never stop. But it did.

 It remains to be seen that India’s second war for independence would spread further or soon the principal culprits will be forgotten, witnesses will be purchased or will ‘voluntarily’ withdraw their statements, bail would be granted by friendly judges, back-door deals for mutual protection will be struck across party lines, some elections will be won, and the same people will be back in power. And show  must keep going on and on.

These view reflect the agreement with views presented are vies of the author.

Always Yours — As Usual — Saurabh Singh

 

OIL POLITICS, SPECULATION, CHAIN REACTION AND MANAGEMENT

It requires quantum of intelligence, to infer from what is happening in the markets, or politico-socio-economic across the globe, to why it is happening. Things are never as simple as they seem to be. This would become comprehendible and evident as soon as one reads, relates and analyses the instances mentioned hereunder:

Crude oil prices peaked to US $ 100 – 115 a barrel in April and May 2011 and moved downwards after that to touch a rate of US $ 90 – 92 per barrel in June 2011. In such a scenario, price increase by the Union Government should have been announced in April – May 2011, but the same did not occur. The Government found June 2011 to be the auspicious time for announcing price hike when the prices had nearly normalized. What could have been the motive for doing so? Simple answer is that April – May 2011 was the time when five states were going to elect the assembly members. The states being, West Bengal, Tamil Nadu, Assam, Kerala and Puducherry.

If one goes by what the campaign managers of Congress had to say on the Rahul Gandhi’s much publicized kisan padyatra-(which as claimed was undertaken to champion the cause of the farmers of the region) –  was conceived to detract the public attention from the issue of hike in petroleum products and their possible spiraling effect on inflation. This yatra detracted the lot of electronic media attention from the campaign that opposition forces such as BJP and Left were seeking to build up on the oil price hike related issues.

Since the Oil shock of 1973, USA strategically took measures to control the oil market by keeping continued focus on West Asian Region. In 1980, Jimmy Carter, the then President of USA declared Persian Gulf an exclusive zone of American influence and created a rapid deployment of forces, which latter turned into what is known as US Central Command or CENTCOM. 

As is being believed by majority that skirmish in Libya is behind recent spurt in prices, should correct their facts. Libya produces less than 3 per cent of global petroleum output. Where as Saudi Arabia has already made up for the current shortfall and its excess stocks are more than that of Libya and Algeria put together. In fact in present situation too oil production at many of Libyan facilities continues even in civil war there.

The argument being forwarded by few is that rising demand from China and India has forced an upward trend in oil prices is also unjustified. Though these two countries do account for growing share of global demand, but then same is counterbalanced by slower demand from USA and Europe.

There is still a wide spread perception that cartel of Oil Exporting Countries can manipulate and influence the prices by changing the level of their supplies. Reality today is much different. The OPEC has turned from being a cartel to being a minor player today. Non OPEC countries now account for increasingly significant proportion of global supply. Russia has already snatched the title of being largest supplier of crude oil from Saudi Arabia since 2009. 

Many more such instances may be quoted. It’s not being quoted in anticipation that the variety of above instances is good enough to comprehend that nearly none of the factors assumed or arguments forwarded are capable of forcing any kind of hike in prices of the crude oil.

 

Then what is it, which is responsible for hike in crude oil price?

 

…….any guesses, if not, then storm your grey matter and keep visiting this place in hope of getting answer to this simple question.

 

Always Yours — As Usual —- Saurabh Singh

 

 

FY 2012 – 13 AND FCCB – IS IT GOING TO BE A SPEED BREAKER FOR INDIA’S GROWTH STORY

Global hedge funds and offshore investors are closely tracking the response of Corporate India, the judiciary and financial market regulators as 16,000 crore of convertible bonds sold by local top 500 companies come up for repayment by March 2012. With some Indian firms trying to wriggle out of their commitments, overseas bondholders are beginning to question the creditworthiness of India Inc. They are also anxious to figure out whether Indian courts will uphold creditors’ rights. The Reserve Bank of India had raised concerns about high overseas borrowings in its recent Financial Stability Report. Shares of many companies are trading at a fraction of the price at which Foreign Currency Convertible Bonds (FCCBs) are to be converted into shares. If prices recover, investors can convert the bonds into equity shares. That looks unlikely. If prices don’t recover, the companies can redeem the bonds by paying off investors. That appears impossible given the stretched balance sheets of many companies. Then, companies will have to issue fresh bonds in lieu of the old ones, negotiating a new set of conditions — revised conversion price, extended tenure and reset interest rates. Most companies worth their salt will try to work out some solution either by raising fresh money to redeem the FCCBs along with redemption premium or by restructuring the bonds. This is because they know a default or legal tussle would blacklist them in the foreign market. It will also downgrade their credit rating. That’s why the companies, whose stocks are trading at a discount to the conversion price, are already in talks with investors, says Ashutosh Maheshwari, head of investment banking at Motilal Oswal. Assam Company and Suzlon are two such examples. “We are looking at restructuring our outstanding FCCBs,” says Sanjay Sharma, finance head of Assam Company, whose FCCBs worth $32 million will mature in November. Offshore Investors Watching Closely .

