Oil trading and refining Companies- Darkhorses

With the idea of  doing away with Diesel subsidy gathering momentum, Oil refining and trading Companies like HPCL, BPCL and IOC could have a spurt in performance and prices of their shares could see significant rise once the subsdiy is reduced substantially or done away with

Of course subsidy is a sensitive thing next only to Reservations. One can take a chance. Everything reaches a tipping point  and that time in case of diesel might be coming quite close.Fiscal deficit is threatening, inflation high, low growth rates, industrial confidence low, could just  be the confluence of all negatives to necessitate change.

It is a risk but worth taking. HPCL with a market cap of around Rs 10,000 crs , could easily go up by 3-4 times if things fall in place.Downside risk at this point appears low.

US Debt

Read a very interesting piece by Satyajit das on US Debt. It is around $ 16 Trillion. It is a known fact that US has been living on borrowed funds, in fact borrowing by all accounts is for consumption and not for investment in Capital goods.

The author quotes Keynes on debt. When someone takes $ 1000 , and is not able to repay, it is his problem , when someone takes $ 1 Bio or some such huge amount and is not be to repay , it becomes the Bank's problem.

This is exactly what appears to be happening with US. Other countries can't even let US currency depreciate, or like Germany of post WW I, US can easily resort to pumping in money , let the currency depreciate and pay back cheap USD.

US may not come down to doing that but countries like China can't afford to cut out supplies nor can they afford to let the USD depreciate.

At some stage, it has to reach the stage of the final straw which breaks the system.

Investments in Holding Companies selling at discount

A portfolio for Rs 5 lacs Investing in Holding Companies which are selling at a discount Vis a Vis their quoted subsidiary companies or have investments in  unquoted businesses whose embedded value appear much more valuable than the overall Enterprise value of the Holding Company is given .

Market price 27- Dec-2012  (around 10:50 am). There could be intra day variations, anyway this investment is proposed as a medium term investment , such variations should hardly make a difference.

Investments in Holding Companies priced at a discount
Description	No of shares	Price	Invtmnt Rs
Aditya Birla Nuvo	100	1,082	108,200
Sund Clayton	400	321	128,400
Bajaj Holding	100	971	97,100
Bajaj Finserve	100	920	92,000
Rane Holdings	400	198	79,200
Total			504,900

Let us see after a year, may be after a couple of years. Expect a post tax return of atleast 15%
I have not invested in these so far , but plan to do so once I have some investible funds.Rationale and discount given in earlier postings for some of the cases. But similar analysis done for the abovementioned Companies.

Arbitrage opportunities in Holding Companies Vis a Vis direct investment in Subsidaries

This is the general trend. Of course this no new discovery or finding by me. Most of the Holding Companies quote at varying discounts to the subsidiary Companies. Not sure as to the reasons.Atleast if there was Dividend distribution tax on dividends paid by Subsdiaries to Holding Company , I would think that there is some reason and rationale. Now that Income tax Act gives waiver on double taxation on DDT ,( Dividends declared by the Holding Company out of the dividends it receives is exempt , provided DDT has already been paid.... or something to that effect) the discount can not be justified.

There is always the question mark as to whether the Holding Company can come out with a schemen of arrangement and have the shares swapped at less than favourable rate to the Holders of shares in Holding Company . The people affected are the "other shareholders", that is the ones other than the promoters group.

If the group is transparent, the discount is not justified.

Another Holding Company , I was looking at was Grasim. Grasim holds 60% of Ultratech shares.

Ultratech sells at Rs 1960 per share, a market cap of Rs 53,000 Crs .

Grasim shares sell at Rs 3200 per share, a market cap of Rs 29,000 Crs and an enterprise value ( adding the loans) of around Rs 36,000 Crs

Grasim's share in Ultratech  alone is worth Rs 32,000 Crs giving a value of around Rs 4,000 as value of other Grasim businesses.

Grasim's other business , namely VSF make around Rs 1,000 profit.

Good value for another Holding Company.

Similar is the case with Adity Biral Nuvo. Will have a seperate post for the same

INR-USD could there be twist ?

Rupee has been steadily depreciating against USD . From a high of Rs 45 to a dollar , it is now around Rs 55 to a dollar.

I recall my working days  in APC , between 2000-05, the rate was around Rs 42-45 to a dollar , in fact, it had appreciated  from a low of Rs 49 or so in between. Once rupee started moving up , in fact , I recall it ( may be after 2005) had gone to a high of Rs 40 , the self proclaimed experts started coming out with theories of how rupee could appreciate further.This did not happen .

Between India and USA , there are probably  more negatives in US economy than in the Indian economy. While that may not be enough reason for INR to appreciate, the state of economies is definitely not such that INR should depreciate as badly as it had done in the past year or so.

It may be a good idea to invest in Import heavy Industries . There is a very good chance of the rupee appreciating going forward. Of course there is always an element of risk but at this point of time, it appears a reasonable guess . IT Industry could struggle , could in fact see negative growth numbers. Inspite of such a strong depreciation of INR and the fact that IT Companies still have earnings in USD and significant part of expenses in INR, the last few quarters have hardly seen a growth even in INR. 

India Nippon- Could be a very Interesting buy

Went through the financials of India Nippon Electricals Ltd, part of Lucas TVS ...

Very interesting. The financials are very good. Good and steady EPS, last EPS was around Rs 30

Very little or no debt. Is a subsidiary of (51% holding ) Lucas Indian services which in turn is a 100% subsidiary of Lucas TVS.

India Nippon holds 8% in Lucas TVS. Lucas TVS plus Lucas Indian Service themselves could be around Rs 1200 Crs value  considering the fact that as of Mar 2011, the two together has PAT of around Rs 100 Crs.

Market capitalisation of India Nippon is Rs 200 Crs ( approx) out of which value of embedded investment alone would be Rs 100 Crs. 

