Book " Scam " By Debashis Basu and Sucheta Dalal

Finished reading the book. Well researched . Considering the fact that several agencies involved like RBI, SEBI,BSE ,JPC etc could not come to a proper conclusion and had come out with highly disjointed effort and conclusion, this book is terrific effort. After all the material must have been from published sources, some interviews and piecing together and connecting the dots. The authors have done a great job. The scam covers the 1992 one where Harshad Mehta became the face of the scam and 2001 where Ketan Parekh was the face and in fact had a greater responsbility in the scam than Harshad Mehta had for 1992

Book requires another read for a full understanding and for a grip on the chronology, still some of the very prominent points are 

1992 scam was misue of money markets,diversion of money from money markets ( Bonds etc) and use in stock markets

          Money market , the control was primarily with the Banks and RBI whereas stocks were controlled by BSE and SEBI

         Banks had serious restrictions in having to maintain SLR ( Statutory Liquidity ratio) and CRR etc on deposits collected, hence to circumvent the same they resorted to PMS ( Potfolio Management schemes . While the scheme was supposed to be service to clients on a fee , the Banks actially used it with a primise of guaranteed return , investing the money in to stock marketsm earning high returns and retaing the same with them. For this they make use of Brokers

The regulations regarding Bonds , their value etc was still not quite robust. The value at hwich they could be carried was market rate or face value ( cost or market value lower of twqo came up much later . Banks made use of it to curry favours with the brokers at the cost of PMS clients

Banks carried out Ready forward deals ( agreement to sell and buy at fixed furure dates ) to generate or provide funds to brikers to manipulate markets. Buy can be immediate by Banks where money has to be paid immediately where readu forward sale could be at a future date , hence money to be received after a month or so, depending on the date. The float was afforded to the brokers for playing in the market and Banks to partka esome part of it.

Foreign Banks CitiBank, Bank Am , Stan C and ANZ used PMS  and Money market instruments to the hilt

In fact foreign Banks were makiing money out of the local banks by buying or selling post Interest rate hike/lowering without regard to the market rate through the Brokers

Major float or funds were generated in the money market by use of BRs ( Banker's receipts ) which is nothing but an ack of securitines being held or in transit of the holder. SGL  ( Securities General Ledger ) was the original account prrof of the bons and transactiosn of securities and movement of SGL through RBI used to take time, Bankers came up with an interim BR s.

With so much instrucmnet sin transit brokers like Harshad Mehta made full use . In fact false BR s started getting created so much so small Banks like Bank of Karad had several crores of BR issued

Actual scam surfaced as a stock market manipulation but in fact it started way earlier than 1992 in the money market. The inefficiencies in the money market were misused mostly by the Foreign banks

One looks at who is who of the scam, you have names which make the who is who is of Corporate India

Except for local Bank SBI officials and Harshad Mehta and Bhupen Dala and Hitren Dala and few others, almost all got scor free in 1992 scam. The investigation was carried out by inept outfits so much so the conclusions by JPC which depenede don investigating agencies was a damp squib and inconclusive

Many people have died over the years 

One recalls how Harshad Mehta used the money market funds to push up prices, built replacement cost theory to push ACC etc to stratosphere

2001 Scam was masterminded by Ketan Parekh. This was a case of collusion between the promoters, Banks, Parekh, brokers to push the prices up. It waes a case of total manipulation of prices by insiders including the corporates themselves

HFCL,Global tele, DSQ ...... what was termed K-10 were all pushed up with money funding by banks, Finance companies , promoters. In most of the cases it was the promoters themselves funding it

If anything 2001 was even bigger

In the whole process RBI  comes out as a weak and dithering regulator

Unicorns

ET carried s piece on unicorns,most of which are e commerce ones. Will just list out the companies and see how many survive the next few years
Snapdeal
Flipkart
Inmobi
Paytm
Zomato
Quikr
Olacabs
Musigma

Buy List

Following shares are mostly cyclical ones and/or Infra related. Most of them are also in the trough of the cycle and are good companies , well managed, good corporate governance or Govt companies which do not have incentive to fudge figures

SAIL   Rs  65   -Steel Industry going thru bad phase, likely to go up with Infra picking up and                                       Industry also likely to see better days after a bad period

NMDC   Rs 130 -Iron ore, Infra based. no debt, excellent cash flow.PE <10 p="">
Coal India Rs 390 - Production likely to go up with renewed focus. Largest mineral ores Company in                                 India. No dearth of capaicty or availability. Constraint was production

