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Sunday, May 21, 2006

SSKI Weekly Trendwatch

Busted !! - here

Karan Thapar interviews Kalyug ka Arjun

Brilliant Interview with lot of research

Karan Thapar: Hello and welcome to the Devil's Advocate. As the debate over the reservations for the OBCs divides the country, we ask - What are the government's real intentions? That is the critical questions that I shall put today in an exclusive interview to the Minister for Human Resource Development Arjun Singh.

Most of the people would accept that steps are necessary to help the OBCs gain greater access to higher education. The real question is - Why do you believe that reservations is the best way of doing this?

Arjun Singh: I wouldn't like to say much more on this because these are decisions that are taken not by individuals alone. And in this case, the entire Parliament of this country - almost with rare anonymity - has decided to take this decision.

Karan Thapar: Except that Parliament is not infallible. In the Emergency, when it amended the Constitution, it was clearly wrong, it had to reverse its own amendments. So, the question arises - Why does Parliament believe that the reservation is the right way of helping the OBCs?

Arjun Singh: Nobody is infallible. But Parliament is Supreme and atleast I, as a Member of Parliament, cannot but accept the supremacy of Parliament.

Karan Thapar: No doubt Parliament is supreme, but the constitutional amendment that gives you your authorities actually unenabling amendment, it is not a compulsory requirement. Secondly, the language of the amendment does not talk about reservations, the language talks about any provision by law for advancement of socially and educationally backward classes. So, you could have chosen anything other than reservations, why reservations?

Arjun Singh: Because as I said, that was the 'will and desire of the Parliament'.

Karan Thapar: Do you personally also, as Minister of Human Resource Development , believe that reservations is the right and proper way to help the OBCs?

Arjun Singh: Certainly, that is one of the most important ways to do it.

Karan Thapar: The right way?

Arjun Singh: Also the right way.

Karan Thapar: In which case, lets ask a few basic questions; we are talking about the reservations for the OBCs in particular. Do you know what percentage of the Indian population is OBC? Mandal puts it at 52 per cent, the National Sample Survey Organisation at 32 per cent, the National Family and Health Survey at 29.8 per cent, which is the correct figure?

Arjun Singh: I think that should be decided by people who are more knowledgeable. But the point is that the OBCs form a fairly sizeable percentage of our population.

Karan Thapar: No doubt, but the reason why it is important to know 'what percentage' they form is that if you are going to have reservations for them, then you must know what percentage of the population they are, otherwise you don't know whether they are already adequately catered in higher educational institutions or not.

Arjun Singh: That is obvious - they are not.

Karan Thapar: Why is it obvious?

Arjun Singh: Obvious because it is something which we all see.

Karan Thapar: Except for the fact that the NSSO, which is a government appointed body, has actually in its research in 1999 - which is the most latest research shown - that 23.5 per cent of all university seats are already with the OBCs. And that is just 8.5 per cent less than what the NSSO believes is the OBC share of the population. So, for a difference of 8 per cent, would reservations be the right way of making up the difference?

Arjun Singh: I wouldn't like to go behind all this because, as I said, Parliament has taken a view and it has taken a decision, I am a servant of Parliament and I will only implement.

Karan Thapar: Absolutely, Parliament has taken a view, I grant it. But what people question is the simple fact - Is there a need for reservations? If you don't know what percentage of the country is OBC, and if furthermore, the NSSO is correct in pointing out that already 23.5 per cent of the college seats are with the OBC, then you don't have a case in terms of need.

Arjun Singh: College seats, I don't know.

Karan Thapar: According to the NSSO - which is a government appointed body - 23.5 per cent of the college seats are already with the OBCs.

Arjun Singh: What do you mean by college seats?

Karan Thapar: University seats, seats of higher education.

Arjun Singh: Well, I don't know I have not come across that far.

Karan Thapar: So, when critics say to you that you don't have a case for reservation in terms of need, what do you say to them?

Arjun Singh: I have said what I had to say and the point is that that is not an issue for us to now debate.

Karan Thapar: You mean the chapter is now closed?

Arjun Singh: The decision has been taken.

Karan Thapar: Regardless of whether there is a need or not, the decision is taken and it is a closed chapter.

Arjun Singh: So far as I can see, it is a closed chapter and that is why I have to implement what all Parliament has said.

Karan Thapar: Minister, it is not just in terms of 'need' that your critics question the decision to have reservation for OBCs in higher education. More importantly, they question whether reservations themselves are efficacious and can work.

For example, a study done by the IITs themselves shows that 50 per cent of the IIT seats for the SCs and STs remain vacant and for the remaining 50 per cent, 25 per cent are the candidates, who even after six years fail to get their degrees. So, clearly, in their case, reservations are not working.

Arjun Singh: I would only say that on this issue, it would not be correct to go by all these figures that have been paraded.

Karan Thapar: You mean the IIT figures themselves could be dubious?

Arjun Singh: Not dubious, but I think that is not the last word.