Turnover of India Nippon is Rs 260 Crs and pays dividend of Rs 9-10/share.

Asset base is also small, just around Rs 38 Crs

Not much could go wrong in this share at Rs 180-190 per share.Equit of Rs 11.3 Crs

One can't expect some super normal profits but one can expect returns of around 10-12% compounded .

Sundaram Clayton and Tata Investments-Good buy and arbitrage opportunity

Was trying to look in to the shareholdings of some of the TVS Companies. One interesting fact which cam up a few months back was the fact that Sundaram Clayton which holds more than 50 % in TVS Motors has an embedded value which is at a significant discount to the price of TVS Motors Ltd.

Buying one share of Sundaram Clayton is equivalent to investing in to Sundaram Clayton standalone plus  14 shares of TVS Motors.

Sundaram Clayton is selling at Rs 320 and TVS motors at Rs 37 per share. You can see that against embedded value in terms of TVSM itself of Rs 518 per share of SCL (14 shares of TVSM at Rs 37 per share ) plus the standalone value of SCL, you get the share  at Rs 320 , a discount of 38% and more or if and when there is parity , you could gain 62 % on your investment .

Of course, there has always been a trend of the Holding Company being at a discount Vis a vis the embedded value of subsidiaries in the same. Can't understand the reason. 

The case of Tata Investment is quite different. It is in the business of investing in to equity of Tata and other Companies also. It is almost like investment in to a Mutual fund.

In Tata Investment case, the NAV is almost Rs 800 plus , the share is available at Rs 450.When we subscribe to mutual funds at NAV , why not in to Tata Investments.

Largest democracy ?

Atroicious, two girls being arrested on putting comments about the overreaction in the City of Mumbai after Bal Thackeray's death.

One girl had put up a comment on the following lines

.... why such a fuss over the death of a man when many like him die everyday. We hardly observe a two minute silence rememebering Bhagat Singh and Sukhdev.....

This girl was arrested and the other one who liked it also arrested.

She is entitled to her opinion. You can't be arresting some person for such an innocuous comment. This is no better than Mamata's arrest of the professor in Bengal who had some unsavoury remarks about her handling of things.

Scary. Are we living in a democracy or are we also getting  Talibanised ? Clear Fascists laenings. Use of State machinery to cow down people. Just shows , Hindu or Muslim, if we start pandering to religious fundamental elements, this is the likely trajectory and shape the nation could take . Is it competitive fundamentalism . You are fundamental , I am more fundamental .

 It is quite possible that the girl who commented was a Muslim influenced the action of the mob.

Her uncle's clinic was vandalised. No arrests of the vandals.

Nation's DNA especially the Political class was shaped by Indira Gandhi in the 70 s. She made "State control" , an acceptable norm .

Dangerous precedent.

SPB and Ponni Sugars

A few years back had progressively bought a couple of thousand shares of  Seshasayee Paper and Boards Ltd and around 500 shares of Ponni Sugars Ltd.

 Have risen to Rs 270 plus and Rs 390 plus respectively. Wish, I had invested a lot more in both. Atleast in the case of Ponni , had seriously thought of buying some more. No point in regretting now.Happy that I had not sold earlier when the price went up to Rs 200/share ( Ponni)

Now the more difficult question is when to exit.

Interestingly , SPB has 21% in Ponni and Ponni has 10.67% in SPB.

Had run the numbers and found them interesting. SPB has a capacity of around 120 k Tonnes paper production and Ponni has been producing around 76 k tonnes of sugar

SPB had initiated process to add on to capacity , instead has gone ahead and bought a Paper Company Subburaj Papers with a capacity of around 98k tonnes.

They seem to have paid Rs 25 Crs to acquire 83 % equity plus taken over Rs 210 crs of debt, I think. Total debt free consideration is Rs 240 Crs. Appears okay , considering that SPB has an asset base of Rs 400 Crs currently.

SPB is planning a merger with an equity swap of 1 SPB for 11 shares of Subburaj papers. 125 lac shares -83%. Total shares should be 150 lacs. SPB would end up addding 1.36 crs to equity (13.6 lac shares )

41.67% would be held by Ponni and balance with SPB Ltd. promoters and shareholders.

Ponni sugars might have reached close to the peak, SPB may have some steam left.
My assessment is that Ponni could touch Rs 500 and SPB also around 500-600 , after which sale would make sense. May be pushing my luck a bit, but prepared to wait.

Life and Times of Einstein by Ronald Clark-

This is just a synopsis and not a critique on the book.

Well researched , I would think , considering the fact that , records if any , available those days were only the written ones and possibly helped by interviews with several people. Of course in the case of Einstein who had become a celebrity of sorts , even those days, his being in the printed news more often and the fact that must have been preserved must have helped .

It was quite surprising to read somewhere that there was no electricity in one of the places Einestein stayed, early in his career, was it Berne ?

Born in Ulm, term him swabian,must have been the term for Jew form that area. While Einstein was born a Jew , did not seem to  have had strong religious feelings or affiliations  till his community started getting  persecuted .

Did his Graduation in ETH, Zurich

Secured  doctorate by submission of thesis to ETH  ?

Left Germnany to pursue education in Switezerland

Gave up German citizenship once, very early in life in his teens to avoid conscription and later again in protest 

Struggled to get a job, research or teaching and after a lot of effort gets a low level job in the Patent office in Switzerland

The time he spent as an employee of Patent office, was almost a science sterile atmosphere. Was almost left to his imagination. Of course did seem to have had some access to scientific journals , but no access to great minds. Had a very average lifestyle. Meeting ends appears to have been a  stretch. Such an imaginative mind , being left to himself,  must have been able to think out Photoelectric effect and  Special theory of relativity in 1905 . Visualising  something totally against the trend of the then  current thinking  is one thing but thinking something radically different and against what no one would suspect even in a dream requires vision beyond any great visionary. Could anyone have imagined that space, length and time are not absolute.

