Most asset managers would love to just mark up their portfolios now and then; perhaps they should stay invested in India, which would give them that chance.
As we have always maintained, horrible corporate governance or poor disclosure never keeps foreign flows out; the promise of growth is always adequate to attract foreign money. But is that all we should care for? To graduate to the next level, Indian companies will have to improve the quality and quantity of information they disclose, respect contractual laws—not least of these being creditor rights—and regulators will have to work through their obsession with an upward moving stock market and instead improve the depth of the market, hence its liquidity.
A meaningless upward mark-to-market is exactly what happened in the low-volume, 60-second trading session of 18 May. While retail investors and punters celebrated, we can’t see how such volatility can give institutional investors anything but ulcers, as they dashed to cover their short positions or gain exposure to avoid underperforming their benchmark indices. Early election results on the fateful weekend were already pointing to a strong United Progressive Alliance (UPA) win, but the market regulator in all its wisdom decided to raise margin requirements to avoid “market volatility”.
With the early result indications and the buildup of heavy short positions, one has to wonder whether the folks at the Securities and Exchange Board of India didn’t envision that they might end up creating the very volatility they were avoiding; of course, upside volatility by Indian definitions is never unwanted.
Even those who try to explain the move fundamentally would find it difficult to support the magnitude of the move. We won’t argue with the fact that the Congress party in power does bring some semblance of stability and not having the Left parties in the mix is indeed business-friendly, but aren’t we looking at four more years of “more of the same” to be this gung-ho? Don’t we Indians as well foreign investors well acclimatized to India know that the pace of reforms always has an upper limit with Indian bureaucracy? It was under the same Congress government, and literally the same government given that most key ministerial slots are staying with the same people, that the fiscal deficit ballooned to 13% of gross domestic product. Countercyclical spending by the government was thrown out right there and then.
We can’t help remembering what BJP stalwart Arun Shourie said at a conference in New York when he was asked whether India was becoming more like Italy with the government playing an ever-receding role in business. Shourie cheekily replied, “We are indeed becoming more Italian than we know”! He then did expound that he believed the only way for business to flourish was for the government to do less, not more.
We have the utmost regard for Prime Minister Manmohan Singh and his credentials. So if press reports are to be believed, when he wanted Montek Singh Ahluwalia as his new finance minister, we couldn’t but think it would be a smart move to have a technocrat in that key position. We all know the end result—clearly politics won. New finance minister Pranab Mukherjee is already promising fiscal stimulus; he would be well advised to take a look at the woeful state of government finances.
Disclosure by Indian companies, while certainly not the worst in the world, has some enormous deficiencies. Quarterly earnings information is itself reasonably new, but the half measures of quarterly disclosure are quite astounding—Indian companies do not put out quarterly balance sheets or cash flow statements, two of the three major accounting statements.
This information deficiency is far from the norm in most other emerging economies. During the credit crisis that we have witnessed, flying blind on your investment’s liquidity situation is indeed a leap of faith. The regulators would be well advised to fix such broader, longer-term issues rather than constantly worrying about market moves.
Two small companies recently apparently walked away from their creditor claims. This happened in the highly illiquid FCCB (foreign currency convertible bond) market. We’d hate to even call these defaults when creditors, secured or unsecured, have no legal claims, but such “defaults” are going to be plenty over the next couple of years. Companies, small and large alike, raised far too much money through this route during the boom years without any thought of how they were going to pay the creditors back. Some $14 billion (Rs66,920 crore) of FCCBs (redemption value) are still outstanding of which about $13.5 billion come due over the next three years.
With the precedent set by the two small companies, wouldn’t this be a lovely way to wash some liabilities off the balance sheet, even if the global liquidity spigot turned on again and made refinancing easier?
Rajeshree Varangaonkar and Bharat Indurkar have day jobs with US-based hedge funds. They write every other Friday. Send your comments to firstname.lastname@example.org