Karan Thapar: All right, maybe the IIT may not be the last word, let me then quote to you the report of the Parliamentary Committee on the welfare for the Scheduled Castes and Scheduled Tribes - that is a Parliamentary body.

It says that looking at the Delhi University, between 1995 and 2000, just half the seats for under-graduates at the Scheduled Castes level and just one-third of the seats for under-graduates at the Scheduled Tribes level were filled. All the others went empty, unfilled. So, again, even in Delhi University, reservations are not working.

Arjun Singh: If they are not working, it does not mean that for that reason we don't need them. There must be some other reason why they are not working and that can be certainly probed and examined. But to say that for this reason, 'no reservations need to be done' is not correct.

Karan Thapar: Fifty years after the reservations were made, statistics show, according to The Hindustan Times, that overall in India, only 16 per cent of the places in higher education are occupied by SCs and STs. The quota is 22.5 per cent, which means that only two-thirds of the quota is occupied. One third is going waste, it is being denied to other people.

Arjun Singh: As I said, the kind of figures that have been brought out, in my perception, do not reflect the realities. Realities are something much more and of course, there is an element of prejudice also.

Karan Thapar: But these are figures that come from a Parliamentary Committee. It can't be prejudiced; they are your own colleagues.

Arjun Singh: Parliamentary Committee has given the figures, but as to why this has not happened, that is a different matter.

Karan Thapar: I put it to you that you don't have a case for reservations in terms of need, you don't have a case for reservations in terms of their efficacy, why then, are you insisting on extending them to the OBCs?

Arjun Singh: I don't want to use that word, but I think that your argument is basically fallicious.

Karan Thapar: But it is based on all the facts available in the public domain.

Arjun Singh: Those are facts that need to be gone into with more care. What lies behind those facts, why this has not happened, that is also a fact.

Karan Thapar: Let's approach the issue of reservations differently in that case. Reservations mean that a lesser-qualified candidate gets preference over a more qualified candidate, solely because in this case, he or she happens to be an OBC. In other words, the upper castes are being penalised for being upper caste.

Arjun Singh: Nobody is being penalised and that is a factor that we are trying to address. I think that the prime Minister will be talking to all the political parties and will be putting forward a formula, which will see that nobody is being penalised.

Karan Thapar: I want very much to talk about that formula, but before we come to talk about how you are going to address concerns, let me point one other corollary - Reservations also gives preference and favour to caste over merit. Is that acceptable in a modern society?

Arjun Singh: I don't think the perceptions of modern society fit India entirely.

Karan Thapar: You mean India is not a modern society and therefore can't claim to be treated as one?

Arjun Singh: It is emerging as a modern society, but the parameters of a modern society do not apply to large sections of the people in this country.

Karan Thapar: Let me quote to you Jawaharlal Nehru, a man whom you personally admire enormously. On the 27th of June 1961 wrote to the Chief Ministers of the day as follows: I dislike any kind of reservations. If we go in for any kind of reservations on communal and caste basis, we will swamp the bright and able people and remain second rate or third rate. The moment we encourage the second rate, we are lost. And then he adds pointedly: This way lies not only folly, but also disaster. What do you say to Jawaharlal Nehru today?

Arjun Singh: Jawaharlal Nehru was a great man in his own right and not only me, but everyone in India accept his view.

Karan Thapar: But you are just about to ignore his advice.

Arjun Singh: No. Are you aware that it was Jawaharlal Nehru who introduced the first ammendment regarding OBCs?

Karan Thapar: Yes, and I am talking about Jawaharlal Nehru in 1961, when clearly he had changed his position, he said - I dislike any kind of reservations.

Arjun Singh: I don't think one could take Panditji's position at any point of time and then overlook what he had himself initiated.

Karan Thapar: Am I then to understand that regardless of the case that is made against reservations in terms of need, regardless of the case that has been made against reservations in terms of efficacy, regardless of the case that has been made against reservations in terms of Jawaharlal Nehru, you remain committed to extending reservations to the OBCs.

Arjun Singh: I said because that is the will of Parliament. And I think that common decisions that are taken by Parliament have to be honoured.

Karan Thapar: Let me ask you a few basic questions - If reservations are going to happen for the OBCs in higher education, what percentage of reservations are we talking about?

Arjun Singh: No, that I can't say because that has yet to be decided.

Karan Thapar: Could it be less than 27 per cent?

Arjun Singh: I can't say anything on that, I have told you in the very beginning that at this point of time it is not possible for me to.

Karan Thapar: Quite right. If you can't say, then that also means that the figure has not been decided.

Arjun Singh: The figure will be decided, it has not been decided yet.

Karan Thapar: The figure has not been decided. So, therefore the figure could be 27, but it could be less than 27 too?

Arjun Singh: I don't want to speculate on that because as I said, that is decision, which will be taken by Parliament.

Karan Thapar: Whatever the figure, one thing is certain that when the reservations for OBCs happen, the total quantum of reservations will go up in percentage terms. Will you compensate by increasing the total number of seats in colleges, universities, IITs and IIMs, so that the other students don't feel deprived.