 One understands that he was helped in this, in having got an inkling of things from Maxwell,(electromagnetic field), Lorentz and a few others. Morley Michelson who experimentally disproved the existence of "ether" also helped Eisntein to come to a conclusion that speed of light was absolute and independent of the frame of reference or speed of the origin point. Speed of Light is the limiting speed , nothing can equal or exceed this. While earlier scientists had come close to finding that Matter Very difficult to comprehend. An average brain like yours truly would require several more readings to even come close to understanding the concepts.The mats , for the special theory of relativity was provided by Minkowski, his teacher in ETH.Notwithstanding the gentle nudge that Max Planck, Lorentz and the Morley Michelson experiment gave, still to come out with what he thought out on the relativity of time, space ... was extraordinary to put in the mildest terms.

Shifts to Berlin in 1919 to Kaiser Wilhelm Institute and possibly does he best work in the next 14 years or so.Had become very famous by then and publishes his general thoery of relativity

Great friendship with Max Planck, the quantum man.Had great respect for Lorentz.

Eddington was one of the early converts to relativity and did huge service to the cause of spreading the same across Europe .

Einstein was a confirmed Pacifist . Was completely against Germany's armament and against any kind of armament.

The  author tries to bring out that Einstein , while great physicist was a bit muddled in other aspects.From a lot of information that the author brings out, it does not appear so. He might have been a bit innocent about the ways of the world but to come to a conclusion based on his change from pacifism to armament once Hitler came to power that he was muddled is not correct.

He realised later that Pacifism does not always work. There are occasion when you have arm yourself and threaten to protect the larger interests.

Einstein became such a popular figure ( the splayed and flying hair on the head also created aura and halo like looks must have helped ) that he was perennially invited to address several public meetings , science as well as others.

During the period till mid 1930 s , was a clearly the leader amongst scientists , his opinions and views mattered more than others.

In 1933 , shifts to US and sometime later gives up his German Citizenship again, Continued to retain his Swii Citizenship.

Won the Nobel in 1920 for his discovery on something to do with Photoelectric effect

Spent the last 20-25 years trying to come out with a Unified theoery. Did come out a few times, rejected them himself when it did not quite come comprehensive and logical or when one of the premises was proven wrong (mostly by himself )

Could not quite agree with Bohr on Quantum theories . Bohr had theorised the concept of electrons jumping from shell to shell, giving up and sometimes absorbing energy. Einstein could not quite accept the probabilistic aspect embedded in this.

He was quite sure that any theory should have as one of the basic premise the  Determinancy, and Causal  and not probabilistic as suggested by  Bohr in his quantum theory and Heisenberg.... Famous words of Einstein " God does not play dice" and or something on those lines.

At the time of dying still had fond hopes that the theory of everything  would sometime in future be unravelled.

His unmatched humility and kindness is brought out , so was his being most of the time not being too bothered about personal aspects,conveniences and people were not of great concer also most of the time including his first wife.

Spent last 20 years trying to come out with a simple and comprehensive unified theory

Letter to Roosevelt to speed up the A bomb project though it was quite possible that he was not aware that anyway , US was going ahead albeit at slow speed. Einstein appeared to have been swayed by the fact that there were reports that Germany had made progress on the same.

Offered Presidency of Israel, but rejected due to  a combination of health, inability to devote time and his own perception of his inability to do justice such jobs and also a desire to devote time on science ( Unified theory et al)

Involved a bit with Weizman ( who was the first President ) in the Zionist movement and formation of Israel

Was Involved in founding of  Hebrew University. 

Without doubt , Albert Einstein was a rounded intellectual, less rounded in some aspects but all the same a great thinker who appeared to have applied himself to a variety of things and left no one in doubt as to what was his true calling and talent.

One of the greatest minds , a great and imaginative one at that.Relativity appears almost like a Hindu concept, more specifically , Sankara on the whole universe being "maya". A confluence of wave and matter, interchangeability of energy and matter all appear more Hindu philosophy than Advanced physics.

One understands that he had no fear of death and had a peaceful death when he was 75-76 years , aneurysm of aorta (enlargement of aorta ) which required surgery and with  just about 50% chance of survival. He rejected the idea of any surgery.

Quite a nomadic life, he had, from Germany to Berne, Switzerland to Berlin to USA , initially CALTECH in USA and finally Princeton

The author very well captures how various groups , starting from Jewish group to Pacifists group to..... try using his name and get mileage. Einstein also understood it and lends his name to many. The author suggest that he also had a tendency to make inappropriate statements occasionally.

Einstein had a nice take on him spending the last  20-25 years on "Unified theory", it was almost like chasing a mirage. He was convinced that there could be a simple way of conceptualising and quantifying a comprehensive unified theory and mentions that , he, having a name for himself can afford to spend time on a potentially unsuccessful effort Vis a Vis younger scientists who would be better off spending time on something more concrete with probability of success being more.

Fabulous to read about such great personalities . Uplifting experience and in this case , considering  the theory , almost a spiritual experience.

The author appeared to have felt that , Einstein should have been a bit more forgiving of the Germans. Einstein developed a strong hatred towards the country and to a great extent , large population of the people who went along with Hitler and persecuted, tortured and killed Jews.I find that a normal reaction even of an extraordinary man when one considers the atrocities perpetrated on Jews, imagine 6.0 Mil Jews killed, almost 25% of the global Jewish population annihilated by a mad man .

Great selection of books or wonderment of an average human being

Almost all the books that I have been reading ( most bought ), I have been finding them good or great and sometime extraordinary. It could be either a case of fabulous selection of authors and/or  books or just that , I am of such average intelligence with low expectations and standards that I end up appreciating anything which is above average and most of the books, I would presume would be good concepts written by significantly above average people.

The truth could be somewhere between the two. I have definitely been making sincere attempts at selecting good books by good authors plus also the factor that I go for subjects which interest me a lot.The bias also adds to the "liking" factor.