Tata Steel   Rs 330-Excellent management. Steel can see better days. Large capacity . High debt but                                    get over the same

NTPC         Rs 140 -Had seen rates of Rs 300+. Well managed and largest power generator

NTPC,NMDC ,Coal India-Could see significant return for the investors from this price

NTPC which was around Rs 250-300 for a long time is now around Rs 140. Of course results in the last one year has ben tepid , what with the coal availability being poor etc. The results are likely to get better with better coal availability now that the coal auctions are over and Govt's is bent on improving power situation.PLF ( Power load factor which was was in early 80 s could see increase to may be 90 + and at that rate the profitability could see incremental gains

NMDC a mineral ores Company saw prices of Rs 300-400 earlier is now Rs 130 plus. Commodity prices have been lower in the past two years but with India's push to betterment of infrastructure this could see much better days. 

Coal India is a a monlith. Private mining could in fact rub off on PSU also. Current price is Rs 380 There will be a tendency to get inertia and in to more productive days.It is Rs 10 share and post split as and when the same happens could see the price getting Rs 70-80

HPCL and BPCL the prices have run up in the last year or so from Rs 400 and Rs 500 to Rs 600 plus and Rs 700 plus

They could see further rise and if things fall in place could even see Rs 2000 plus in a couple of years

HPCL and BPCL -Could well be the tipping point now

In terms of sheer scale of operations,the retail network that both have and the refining capacities at their command, these are two companies ,but for the controls on oil and power sector, especially the refining and marketing companies would command a better valuation than the current and their past valuation.

HPCL has a refining capacity of some 16 mio tonnes, BPCL has some 31 mio tonnes and both have some 10,000 plus retail outlets and turnovers of Rs 250,000 Crs plus. The market capitalisation of HPCL is some Rs 12,000 Crs  , add to that thge debt of around Rs 40,000 Crs, the total enterprise valuation is just Rs 52,000 Crs,way below what is possible , if only the companies operate freed of price controls.Equity of HPCL is around Rs 333 Crs. Oil subisdy has been debated for too long and was some kind of a hot potato for too long, especially diesel. Apart from the increasing and unmanageable subsidies, there has been overuse and misuse of oil, understandably so. Anything priced low, overuse and excess consumption is almost the norm plus the excessive sale of diesel cars and SUVs in the recent past has clearly brought out the misdirected subsidy .

HPCL , even at a  2-3% post tax net margin  on turnover can make a  net profit of Rs 5,000 crs to Rs 7,500 Crs ( EPS range of Rs 150- 250 ). Currently HPCL shares are selling at Rs 410, it can very well be thye next huge multi bagger. One has to just cast one's mind to the PSU bank's share prices.SBI was selling at a little over Rs 200, now it is closer to Rs 3000. While the Industries may not be strictly comparable, the point is,Oil Companies , after a debate for over 15 years, appear to be closer to the end of the tunnel and may get to see some light soon and at that point, the share price may ,instead of gradually creeping up, may just shoot through to reach Rs 1500-2500 levels in a short time.

Even if the Enterprise value goes up to Rs 100,000 Crs , with a constant debt factor, mkt cap can go up to Rs 60,000 Crs (4 times approx)

BPCL has an equity of Rs 730 Crs ,and at Rs 600 per share , a mkt capitalisation of Rs 42,000 Crs. Has a debt of around Rs 27,000 Crs. Total enterprise valuation is Rs 69,000 Crs

Advantage with BPCL is, besides higher refining capacity (30 Mio tonnes ) , it also has interests in oil exploration which are on the verge of getting productive anytime.

BPCL also has the potential of being multi bagger, could well reach Rs 2500-3500 per share

Of course the imponderable is the ability of the Govt to get rid of overall subsidy and get the Companies operate under a free pricing regime.

One more thing is, such free pricing would encourage private players and add to the competition but HPCL and BPCL with the current set up and facilities and head start would still command a price which would be 5-6 times the current price

India Uninc by Prof R.Vaidyanathan

Good book and for a change with focus on the Non corporate sector. The author  teaches Corporate Finance in IIM B, painstakingly, with a lot of data picked from various sources establishes the fact that Uninc,namely partnerships and proprietorships ( P & P ,as he terms them) contribute to more than 45 % of the GDP of the nation whereas the Coroporate sector contributes only around 18 %. In fact , the author further adds that apart from this , agri sector etc which are part of what can be terms the unorganised sector,that is the businesses which are not registered under any of the Govt bodies , either for taxes o for something else , contribute another significant portion.