Arjun Singh: That is one of the suggestions that has been made and is being seriously considered.

Karan Thapar: Does it find favour with you as a Minister for Human Resource Development?

Arjun Singh: Whatever suggestion comes, we are committed to examine it.

Karan Thapar: You may be committed to examine it, but do you as minister believe that that is the right way forward?

Arjun Singh: That could be one of the ways, but not the only way.

Karan Thapar: What are the other ways?

Arjun Singh: I don't know. That is for the Prime Minister and the other ministers to decide.

Karan Thapar: One way forward would be to increase the total number of seats.

Arjun Singh: Yes, definitely.

Karan Thapar: But the problem is that as the Times of India points out, we are talking of an increase of perhaps as much as 53 per cent. Given the constraints you have in terms of faculty and infrastructure, won't that order of increase dilute the quality of education?

Arjun Singh: I would only make one humble request, don't go by The Times of India and The Hindustan Times about faculty and infrastructure, because they are trying to focus on an argument which they have made.

Karan Thapar: All right, I will not go by The Times of India, let me instead go by Sukhdev Thorat, the Chairman of the UGC. He points out that today, at higher education levels - that is all universities, IITs and IIMs - there is already a 1.2 lakh vacancy number. 40 per cent of these are in teaching staff, which the IIT faculty themselves point out that they have shortages of up to 30 per cent. Given those two constraint, can you increase the number of seats?

Arjun Singh: That can be addressed and that shortage can be taken care of.

Karan Thapar: But it can't be taken care of in one swoop, it will take several years to do it.

Arjun Singh: I don't know whether it can be taken care of straightway or in stages, that is a subject to be decided.

Karan Thapar: Let me ask you bluntly, if you were to agree to compensate for reservations for OBCs by increasing the number of seats, would that increase happen at one go, or would it be staggered over a period of two-three or four year old process.

Arjun Singh: As I told you, it is an issue that I cannot comment upon at this moment because that is under examination.

Karan Thapar: So, it may happen in one go and it may happen in a series of several years.

Arjun Singh: I can't speculate on that because that is not something on which I am free to speak on today.

Karan Thapar: Will the reservation for OBCs, whatever figure your Committee decides on, will it happen in one go, or will it slowly be introduced in stages?

Arjun Singh: That also I cannot say because as I told you, all these issues are under consideration.

Karan Thapar: Which means that everything that is of germane interest to the people concerned is at the moment 'under consideration' and the government is not able to give any satisfaction to the students who are deeply concerned.

Arjun Singh: That is not the point. The government knows what to do and it will do what is needed.

Karan Thapar: But if the government knows what to do, why won't you tell me what the government wants to do?

Arjun Singh: Because unless the decision is taken, I cannot tell you.

Karan Thapar: But you can share with me as the Minister what you are thinking.

Arjun Singh: No.

Karan Thapar: So, in other words, we are manitaining a veil of secrecy and the very people who are concerned...

Arjun Singh: I am not maintaining a veil of secrecy. I am only telling you what propriety allows me to tell you.

Karan Thapar: Propriety does not allow you to share with the people who are protesting on the streets what you are thinking?

Arjun Singh: I don't think that that can happen all the time.

Karan Thapar: But there are people who feel that their lives and their futures are at stake and they are undertaking fasts until death.

Arjun Singh: It is being hyped up, I don't want to go into that.

Karan Thapar: Do you have no sympathy for them?

Arjun Singh: I have every sympathy.

Karan Thapar: But you say it is being hyped up.

Arjun Singh: Yes, it is hyped up.

Karan Thapar: So, then, what sympathy are you showing?

Arjun Singh: I am showing sympathy to them and not to those who are hyping it up.

Karan Thapar: The CPM says that if the reservations for the OBCs are to happen, then what is called the creamy layer should be excluded. How do you react to that?

Arjun Singh: The creamy layer issue has already been taken care of by the Supreme Court.

Karan Thapar: That was vis -a-vis jobs in employment, what about at the university level, should they be excluded there as well because you are suggesting that the answer is yes?

Arjun Singh: That could be possible.

Karan Thapar: It could be possible that the creamy layer is excluded from reservations for OBCs in higher education?

Arjun Singh: It could be, but I don't know whether it would happen actually.

Karan Thapar: Many people say that if reservations for OBCs in higher education happen, then the children of beneficiaries should not be entitled to claim the same benefit.

Arjun Singh: Why?

Karan Thapar: So that there is always a shrinking base and the rate doesn't proliferate.

Arjun Singh: I don't think that that is a very logical way of looking at it.

Karan Thapar: Is that not acceptable to you?

Arjun Singh: No, it is not the logical way of looking at it.

Karan Thapar: So, with the possible exception of the creamy layer exclusion, reservation for OBCs in higher education will be almost identical to the existing reservations for SC/STs?

Arjun Singh: Except for the percentage.

Karan Thapar: Except for the percentage.

Arjun Singh: Yes.

Karan Thapar: So, in every other way, they will be identical.