Crash Proof-2.0 by Peter Schiff

Good and courageous book . Peter Schiff talks about how the US as a country and US Economy , from an economy which was producing more than waht it was producing in the 40 s through possibly the 60 s, has started consuming more than what it produces.

It is a clearly a doomsday prediction of the US economy .

The points that the author makes are valid and appear quite sensible , but is quite full of himself, with a lot of chest thumping and I told you so or I am telling you so. Also laced with a bit of marketing of his Company Euro Pacific.

The author talks of how US is running a huge current accout deficit of more than $ 700-800 Bio per annum and how the current total debt of $ 8.5 trillion could submerge the US economy.In addition talks of unfunded pension benefits of $ 33 Trillion or so.

Draws parallel between a national economy and a normal  a household budget  and tries to pitch his point as to how , a household which continuously borrows can not sustain for long, an economy would meet up with the same fate, albeit after a prolonged period.

Labours on the point that how the economists , instead of advising less spending and saving more, are advocating additional expenditure by the Government to kick start the economy again.

He talks of how easy money and low interest rates , provided an incentive to borrow rather than an incentive to save.

Talks of how US Government is trying to save financials institutions instead of letting them die so that the market forces bring in the required correction.

Talks , how the US Government is faking and artificially spreading a feeling of well being 

Talks of how much US owes countries all across.

US which had a Gold backed currency system, got out of the same in 1971 and since then have had access and tendency to print money, what he calls the fiat currency

Author talks of the real estate bubble and how it burst and how easy borrowings had made that possible

Talks of impending fall of US currency and advises people to invest abroad, in Asia.He expects inflation in US . Talks of how investments abroad , in addition to getting genuine returns could give a huge additional kicker in terms of current deprecation ( usd)

Talks, how a lot of Governments have gone out of the Gold standard and resorted to currency printing

Says that private individuals may force a comeback of Gold standard

Predicts huge bull market in Gold. Advocates hoarding of Gold coins and Gold as such.

Talks of how US has been fooling the world and continues to give the comfort to people as reservce currency

Talks of how a small thing can have a cascading effect and the cookie could crumble.

The points without doubt are well taken but whether US will crash or something will be done to rescucitate the economy and bring it back to health is a question. All said and done, US has the smartest collection of people and it is quite posisble that they would bail themselves out before shit hits the fans, as they say.

One major factor the author does not touch upon , is , US is the repository of the best scientific minds , the best research instituitions and possibly the originator of a whole lot of new ideas. Intellectual production still happens there. IP is a lot more valuable than hard goods.May be that would save them. Of course , IP by its very nature is a bit elitist, intellectual elitism at that , but may not help in keeping a large population , which would be mediocre , happy and well off. There could be a problem in that.

Snowball-Biography of Warren Buffett by Alice Schroeder

Half way through the book.

Recall , statements attributed to Warren Buffett that when one  buys a share one has to look at it as buying in to a business. While the broad meaning is understood, in his case, he was buying significant portions and in fact works with the Company management and in several cases ,  appoints  a new team and tries to change the course of things.

You can't just call him just an investor, he was and in fact possibly continues to be an active investor , who actively participated in policy aspects of the Company he had invested in.His holdings were all almost controlling or close to controlling interests.

Completed the book.

 Excellent read. A good combination of personal and technical mix. All said and done it is a biography of an individual who had exceptional talent in spotting great investments and one has to necessarily capture the some technical aspects and the technical and personal attributes that he had which made him the success that he was.

It would also be wrong to assume that he did not make mistakes in his investment career. He did make mistakes, in fact his first fairly large investment ib , Berkshire which was predominantly in to textile business was itself a mistake. It is another fact that he worked around the Company and merged or juxtaposed other businesses in to this and made it a grand success.

His training under Ben Graham and the ideas and the principles that he imbibies from his teacher shows in his early investments. The concepts of cigar butts ( small value left in cigar butts but to which nobody pays attention) and the concept of margin of safety. Graham basically looked at tangible and solid assets and almost always valued and saw value in each of the proposed investment in terms of its liquidation value . While that served Buffett well in early stages, he was quite well influnced by various people including his close friend Charlie Munger in terms of seeing value in business in terms of its business worth as a going concern and the ability of the business to churn out value day in and day out. It was a delightful combination of , Ben Graham and Phil Fisher ?

Warren Buffett repeatedly picked up great Franchisee businesses , that had great brands and that could be replicated across developing a large customer base.

He picked up Sees candies, Coke at a later stage .He saw the fabulous source of capital to fund his invetment ideas in Insurance business where the premium os collected upfront. He was one who always was working at probabilities ,evaluating the overall chance of success, ensuring that downside risks were limited and this business fitted in very well.

It was very clear from his early days as an investor( as a kid ) that he was extremely focussed in "money"

Thew delightful aspect is his ideas and principles also grow and mature with age and success. Some one who valued money so much to finally come to a conclusion that money's value is best when it is used for the most productive cause is great. The biggest surprise was that he was not one of those narcissists who wanted to have several foundations in his name. Objective was very clear, he wants his money to be put to good use and finding that his great and younger friend , Bill Gates was and is continueing to do that in his foundation has pledged most of his money to their foundation.

He was an investor but was not just a passive investor , he was involved in shaping the policies of the management and ensuring that they do not get in wrong businesses , at the same time , not interfering on regular matters of management.

He was also not one of those people whose sole aim was to protect his investment record and make money . He was very particular that his reputation of  man who did business ethically was protected at all times. 

On quite a few acquisitions, remunerates the existing promoters at an agreed and reasonable price rather than making use of a price which reflected the troubled times they were in and the price which reflected such troubled time.