Image on Economy

The stock of the Kolkata-based tea company has been hovering at around15, a good 48% discount to the conversion price of 28.75 that the company had fixed when it issued bonds in 2006. The Suzlon spokesperson says the company does not foresee any problems with FCCBs. Suzlon’s $300 million worth FCCBs will mature in June and October next year. The Suzlon stock is quoting at 50% discount to the conversion price. Reliance Communications has the largest chunk of outstanding FCCBs worth $925 million (about 4,150 crore). These bonds are unlikely to be converted into equity shares when they mature in March, as the stock is trading at 86% discount to the conversion price of . 661. RCOM will try to raise bank loans to repay bondholders, says a person close to the company. That will add to the company’s ballooning debt burden of 35,000 crore. RCOM did not comment on the issue. “Offshore investors are watching how India Inc behaves. If pragmatism prevails over greed, then invariably restructuring will work,” says H Jayesh, founder-partner of law firm Juris Corp. At the same time, there is a lingering fear that this could easily turn into a minefield of disputes. “We fear some Indian promoters will neither agree to convert at a lower price — as it will dilute their stake, nor repay the money,” says a bondholder, who had subscribed to FCCBs of a handful of companies in 2007. Akil Hirani, managing partner of legal firm Majmudar & Company, expects some bondholders to have disagreements with the promoters on revision of the conversion price, leaving them with no option but to take legal recourse against the companies. If the companies want investors to give heavy discounts, the matter is likely to go to courts, according to Huzefa Nasikwala, managing partner, Nasikwala Law Office. “Agree to a conversion at a realistic price and most investors will effectively extend the maturity period by a few years, if not more,” is what Juris Corp’s Jayesh advises companies. A month ago, a Singapore-based hedge fund, 3 Degrees Asset Management, moved the RBI against Karur KCP Packagings, a Tamil Nadubased cement bag maker. Karur KCP had raised $10 million in April 2006 through FCCBs bearing a 2% interest rate and conversion price at 75. The bonds were due to expire on April 27, 2011. Backed by majority of the bondholders, the tenure of the security was extended by another 10 years and coupon was cut to zero. The hedge fund has alleged fraud and manipulations in the company’s exemption scheme. The foreign fund is planning to initiate legal proceedings against the issuer. Two years ago, US-based hedge funds DE Shaw and Citadel Investment Group had filed a winding-up petition against Chandigarh-based Venus Remedies after the company defaulted on an FCCB issue. However, the matter was resolved last year. Beginning 2006, FCCBs captured the imagination of promoters of Indian companies who exploited it as the cheapest source of finance. It was a simple bet: the stock market will continue to rise and issuers will not be driven to a point where they will have to pay back the money; once the stock of the issuing company touches a pre-agreed price (conversion rate), the bonds will be converted into shares. The bet backfired as the stock market dipped — the bellwether Sensex has fallen 15% this year — and the stocks are struggling at a fraction of the conversion price. Some small and mid-caps are now trying different ploys to hold back payment. A few have entered into messy court feuds, one of the firms has allegedly falsified accounts to overstate losses and moved the BIFR while another has taken refuge in complaints by local investors. Bonds worth 31,500 crore are due for redemption by March 2013, according to a Crisil Research study of S&P CNX 500 and BSE 500 companies. Of this, Rs 16,000 crore of bonds will mature by March 2012. Market participants say the numbers could double if all mid and small-cap companies are taken into consideration. Among the top 500 companies, it looks like 70% of outstanding bonds may not be converted, says Crisil’s Koparkar. Of this, the “real worry” is bonds worth 2,000 crore, he adds. But the figure is at least 5,000 crore if all small and mid-cap stocks are taken into account, says a bondholder, not wanting to be named. Three years ago, some companies defaulted in paying FCCB investors. The bondholders, in turn, took them to courts. The list included Wockhardt. Its bondholders had filed a winding up petition against the company.

Always Yours — As Usual — Saurabh Singh

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