Arjun Singh: Yes, in every other way.

Karan Thapar: Mr Arjun Singh, on the 5th of April when you first indicated that the Government was considering reservation for OBCs in higher education, was the Prime Minister in agreement that this was the right thing to do?

Arjun Singh: I think, there is a very motivated propaganda is on this issue. Providing reservation to OBCs was in the public domain right from December 2005, when Parliament passed the enabling resolution.

Karan Thapar: Quite true. But had the Prime Minister specifically agreed on or before 5th of April to the idea?

Arjun Singh: Well, I am telling you it was already there. A whole Act was made, the Constitution was amended and the Prime Minister was fully aware of what this is going to mean. Actually, he had a meeting in which OBC leaders were called to convince them that this would give them the desired advantage. And they should, therefore, support this resolution. And at that meeting, he himself talked to them. Now, how do you say that he was unaware?

Karan Thapar: But were you at all aware that the Prime Minister might be in agreement with what was about to happen but might not wish it disclosed publicly at that point of time? Were you aware of that?

Arjun Singh: It was already there in public domain, that's what I am trying to tell you.

Karan Thapar: Then answer this to me. Why are members of the PMO telling journalists that Prime Minister was not consulted and that you jumped the gun?

Arjun Singh: Well, I don't know which member of the PMO you are talking about unless you name him.

Karan Thapar: Is there a conspiracy to make you the fall guy?

Arjun Singh: Well, I don't know whether there is one or there is not. But fall guys are not made in this way. And I am only doing what was manifestly clear to every one, was cleared by the party and the Prime Minister. There is no question of any personal agenda.

Karan Thapar: They say that, in fact, you brought up this issue to embarrass the Prime Minister.

Arjun Singh: Why should I embarrass the Prime Minister? I am with him. I am part of his team.

Karan Thapar: They say that you have a lingering, forgive the word, jealousy because Sonia Gandhi chose Manmohan Singh and not you as Prime Minister.

Arjun Singh: Well, that is canard which is below contempt. Only that person can say this who doesn't know what kind of respect and regard I hold for Sonia Gandhi. She is the leader. Whatever she decides is acceptable to me.

Karan Thapar: They also say that you brought this issue up because you felt that the Prime Minister had been eating into your portfolio. Part of it had gone to Renuka Chaudhury and, in fact, your new deputy minister Purandar Sridevi had taken over certain parts. This was your way of getting back.

Arjun Singh: No one was taking over any part. This is a decision which the Prime Minister makes as to who has to have what portfolio. And he asked Mrs Renuka Devi to take it and he cleared it with me first.

Karan Thapar: So there is no animus on your part?

Arjun Singh: Absolutely not.

Karan Thapar: They say that you did this because you resented the Prime Minister's popular image in the country, that this was your way of embroiling him in a dispute that will make him look not like a modern reformer but like an old-fashioned, family-hold politician instead.

Arjun Singh: Well, the Tammany Hall political stage is over> He is our Prime Minister and every decision he has taken is in the full consent with his Cabinet and I don't think there can be any blame on him.

Karan Thapar: One, then, last quick question. Do you think this is an issue, which is a sensitive issue, where everyone knew there would have been passions and emotions that would have aroused has been handled as effectively as it should have been?

Arjun Singh: Well, I have not done anything on it. I have not sort of what you call jumped the gun. If this is an issue, which is sensitive, everyone has to treat it that way.

Karan Thapar: But your conscience as HRD Minister is clear?

Arjun Singh: Absolutely clear.

Karan Thapar: There is nothing that you could have done to make it easier for the young students?

Arjun Singh: Well, I am prepared to do anything that can be done. And it is being attempted.

Karan Thapar: For seven weeks, they have been protesting in the hot sun. No minister has gone there to appease them, to alley their concerns, to express sympathy for them. Have politicians let the young people of India down?

Arjun Singh: Well, I myself called them. They all came in this very room.

Karan Thapar: But you are the only one.

Arjun Singh: You are accusing me only. No one else is being accused.

Karan Thapar: What about the Government of India? Has the Government of India failed to respond adequately?

Arjun Singh: From the Government of India also, the Defence Minister met them.

Karan Thapar: Only recently.

Arjun Singh: That is something because everyone was busy with the elections.

Karan Thapar: For seven weeks no one met them.

Arjun Singh: No, but we are very concerned. Certainly, all of us resent the kind of force that was used. I condemned it the very first day it happened.

Karan Thapar: All right, Mr Arjun Singh. We have reached the end of this interview. Thank you very much for speaking on the subject.

Of market rallies and investor follies...

Investor irrationality has, more than once in the past, given evidences of how the 'herd mentality' can lead to unfathomable market appreciation without the support of sufficient value in the underlying assets. Such phenomena have led to 'market crashes' that eroded investor wealth and dissuaded market participation for a considerable duration of time.