His involvement in Solomon Bros was another case in point. No doubt that he was an investor who was there to make money. He did invest in to Solom Bros on terms which were very good ( Solomon badly wanted the money to save themselves from acquisition by a Corporate invader) but rose up to their defence when they were caught up on ethical issues and were hauled up by SEC . The case involved one of their top employees submitting additional quotes through proxy accounts to corner more treasure bonds.

Of course . such exceptional people , who are so focussed in their interest end up ignoring aspects  of a normal life , possibly could not quite fulfill the emotional needs of his wife and family. Has a strange arrangement, when his wife leaves him but links him up to another woman to take care of him as a companion.That arrangement was also quite dignified the way it was arranged and the way it was maintained

The book touches his professional and personal; relationship with Graham's other students, with Bill Gates, Charlie Munger, Kay Graham ( washington Post ), Sharon Osberg ( Bridge player)

Good book, may a be bit long but made up by the fact that it was a racy read, racy not in terms of any mushy content bit in terms of sequencing, narrative style and content.

The book's title is explained in terms of how Warren Buffette's money making starts off as in a small way and gathers momentum and mass like a snowball.

To briefly go back to how his money making and his mutual fund (partnerhsip) was started, very interesting arrangement and an excellent method of leveraging with equity.

He ropes in people as partners only from those with whom he had excellent personal relationship ( including some of his close relatives with whom he had close relationship like his aunt s etc) and guarantees them a certain minimum return , in an arrangement where he shares losses at 25% below such return and the investor to share some part on the returns in excess of the guaranteed ones. This way , it was clear that he Warren Buffett had an incentive to better the promised returns and was able to earn accelerated money for himself for good work.

Changes in Company Annual reports disclosures- Quantitative aspects

From the  Annual report starting from 2011-12 , found that  the quantitative information like production , sales and raw materials consumed etc are no longer required to be disclosed..

Quite strange. While the broad consensus is for improvement of disclosures and greater transparency, stopping quantitative information is a retrogade step. It is quite possible that the Companies in their desire to stop feeding information to competition must have lobbied to get this requirement removed. This has the side effect of stopping information to investors and potential investors. Comparative analysis becomes that much more difficult .Quantitative information is a key aspect for evaluation.Negative impact of this is greater than the benefits of keeping off competition.

Changes in other disclosures like segregation of liabilities and assets in to current and non-current etc are quite welcome.

Reforms redux

It was quite amusing to read  Dr Manmohan Singh’s statement that the economic situation in the country is almost as bad the one of 1991 . He was trying to justify and rationalize the “reforms”. He and his party has been in power for the last 8 years, not to mention several years before that. Was he trying his best to get the country to this situation and do the clean up as a task and carve a name for himself.

Some method this one, to earn a great name by creating a problem in the first place and  attempt to bail us all out from that problem.

Politics and convictions

Can these two be mentioned in the same breath ? Does not look like it. One does not have to go beyond the present crisis to get an insight in to that. When BJP was in power , the policies that they pursued vigorously are being rejected by them only because the same have been proposed by Congress. FDI Retail is a case in point and I am sure if BJP had been in power the "reforms" like FDI in retail and freeing of fuel prices would have happened earlier.And to round it off, one understands that policies opposed by Cong when they were in opposition are proposed by them.

There are two aspects one is personal convition Vis a Vis party's stand. There could be occassions when on some aspects your personal convictions are not in sync with your party's stated position. I would  think that is okay as long as the principle policies and positions are in sync.

Earlier we used to hear terms like"turncoat" used very derogatively and to reflect on people with no morals and hypocrites. The very fact that the term is no longer in vogue suggests that the behaviour which was used to describe is acceptable to a large extent and is normal . It is no longer something which is bad and unusual.

People's convictions seems to be a function of the party they are in rather than they being in a party due to syn of their personal convictions with that of the party. In fact ,I am not even sure whether any political party has any stated conviction which can stand the test of time.

Is this just a recent trend or has it always been like this ? I would think that this is a recent trend getting worse by the day. Karnataka is a case in point.Yedurappa is part of BJP only because he would be reward with CM position and BJP had him as the leader only because he had a large caste based vote bank under him. 

Quite frustrating .

Corporate accounting and reporting and Ethics– Need for Chartered Accountants to introspect

Sent an email to CA Institute (eboard ) requesting them to publish (19-Jun-2012). No response. Had sent a reminder also. No response. I feel no obligation to wait any longer. After all , I am just stating facts and not denigrating my own bfrethren.  Will go ahead now that I have waited for sometime.

Corporate accounting and reporting and Ethics– Need for Chartered Accountants to introspect

Introduction

All around us there is this talk of lack of ethics , corruption, inability of a normal Citizen to get justice in time , so on and so forth. The biggest irony is that the  normal  citizen who talks about injustices in several cases become the perpetrators in a different role. The same citizen who does not get justice or of whom bribes are demanded becomes the perpetrator in a different avatar. He could be the one complained about. We play different roles and wear different suits. Ethical standards are different , one for preaching and one for personal practice. Human mind is so innovative that they find creative ways of justifying and rationalizing things.While each one of us talks of hypocrisy, if we  do a honest assessment, just a miniscule percentage amongst us only would come with flying colours.While this may be true of the entire society, the aim here is to take stock of and introspect as to what needs to be done of the malaise to whatever extent is prevalent  in our own profession, the Chartered accountants.

Ethics or rather the lack of it amongst professionals

Let me start with something which had received wide publicity to set the tone for the theme. In one of the episodes of his program “Satyameve Jayate”, the Bollywood super star and celebrity, Aamir Khan   brought out the unsavory aspect of lack of ethics amongst some members of the medical profession. This caused a huge furor within the medical profession, at least with the Indian medical association which sought an apology. The unholy nexus that exists between the Hospitals, the diagnostic centers and the doctors and also various other tactics followed by some of the Hospitals geared towards revenue and profit generation is a topic discussed in our drawing rooms, offices  and a matter, some of us would have experienced in our own lives. This is not to paint the entire profession with the same brush. You have several members of the profession rendering yeomen service, but, that cannot take away the fact that there exists a fairly significant number of people, professionally qualified doctors and others associated in the medical profession indulging in practices which what one can term as completely anti- patient. One also finds it difficult to digest the fact as to why we have never heard of the same Indian medical association   taking up cudgels against malpractices in the medical profession. They might have done in a few cases but would never publicize it. Good as well as bad have to be publicized. To say that there exists no wrong doing and hence no need for punishment is just living in denial.