The author brings out the fact that a disproportionate amount of time , attention ,effort is directed towards the corporate sector leaving the Uninc sector to fend for itself. He goes on to establish that it is this sector , consisting of self employed shopkeepers, people involved in  construction,tourism,transport,large amounts of inter mediation who form the very back bone of the economy and have contributed and have been contributing handsomely to the growth of the economy. 

He talks of how badly served the sector is , be it credit delivery or the infrastructure or the Govt support. He goes to establish how ,caste based relationships have rallied around the business communities and made arrangements for finance and a support system to further the community's interests. The author establishes that Banks in India extend credit based on assets rather than cashflows, jocularly mentioned by some as "loans to people who have money ".  

Developed countries, especially US , the contribution of corporate sector is almost 90% as against the 18% in India , as such aping the Western Model of focusing on the corporate sector would not help in furthering our overall economic interests as per the author. 

He has a deep distrust (bordering on bias) of the western model. The author draws upon the past successes of India ,meaning few centuries back, establishes the fact that the model of small time or household entrepreneurship , self employment have in the past been the formula for success and there is every reason for us to stick to that  model with some variations possibly to ensure that we not only have overall economic growth but also a vibrant and well taken care of citizens. He repeatedly talks how our economic model is a spillover of our family system.He talks of the fact that the West with the family system under decay , has almost given the full responsibility of taking care individuals whether in old age or sickness or both to the State.

At one level it does make sense. Corporatisation of everything is not a solution. Corporitisation has its uses when there is requirement for large sums but most activities are done at a small level and entrepreneurisation or vaishyaisation as the author terms it is a lot more effective. 

Author talks of how the savings rate, at 32-34% plus of the GDP is mostly from the household sector , almost 90 % of the total savings . The author talks how FDI which is just around 10 % of the GDP  and is just  hyped up  in terms of its role in our economy.

The author talks of the futility of trying to ape the West . He talks of how the economic model has to be in conformity or conjunction with the cultural model of the Country.

The point about credit delivery and lack of credit to the self employed groups is strongly emphasised by the author.The author also talks of the need to encourage NBFCs( Non Banking Financial Companies) and the home grown credit cooperative societies and chits which fill in the huge gap left by the Banking system.

He touches upon the social capital of a caste system in India, how caste and community groups engage with each other, form group to fund ,finance and extend help to members belonging to the group to further the economic interests of each other. 

The author makes mention of the opaque nature of several NGO s , the fact that they receive funds from religious organisations from abroad and the need to bring in transparency. He talks of how the so called NGO s whidch are for a charitable purposes have 70-80% establishment expenses . Such high establishment expenses negate the very purpose of such NGO s.

The author also talks of religious conversions and how Church establishments of West with the dysfunctional  family set up and eroding faith are trying to turn to developing nations to get more people in to its fold by indulging in conversions.

He makes a serious case of not getting carried away with Corporitisation and focusing on helping the small entrepreneurs . This could be the recipe for larger engagement and larger employment base.

The book is not exactly prescriptive , it is rather a one which provides the facts and rationale and nudges the powers that be towards a model which is neither leftist nor a bling market oriented and consumption based economy. 

The author does sing paeans of praise on the telecom revolution, on how this has enhanced the business prospects of small self employed people like the plumbers, the cobblers and so on. He renders anecdotal illustrations to establish this aspect.

Repeatedly brings to the fore the futility of just focusing all our efforts on corporates and the organised employees to the exclusion of small entrepreneurs and the self employed which forms the core and the backbone of the country.

Breakout Nations by Ruchir Sharma

Breakout Nations by Ruchir Sharma

Excellent book a person who has been working on emerging markets for several years and who has been studying markets and economies for several years.High credibility and instead of just theorizing the author has come out with specific examples of how the nations have fared in the last 20-30 years and what they had done during the same period. If they had got something right, he also given the background as to what was done during that period and what kind of a leader was at the helm of affairs.Conclusions are invariably based on empirical analysis and data . Instead of deluging and deluding  the reader with too much and data, the author has given critical data , the data which has  and really had a huge bearing on the way the economies of nations  fared.He has been consistent with the data. not cherry picking data to suit a foregone conclusion. By and large one can see across the book that the author focuses on country’s leadership,data on Debt to GDP ,the country’s willingness to bring it to reasonable levels,  education eco system ,position of the currency and the strength of laws for foreigners to come and do business or to invest.