It is an oft-repeated scenario in market rallies that investors tend to follow the 'herd' and value a stock beyond any accurate or rational reflection of its actual worth. This creates a situation wherein, once the correction sets in, the majority of investors try to flee the market at the same time and consequently incur massive losses. Attempting to avoid more losses, investors during a crash, indulge in panic selling, hoping to unload their declining stocks onto other investors. Some of the biggest stock market crashes in history have been the best 'learning lessons' for investor vigilance.

The Tulip Bubble (1634-1637, Holland)
In 1593, tulips were brought from Turkey and introduced to the Dutch. The novelty of the new flower made it widely sought after and therefore, sought a premium price. Soon, prices were rising so fast and so high that people were trading their land, life savings, and anything else for tulip bulb futures. Needless to say, the prices were not an accurate reflection of the value of a tulip bulb. At the peak of the market, a person could trade a single tulip for an entire estate. However, once the correction set in, dealers refused to honor contracts and the government attempted to step in and halt the crash by offering to honor contracts at 10% of the face value.

The South Sea Bubble (1711, United Kingdom)
In the early 1700s, when British investors enjoyed prosperity and had enough liquidity to invest, the South Sea Company had no problem attracting investors to its IPO because of an MoU signed with the government (worth £10 m) for purchasing the 'rights' to trade in the south seas. Stocks in the South Sea Company were traded for 1,000 British pounds (unadjusted for inflation) and then were reduced to nothing by the later half of 1720. In the aftermath of this crash, the British government outlawed the issuing of stock certificates, a law that was not repealed until 1825.

The Florida Real Estate Bubble (1926, Florida)
In 1920, Florida became a popular US real estate destination because of its climate. The supply of housing eventually could not match the demand, causing prices to multiply several times. The land that could be bought for US$ 0.8 m could, within a year, be resold for US$ 4 m (5 times higher), before the prices came crashing back down to pre-boom levels.

The Great Depression (1929)
Despite the Florida real estate crash, after the win in the First World War, US investors continued to be bullish on the stock markets, which led to a bubble. The ensuing correction led to a more than 40% drop in the benchmark indices from the beginning of September 1929 till the end of October 1929. In fact, the markets continued to decline until July 1932 when they bottomed out, down nearly 90% from their 1929 highs.

The crash of 1987 (19th October 1987)
In early 1987, in the wake of the stock market rally, the US stock market regulator, SEC, made aggressive investigations into insider trading. The barrage of SEC investigations rattled investors and by October, they decided to move out of equities and into the more stable bond market. Herd-like panic set in and people started dumping stocks in the dark without knowing what their losses were or whether their orders would execute fast enough to keep up with plummeting prices. The Dow plummeted by as many as 508 points (22.6%) on October 19th and investor wealth to the tune of US$ 500 bn got eroded on a single day. Finally, the Fed chief at the time, Alan Greenspan, had to intervene to help fight off a depression by preventing the insolvency of commercial and investment banks.

The Asian crisis
In the later half of the 19th century, the Japanese economy gained momentum after its long recovery from the war and the atomic bombs. The Japanese economy, coupled with the other emerging Southeast Asian economies, formed an unstoppable economic force. Between 1955 and 1990, land prices in Japan appreciated by 70 times and stocks increased 100 times over. The government sought to halt the inflammatory growth of stocks and real estate by raising interest rates. However, this did not have the desired impact and instead, the subsequent correction led to the Nikkei index plunging by more than 30,000 points.

The dotcom crash (2000 - 2002)
Commercially, the Internet started to catch on in 1995, with an estimated 18 m users worldwide. The rise in usage meant an untapped international market. Soon, the public issues of new dotcom companies started getting oversubscribed several times over on the very first day of bids. This frenzy also perpetuated to the Indian markets and one may recollect Infosys trading at a multiple of over 300 times earnings at its peak during this bubble (FY00). At the end of the crash, the NASDAQ Composite lost 78% of its value.

Lessons to learn...
The above instances are cautionary admonitions for investors to stay out of irrational behaviour. This is not to say that stocks cannot legitimately enjoy a huge leap in value, but this leap should be justified by the prospects of the underlying companies, and not just by a mass of investors following each other. The unreasonable belief in the possibility of getting 'rich' quick is the primary reason people burn their fingers in market crashes. One tends to neglect the fact that there is a direct correlation between high risk and high returns. While the history of market crashes does not in any way foretell anything dire for the future, the best thing an investor can do is keep himself/herself educated, well informed and well practiced in doing research.

Round-Up - Happy Investing

The fact that the Indian stock markets, and for that matter even the global markets, have had a very volatile week is not a news to anyone. From our perspective, falling stock markets offer significant buying opportunities for long-term investors. It is time to take a long-term call and invest.

Instead of focusing on the gainers and the losers in the last one week, in this weekly round up, we have focused on macro issues and how they will impact the stock market performance over the next two to three years. We have consciously stayed away from sounding 'we said so'.