We ,the , Chartered accountants need to take stock of ourselves on the Ethics front

It is also a fashion to talk of lack of ethics and wrong doings in all professions other than their own ones. I have heard lawyers and Chartered accountants and people from various other professions discussing freely and with a lot of passion and righteous anger of sharp and downright fraudulent practices amongst the “other professionals”. Let all of us, Chartered accountants ask ourselves an honest question. Is there not lack of ethics and indulgence in sharp practices amongst the Chartered accountants? CA s has great, some stated and some unstated, fiduciary responsibilities to the society. Don’t we have unethical practitioners amongst us? In fact, Finance professionals (not necessarily Chartered Accountants), post 2008, with all the derivative and credit blow up were and are now also one of the most reviled professionals. That of course is a story for another day. My idea is more to deal with areas in corporate accounting and reporting responsibility of Chartered accountants where there have been failures and continues to be so and issue of ethics in the profession.

 Bigger wrongs  do not make lesser wrongs  all right

While co professionals talk of lack of ethics and corrupt practices amongst “other professionals”, when a motley crowd of professionals (lawyers, CA s and doctors etc ) are together they conveniently talk animatedly about the lack of ethics and corruption levels amongst politicians and the funny aspect is when the politicians meet, they talk of the huge levels of corruption at the ministerial level. All these to justify their own misdemeanours ,which by their own perception are small and in fact  not wrong at all, typical escapism and a perverted way of rationalizing our wrongs.

“Corporate Governance issues” an euphemism for inflated financials and misreporting

One frequently comes across shares, which, in spite of apparently good financial numbers are priced low in the stock market, even factoring in all other factors like Industry, the business cycle etc. The reason, spoken in hush hush tone is “Corporate Governance issues”. What are these Corporate Governance issues? Corporate Governance by its very nature consists of the way the Company is structured and decisions are taken and transacting of business in such a way that the long term interest of the shareholders and various other stakeholders are protected and furthered. Corporate Governance includes amongst other things good business processes, good business practices, ethics, transparency and well calibrated decisions by the Trustees (the Board) with the risk and return in perspective on various decisions . Lack of these could be termed as lack of Corporate Governance. 

The “Corporate Governance issues” that the market players talk of is completely different. It is understood by all the players but rarely spelt out in so many words. “Corporate Governance issues” they talk of is nothing but manipulation of financial numbers. To be fair to the Professional accounting bodies and accounting fraternity and the people framing the accounting regulations, a number of changes have been brought out to ensure that Companies do not take refuge under practices which used to be inadvisable but not prohibited. Consolidation of accounts , segment reporting and few others have furthered the cause of transparency and investor information to make an informed investment decision  What one is talking about is downright manipulation of accounts and misreporting which are swept under the carpet under the garb of aggressive accounting. Just have a look at the financials of the Companies which supposedly have   “Corporate Governance issues”. You will see bloated current assets in most cases and in some cases bloated fixed assets and several other cases “Goodwill” which were possibly an Associate Company making losses bought over or merged at a premium.  A look at the cash flows of such Companies is very revealing. Year after year, you have these Companies show profits but the operational cash flow continues to be negative year after year.

Number manipulation -Innocuousness of the start and snow balling impact.

 Dressing up of numbers starts with a typical and apparently extenuating and appealing  reason like “compulsions from the Banks” (to ensure continuation of the working Capital loan) and a more typical and convincing remedy, “we will make it up next year”.   

Next year the story is repeated with a different story line. This time it could be potential foreign associations in the offing for which a good set of numbers are a must.

The very next year, there could be a potential Private equity investor intending to invest. The numbers have to appear good for a good valuation. The belief is that once the PE investor puts in money, the Company with the extra cash would be able to turnaround.

Move to the next year, the compulsion is a potential strategic investor. We need a good set of numbers to ensure a good valuation and keep the dilution levels low. In some of these cases, the strategic investor buys out the promoters partially and pumps in additional equity for expansions. You can see the reason.

The year after that could be a case of “impending listing”. Once listed the financials massaging get on to a quarterly frequency. The story continues.

These Companies or rather the promoters keep looking for one big deal to sweep all the past sins under the carpet and make money for themselves. This is nothing more than a lottery.

The justification includes the aspect of trying to protect the employees of the Company. The promoters claim that they have a duty to protect the Company in the short term to protect the interests of the employee.This is an emotionally appealing justification but the underlying reason is just selfish and protection of themselves.

In all these cases, you do have qualified Chartered accountants working as part of the Company and churning out these numbers. The combination of being a trained accountant and being focused on ensuring good numbers pushes them to find innovative ways of inflating the profits and going around the audit. Are the auditors backed by very smart set of Chartered accountants missing out the obvious? There are two reasons. You have one set of auditors whose cost structure is so high that they can spend the least amount of time to ensure maximization of revenues Vis –a Vis their cost and there is another set of auditors who have grown with the Company and who can’t afford to antagonize the client lest they lose the client.

Some known cases

You have had several live cases of some of these Companies which had “Corporate Governance issues” surviving in the short term and to the outside world, sometime, even thriving for some time and going turtle after a few years. Few of the retail companies were clear cases of accounting manipulation and many more listed Companies resort to sale of controlling interest or sale of part of the business to raise cash and  reduce debt. They apparently took debt for expansion but the truth most times is quite different. Debts have been taken to fund losses or get cash to replace cash losses.