The author comes out with a telling observation as to the impact on economy and the GDP growth the type of Government , whether democracy or dictatorial or  strong state rule .. and comes to the conclusion based on empirical data that it is just a 50:50 score, meaning that it does not make an impact one way or other as a general concept but what really matters is the kind of leader and the leadership

Some of the key takeaways from the book , not necessarily in chronological or even logical order but the way I can recall are as follows

§  More than the type of Government it was the type of the leader which made the difference.

§  Countries which have been blessed with natural resources like oil, minerals have by and large been in a roller coaster ride , that is when the commodities as it does happen in most cases of commodities, they go through a turmoil barring a few exceptions like Norway who have built some kind of a protection fund and have also invested in other capabilities.He also brings home the point , especially in case of resource rich but with a poor industrial and or education base,how they need to get help fron technologically advanced developed nationbs to extract the resources paying a huge money.

§  Nation like Brazil whose currency is overvalued ,literally pricing itself out . Very high USD costs

§  India for all its confidence ( author terms it over confidence) at a per capita income of  $ 1400 is way below most of the nations, in fact the onlt nations which are scraping below are Bangladesh,Vietnam and Pakistana dn may be a few Islamic countries

§  Gives an exceptional example of Turkey where power has shifted from the secular parties to a more Islamic but not retrograde political leadership. This, per author has brought the larger population to the mainstream without being apologetic about their religious affiliations, sounds like current India. Of course it is another question whether India will progress under NDA under whom people do not have to be apologetic for being a religious and part of majority to boot.

§  On Nigeria , the author comments that it was one of the oil propelled economies which lost it way and now trying to make a comeback under the leadership of Jonathan Goodluck.

§  Philippines ,lost it way and trying to make a comeback under new leadership

§  Has high praise for Czech republic and  Poland and to some extent for  Hungary .

§  Praise for South Korea and how they have built apart from capability on manufacturing , some great brands

§  In this edition has also added some information on US and some European nations , As for US, the author feels that notwithstanding the high debt componebt of US , its innovation plus the fact that it is rebuilding its manufacturing capability ,helped to some extent by the falling USD would stand them in good stead.

§  China the wages are rising and Yuan rising , may lose its competitive edge a bit and may not be able to sustain the 8-10% growth rate perennially.

§  Focusses on GDP,Savings rate, debt in relation to GDP,Spend on Investment or consumption ,the currency and the interest rate.

§  Feels that Japan has lost its way. To get a soft landing of the economic downslide, Japan had foregone hard decisions in the 90 s and let the economy wallow or chug along.

Emerging markets
Country	GDP in USD bn	Per capita in USD
Brazil	2,518	12,000
Chile	243	13,000
Colombia	321	7,000
Mexico	1,185	11,000
Peru	168	5,500
Czech republic	220	21,000
Hungary	148	15,000
Poland	532	14,000
Russia	1,885	13,000
Turkey	763	10,500
Eqypt	232	3,000
Monaco	120	3,000
South Africa	422	8,000

Emerging markets

China	6,988	5,000
India	1,843	1,400
Indonesia	834	3,500
Korea	1,164	23,500
Malaysia	248	8,000
Philippines	216	2,500
Taiwan	505	21,500
Thailand	339	5,000

Frontier Markets
Country	GDP in USD bn	Per capita in USD
Argentina	435	10,500
Ecuador	65	4,500
Panama	30	8,500
Jamaica	1,185	5,500
Trinidad & Tobago	22	17,000
Bulgaria	54	7,000
Croatia	64	14,500
Estonia	23	17,000
Latvia	27	12,000
Lithuania	43	13,000
Romania	185	8,000
Serbia	46	6,000
Slovenia	52	26,000
Ukraine	163	3,500
Botswana	16	9,000
Ghana	39	1,500
Kenya	36	1,000
Mauritius	11	8,500
Namibia	13	6,000
Nigeria	247	1,500
Tunisia	49	4,500
Bahrain	26	23,000
Jordan	28	4,500
Kuwait	171	46,500
Lebanon	41	10,500
Oman	67	21,500
Qatar	173	98,000
Saudi Arabia	560	20,000
UAE	358	66,500
Bangladesh	115	500
Kazhakstan	180	11,000
Pakistan	204	1,000
Sri Lanka	59	3,000
Vietnam	122	1,300