Net investments…
(Rs bn) Mutual Funds FIIs Total
11th May 2006 (0.7) (12.0) (12.7)
12th May 2006 3.6 0.2 3.7
15th May 2006 7.9 (7.3) 0.7
16th May 2006 3.3 (5.3) (2.0)
17th May 2006 1.9 (4.2) (2.3)
Total 16.1 (28.7) (12.6)

Random thoughts on the current trends…
On Thursday, the benchmark BSE Sensex fell by over 826 points. Investors attribute the same to largely three factors.

  1. The recent inflation report in the US and the Federal Reserve's stand on interest rates did raise concerns among the global investing community with respect to whether there is a possibility of interest rates rising much faster. Commodities, including crude oil and gold, witnessed significant correction.

  2. Secondly, domestic investors were 'concerned' about the prospects of new tax being imposed on select FII trades, which the Finance Minister later denied.

  3. Significant unwinding of open interest position in the futures and options market.

If the proposal to tax FIIs was the reason for the Thursday fall, even after the FM clarification on the issue on the same day, what triggered the fall yesterday? We do not have answers to that and neither do the market participants. But one thing is for sure. It is time investors in India recognize the fact that global factors can have a dramatic impact on the Indian stock market performance. Till now, the increase in interest rates, including US, was sidelined with a view that the 'India story' was on a strong footing. Indeed, we subscribe to the India story. But we also acknowledge the fact that the investment decision of FIIs depends on their evaluation of 'India' and its valuation in relation to other emerging markets.

Valuation conundrum…
As our subscribers are well aware, we have recommended a Sell on stocks from sectors including engineering, power and cement purely based on fundamentals. Why should a 'X' cement company (and that too, a regional one) trade at a EV/tonne (enterprise value per tonne) of US$ 200 when the best of cement companies in the global markets are trading between US$ 125 to US$ 150 per tonne.

Similarly, why should an engineering company trade at a price to earnings multiple of over 40 times trailing twelve months earnings when the best of the engineering companies globally are trading at less than 15 times trailing basis. Yes, growth is robust, but we do not wish to upgrade our valuation multiple just to make sure that we have a 'BUY' rating on a stock. But yes, we have reviewed our valuation metric and wherever it was necessary, we have upgraded/downgraded our valuation multiple to reflect the fundamental change in the sector.

We continue to believe that certain stocks from sectors are trading at rich valuations and we see downside risk outweighing the upside potential. That said, even at these levels, we do recommend our subscribers to invest in stocks from a long-term perspective, provided the valuations are justified.

Where to from here?
As we mentioned in our view on the market after the Thursday fall, this decline should be taken as an opportunity to invest and build a long-term equity portfolio. Needless to say that the equity component of the overall asset allocation should be in line with one's risk-return profile. We would also like to remind investors that with the rise in interest rates (and prospects of further increases), debt is becoming attractive.

Therefore, we suggest investors to invest in short-term fixed deposits or floating rate funds that further invest in shorter duration government securities. Overall, you, as a retail investor, should not shy away from equities given the recent decline in the stock market. Invest in good companies with a sound business models (i.e. ability to ride through cycles) from a two to three year perspective and one need not worry about the day-to-day market movements. Happy investing!

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He is one of the youngest resident dollar billionaires in India. When Sun TV, his flagship, listed on the stock markets on April 24, it ended the day with a market capitalisation of Rs 10,089 crore; the value of Maran's 90 per cent share: Rs 9,080 crore. Few would have thought this likely two decades ago, when, in keeping with tradition, Maran-elder son of late Murasoli Maran and grandson of DMK chief M. Karunanidhi-was an active student leader in Chennai. But fate had other things in store for him. Following an MBA degree from the University of Scranton in the US, he joined his family's publication business. In 1993, he promoted Sun TV, a Tamil entertainment channel, and followed this up by launching a new channel or publication every year since. The Sun network now has a bouquet of 14 Tamil, Kannada, Malayali and Telugu television channels, a lucrative cable network, four fm radio channels, two Tamil newspapers and four Tamil magazines. Insiders say Maran depends on his uncanny business sense while taking decisions and can be very ruthless when implementing them. Sun TV's business model is simple: it allocates slots to content producers for a fee, and retains for itself only a small share of advertising slots. If producers don't deliver the desired TRP ratings, the programme is terminated. Says Hansraj Saxena, VP, Programming, Sun TV: "Kalanithi Maran has to be admired for being proactive and for his ability to take swift decisions."

He's had his brush with controversies, too. There have been allegations that he owes his success to his family's political muscle. A leading south-based newspaper recently alleged that he tried using brother Dayanidhi Maran's clout as Union Telecom Minister to demand a one-third share for himself in the Tata-Star TV direct to home venture. Maran denies the allegation. What's next on the agenda? Sun TV has a DTH licence and is keen to enter this segment. Then again, Maran may at a future date list his other television assets-the market value of his company is based only on six television and one FM radio channels. If that happens, expect him to rise further up the list of the super rich.

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Way2Wealth- Unity Infraprojects : AVOID

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Why are the equity markets falling?

Markets go up. Markets go down. Now they are going down? Why?