All these Companies, I am sure have had involvement of Chartered accountants, some of them employed full time and some of them involved as auditors and several others as part of lending Banks and institutions. It is sad but true that they have been sometime active perpetrators or sometimes silent spectators and in rare cases unknowing spectator. Whichever way you look at it is a huge failure either in discharging their fiduciary responsibility to the Shareholders, the investors and potential investors and the society at large or sheer incompetence. Incompetence is a very small percentage one would think. It is mostly a case of active perpetration or turning a blind eye to the whole thing.

I see most of the professional bodies lauding the great work done by their respective members, most of it may be true but there is need to come down heavily on wrong doings. Not only is it necessary to punish, it is more important to publicize such punishments.

Even in United State of America which calls or at least called itself a very evolved financial regulatory system, you had the biggest scams. Theyare tightening  their laws and have in fact been coming down heavily on Corporate and Financial frauds including “Insider trading”.

Difficulties in being ethical in a world where you can survive only by currying favors

Wherever one goes or whoever one approaches ,say,for completion of a tax  assessment or an appellate proceedings ,the clients , even the assesses whose accounts are clean and who has been compliant with the laws of the land , there is this expectation of favors from the authorities  and the professional CA  is guided by the client or sometimes the CA  guides the client to extend the “favor “ and incur the “lesser cost” to avoid a larger future cost .The larger cost could be just the nuisance value of assessments not being completed or it could be threat of some tax claims on the client . The equation at most times is a no brainer. Also take the case of a professional who refuses to go by this. He stands a definite chance of losing the client for which there always hawks waiting in the wings to pick up. Not for a moment one can deny the difficulty of surviving in a world where the unstated and tacitly accepted norm is exchange of favours.But when we talk so proudly of a great profession, don’t we have the responsibility of being different. It is sad that there is a tacit acceptance that passing on favors is okay. Even now the aspect of “Financial frauds” and favors to ensure lower taxes and similar white collar crimes are considered okay. They are not viewed with the same degree of distaste that  a physical crime is. In the author’s view ( I am sure that would be the case with most ) the social cost of white collar crime is significantly larger than the cost of physical harm to anyone. An “Enron” caused a lot more damage to its own employees and investors than any type of physical violence. It deprived several employees and other investors their lifetime savings and the means to live a dignified retirement life.

Consequences and the fallout

First and foremost is the belief amongst the public that the accountants are there to manipulate and support the owners of business  and that they do not perceive that they have a responsibility to the society. There is a certain degree of  negative perception about the profession.

Second is the belief that Professional accountants need to be employed so that the negotiation base for “favors” is on a strong footing. Extent of favor is a function of knowledge and non-compliance. A professional with a better knowledge base of the subject as well as the likely consequences, can weigh the cost of favor Vis a Vis the likely consequential cost .This is nothing but a glorified intermediation for an anti-social activity. The profession’s standing in the eyes of the public goes down.

The good work of Chartered accountants’ professional work in general is not something which shows up as a socially benefitting area of work in terms of its proximate and direct benefit. The benefits are multifold and huge but quite a derived one. One should be able to easily gauge the impact it has on the society by looking at the damage to society in the absence of the accounting professionals or failure by the accounting professionals in discharging their duties. The case of “Enron” mentioned above stands ample testimony to that.

Widespread “financials” manipulation gives rise to lack of credibility in shares and even inclination to avoid Companies which have a good business model and with transparent financials.  

Possible remedial steps.

There are several steps that can be suggested to bring down the incidence of financial manipulation but the greatest single step would be for the CA s to take a resolution of not being a party to manipulations. That may happen in an utopian world. For the record, however, one can bring down the incidence with the following broad steps.

1.       High focus of automation of all Governmental processes and building a system driven work flow. I recall Mr. Narayanmurthy, Founder Infosys talking about this in an interview connected to "Lok pal movement "and one definitely agrees with the fact that this can bring down corruption and need for Professional like CA to curry favours.The CA s should spearhead these and come out with suggestions on this front, in fact the CA Institute should have a focussed committee to suggest areas where automation can be targeted to bring down malpractices.

2.       Need for the CA institute and the professional accounting bodies not to be studiously avoiding embarrassing topics like lack of ethics. They need to boldly talk about it in various forums and emphasise the need for CA s to refrain from non-ethical practices. There is a need to get over the hesitation in talking about wrongs. The more we talk the better is it for the profession to correct itself.

3.       Unethical and misreporting and manipulation of accounts should have a high penal cost. The cost should include a ban from practice plus punishment under the criminal provisions. One is sure that there are possibly laws to that effect in our Country. As is the normal problem, such laws are rarely enforced. Need is to make a few examples.

4.       Make the CA's allegiance to the Institute larger than their allegiance to the employers. Have a cell where CA and others can report existence of non-ethical practises in the Companies. Initially have a practice of protecting the identity of the informer. Gradually we can look at greater disclosures.

5.       System of compulsory rotation of Statutory auditors atleast once in 3-4 years.

Some of the above are just suggestions. I am sure several of my fellow CA professional would come out with far better ideas to remedy the situation buy we have to make a start somewhere.

S.Srikanthan

+91 97415 97791

Membership No 024079

Srikanthansanthanam2001@yahoo.co.in

srikanth@onesourceindia.net

Trip to Madurai

Had to make a quick trip to Madurai to take Archana for an interview at Madurai Kamaraj University for M.Sc Microbial technology. The Hotel we checked in ( we reached the morning of the interview , the interview was scheduled for 1 o clock in the afternoon) , Madurai Residency was okay without being great. Surprisingly the tariff was not low. It was around Rs 2400 inclusive of taxes. Location was great. Close to the Station and Bus stand. Took an auto and reached the  University which is some 12-14 Kms away.

People there were quite nice. Typical semi urban place. The campus was medium sized and sparsely populated but not well maintained. They could do with a lot more tall trees to create shaded Roads. Havn't taken the trouble at all.Not too much commercial activity also around the Campus.

Initially the option appeared attractive but a conversation with two senior students possibly effectively decided the issue against. They were both from North and had their usual bias. Language must have been a problem and food also. The Hostel facility was not great. Archana did have a look.

Quite hot like most other South India towns are. Not very different from Trichy

Madurai may be is a bit bigger. Since we could n't get the Wait listed tickets confirmed, had time before catching the late night bus.Went to Meenakshi temple for Darshan.Good temple. Typical good architecture. Needs more time.

Karl Marx's Das Kapital - A modern day interpretation by Steve Shipside

Kind of an crisp and concise book trying to interpret and revisit the relevance of the issues raised and concepts discussed and espoused by Karl Marx.

The author has taken the key points on labour, impact of mechanisation on labour and on Capital, stagnation of mental side of labourers due to excessive mechanisation etc.

No system is perfect, neither Marxism nor Capitalism .But over a period , people have generally found that Capitalism with its innate ability to get the best out of people by making them work for themselves ( selfish interests ) with great motivation and creativity and in the process end up doing something good for the society.

Karl Marx' theory , some of them are a reflection of the times he was in like Capitalists explouting labour for enhgancement of their interests only etc appear to be taking things a bit too far in the current context, some ideas especially on the impact of excessive mechanisation on people's creativity, the impact of how continuous exploitation of labour would not benefit the Capitalists in the long run appear to have relevance even today. Just have a look at the HR policies these days . A typical BPO appears to be a blue collared labour shop and there too, new and innovative practices to keep the employees motivated have come about.

Understand that Karl Marx took several years to complete his magnum opus.

With Capitalism also showing up gaping holes , Financial crisis which is nothing but result of excessive speculations , building up of bubbles , Capitalists creating such a big bubble and making hay in the bubble ( front ended incentives ) and creating a situation whereby the entire society has to bear the burden in dissipating the crisis, Governments taking up the bad debts bears testimony to that.

One would accept the fact that there are more good in Capitalistic way than a socialistic way where accountability is poor and efficiencies take a beating, one can not adopt the current Capitalistic ways in an unadulterated fashion.

There is also the aspect of unending exploitation land. At a certain stage, it appeared as if the resources are limitless, not so any longer. May be Karl Marx hit upon the right idea ( this aspect atleast ) unknowingly or may be he was very prescient. Now it does appear that the resources are not limitless and in fact there is need to ensure that use of natural resources is judicious.

Good book on the whole.

Blink by Malcolm Gladwell

Good book but not sure whether you can come to any kind of generalisations based on that or you can draw any specific theory. The author talks of how a split second or a decision based on an apparently perfunctory look at something backed apparently on instinct as against a considered and well thought through decision, sometime turns out to be better and correct.
The apparent "instinctive" decision is nothing but what the author terms as thin slicing or ability of individuals to draw on their experience and judgements and brain's ability to process the same without any external or extraneous noises.

I read somewhere that the author has a tendency to draw conclusions based on anecdotal experience rather than empirical and experimental experience. May be a bit unfair considering that he does draw on research undertaken by top class and committed researchers.

He talks of how a " Kouros" ( some greek .. some 2000 years back ) was found to be authentic and original based on an examination of documentation and even by leading experts who establish facts after scientific analysis of the samples ( in fact after this the Museum bought this for several millions ) but a perfunctory look by experts who had several years of experience in this field were not impressed about the authenticity.Later it was proved that it was in fact fake.

Very interesting topic was on mind reading. He talks of one Silvin Tomkins who was an expert and who with no background knowledge of some people ... comes to the right conclusion on the character of the people , he sees in a matter of few minutes , primarily based on ability to read the mind. He had trained himself to read minds based on the facial expressions.
Couple of people, one Eckman and Freisman take the research further and map out what one feels inside and how various muscles in the face act. They term it as Action Unit (AU ) 1/2/3/4 so on.There are some 32 muscles on the face.
Interesting thing is,how these muscles act is quite independent of the country. class , race etc.
They also come out with a strange finding which reverses the cause and effect. Mind causes the face to react. They find that , once one starts moving muscles in a certain way, the mind starts feeling the effect. You exercise your laugh muscles, you start feeling happy and so on.

Interesting read, atleast brings out the fact that the general myths about how snap decision is always inferior can be wrong.

He also discusses the way people react based on prejudices like race, color etc.

He tries to establish the same with anecdotal and sometimes experimental data on colored people

He draws how , women were considered inferior in the classical western music world and how that changed once the audition was just audition and not an audition where the judges get to see the people. The practice of putting a curtain between the performer and the judge , makes people take the correct decision devoid of prejudices.

Fault lines by Raghuram Rajan

Very extensive analysis of the reasons for financial turmoils which keeps happening once every 10 or 20 years.

Very well written book. The author deals at length all aspects of growth, economic turmoil, reasons for the same and broad solutions

Talks of how the western economies have become consumption driven and how the asian world has followed an export led growth. He is not a votary of export led growth either nor a great fan of exchange rate manipulated growth

Recommends various mneasures to optimise on economic growth and democratic aspects.

Needs to be read like a text book. Very detailed , sound and in depth analysis.

I recall, that thge author was one of the first to raise the red flag on the low interest rate led asset bubble ,e specially the hosing asset

He traces the history if how successive US President starting from Reagan to Clinton to Bush cheerled lending , to increase howm ownership. In the zeal , all around , the basic economic aspect of long term capabily to repay by the borrower was forgotten

Lending was more asset price based and not on capability to repay. With increased asset prices, that i sthe housing prices, the tendency was to go for refinance at higher prices . Once the prices started falling , the asset prices were lesser than the loan itself.

Need to read again to capture all aspects . One of the best and not one of this dogmatic ones. Fact based and rational