A. Well, why did stock markets rise - globally? Let's see…there were many reasons.

  1. Firstly, the Iraq war and the fear of SARS made investors out of equity assets till March, 2003 – all over the world. So, by April 2003 when SARS faded away and the Iraq war was "won" money came pouring back to equity markets – globally.

  2. Low interest rates around the world and continuing consumer spending in USA allowed the companies worldwide to lower finance charges and increase profits. When profits increase (when they are not expected to) investors' turn optimistic and bid share prices up – globally.

  3. Also, with low interest rates many hedge funds were able to play the arbitrage game: they could borrow in US$ at low rates of interest and then invest that money anywhere in the world where they expected to get better returns. Some of that money came into emerging markets like Brazil, China, and India.

B. Why did the Indian stock market rise? For many reasons.

  1. Firstly, because of money flows from the FII's (see the 3 points listed above). The FII's invested about US$ 10 billion in the past 12 months. That is about as much money that UTI has under management. Imagine the power of adding one UTI to the Indian stock market: it created a demand and supply imbalance. The demand for shares was more than the supply of shares. When demand is more than supply, prices increase – that is basic economics.

  2. Part of this is the additional demand of shares from foreign investors who are buying Indian stocks outside India. No one knows that amount. No one tracks it. The foreign investors gain exposure to the Indian market via "Participatory Notes" which is captured in the statistics. The foreign investors use this P Note route as they do not wish to register with SEBI nor get involved with the tax implications in India. There were frequent changes in policy and attempts to control this but, most likely, with the sale of government shares and an expected increase in the supply of new shares the rationale and reason to retain the P Note route was considered to be a good decision.

  3. But there were also real reasons to support some of the rise in share prices. Company earnings were good, the economy was doing well, the ruling NDA-led government was expected to win the elections, etc. These are fundamental factors that generally support the increase in share prices.

C. Now why are share prices collapsing?

  1. Well, they are collapsing globally. Interest rates are increasing in the USA and this makes it difficult for many hedge funds to borrow cheap and buy shares around the world or even in their home countries. Before the Indian markets fell, Brazil and China were already down between 20% and 30% from their recent peaks. In Indian terms, this would mean that from the peak BSE-30 Index of 6,100 levels, the market should have been between 4,300 and 4,900 to be "equal" to the fall of Brazil and China - assuming that there is no specific India-event that affects the perception of local and foreign investors.

  2. Investors are getting increasingly concerned about geo-political risk and changes in government, not only in India, but also in Europe and USA in their up-coming elections. And they have decided to book their profits and reduced their exposure to equities for a while.

  3. India is suffering now from the after-effects of relying on one kind of buyer: the foreigner. While the foreigner was buying, everyone was happy and telling us how India was shining. What people should have started to worry about was the effects of these same buyers (whether on the Indian stock exchanges or via P Notes) turning sellers. And we know, or should have learnt by now, that every buyer one day becomes a seller: that is the law of markets and market cycles. Now the foreigner is selling, and the markets are tumbling because there are no buyers to absorb all that foreign selling.

  4. India is also suffering from "the shock" of the NDA not winning. That is an India-specific event, not linked to other global events (like China wishing to slow down its economy, USA raising interest rates, the leader of Iraq's Governing Council blown up in a car bomb attack). No pre-election poll predicted it, no equity strategist expected it and even the winning party did not expect it!

So, who should I blame?

  1. The stock exchanges for having a stock exchange?

  2. The foreigner for buying, and for now selling?

  3. Local speculators who exaggerate market movements on the upswing (by buying ahead of the foreigners) and on the downturn (by selling ahead of the foreigners)

  4. The US central bank for indicating that it could raise interest rates?

  5. The previous government for making us believe we were shining and happy that the rising Index was an approval meter of their policies?

  6. The Left Parties for saying what they have always been saying (which is why they are called "Left")?

  7. The pollsters for not predicting the election results?

  8. The new PM, Sonia Gandhi, for winning?

  9. The people who voted her in?

We love to blame others, so the list above is an indicative one which you can add to and modify depending on whether you are pro-Sonia , pro-BJP, or pro-whoever. Or should we, instead, take this 12-month sharp rise and fall in the markets as yet another lesson (having gone through many before, including the recent tech bubble of 2000) that investing in shares is a risky business and one must be disciplined about it or find a disciplined advisor to make you a decent rate of return as opposed to gambling away on the stock market?

Oh, yes, before I end with these thoughts from a hotel room, another word of advice. The market will rise again - with your money or without it. I don't know when and I don't' know by how much or for how long. But I know it will. So, if you had discipline and kept your fear and greed and other emotions away from your decision-making process, you would invest (not speculate) while others are selling. I know I am investing. 

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GlaxoSmithKline Pharma: Buy

Fresh exposures can be considered in the GlaxoSmithKline Pharma (GSK), which trades at about Rs 1,100. Over the past seven trading sessions, the stock has shed 23 per cent, compared to the 13-per cent fall in the benchmark indices.

We are of the view that the sharp correction is a good opportunity to enter the stock.

However, given the current market conditions, we believe that it is important for investors to temper their return expectations and also buy the stock in small quantity; exposures may be increased should there be a further fall in price linked to broad market weakness.

Though GSK has registered a strong showing in the first quarter of the current calendar, the performance may not be sustainable, given the VAT-related issues that prevailed in the year-ago period. However, growth may be of a more steady nature in the quarters to follow.

GSK's focus on its power brands and its decreasing dependence on drugs under the ambit of price control has paid rich dividends, lending an upward bias to margins.

That, along with its strategy of in-licensing and bringing in molecules from the stable of its global parent, should be the key thrust areas in the medium term.

Recently, GSK has also exited the animal healthcare business, which is reflective of its intent to focus on the core pharma business.

GSK may also decide to adopt the same course of action with the fine chemicals business.

The divestiture from these businesses should provide GSK with the financial muscle to aggressively pursue inorganic growth opportunities, put through another round of buy back or reward shareholders with a handsome dividend payout.

After having consistently commanded a valuation in excess of 30 times forward earnings, the current collapse in price has led to the stock trading at about 24 times its expected per-share earnings for CY07.

The fall in price appears inexplicable, given that the fundamental story has not altered. Buy with a medium-term perspective.

9 commandments for investors

Markets will test the patience of investors and the nerves of the traders. Prudential ICICI Mutual recommends that investors remember the following basic principles:

Markets are neither cheap nor at bubble valuations. They are between fair value and expensive valuation.

The valuations are supported by the optimism about sustained above average future growth and the continuous flow of cash from local as well as global investors.

Markets will become volatile with the opposing forces of liquidity and valuation coming into play.

Markets will reward investors and punish traders.

It is difficult to predict the market except for the long run.

Asset allocation (a fair balance between risky and non risky assets) is the key to withstanding market volatility

Markets are unlikely to melt down like the TMT sector in the year 2000 as this time the doubt is with the valuations and not with the business model.

You should be a buyer in the market if you are under-invested in equity and you should be a seller if you are over-invested in equity.

Regular investment/systematic investment will be the most appropriate way to invest in the equity market

Unity Infraprojects: Avoid

Investors can avoid subscribing to the initial public offer from construction player Unity Infraprojects (Unity). The offer appears ambitiously priced even after factoring in revenue flows from conversion of orders on hand.

Infrastructure spending has prompted a number of players in this space to tap the capital market and ramp up the equity base. The construction activity in the country is likely to ensure that even small players get a share of the business. However, the ability of such companies to compete with established players and execute projects across geographies will determine their long-term growth prospects.

At the price band of Rs 651-732, Unity is likely to list at 30-34 times its expected earnings for 2006-07 on a post-issue basis. While a few established players command this valuation, similar-sized peers such as Valecha Engineering still trade at a significant discount to Unity's offer price.

The sector is also likely to witness more players entering the market in the near future. This throws open a number of options for investors looking for exposure in the infrastructure space.

Objects of issue

Unity derives a chunk of its revenues from building varied civil structures. It is also into other infrastructure works such as roads, bridges and irrigation projects. The company proposes to use the proceeds of the issue to procure capital equipment, repay debt and invest in build-operate-transfer (BOT) projects. The expanded equity base will be Rs 13 crore.

Lacking an edge

At Rs 1,391 crore, Unity's order-book is about five times the 2004-05 revenues. About 50 per cent of the orders are in the civil construction space. Transportation and irrigation constitute 18 per cent and 32 per cent of the orders respectively. Unity is also geographically less diversified with 80 per cent of its projects in Maharashtra.

While irrigation projects can bring reasonable margins, civil structuring and roadways are unlikely to fetch high returns.

In the civil structure segment, Unity may not be able to gain advantage over the unorganised market unless it is able to carve itself as an EPC (engineering, procurement and construction) contractor. The company now does not have in-house designing capability and cannot be classified as an integrated player.

Quite a few small companies that came up with offers recently have niche businesses that set them apart from the rest. While Tantia Construction has an edge in railway infrastructure, Sadbhav Engineering had gained entry into the road BOT space in consortium with Gammon India. As of now Unity Infraprojects does not have any such distinguishing feature to command a high valuation.

The company has, however, entered into a joint venture with IVRCL Infrastructures and Projects for a lift irrigation project in Maharashtra. This may aid in qualifying for similar projects.

Unity's venture into Andhra Pradesh is also a positive as the State has a high budget allocation for irrigation projects. It may have to, however, compete with bigger players such as Nagarjuna Constructions.

Joint ventures

Apart from the understanding with IVRCL, Unity does not have joint venture with frontline companies to gain entry into areas such as BOT projects. In its tie-up with Patel Engineering the latter's holding is now just one per cent. Unity's plan to enter high-potential project segments may depend on its ability to forge ties with technically qualified players.


With revenues of Rs 222 crore as of December 2005, Unity Infraprojects saw a jump in operating profit margins from 8 to 13.5 per cent.

If the company is able to move away from fixed price contracts to projects with escalation clauses, it may be able to sustain margins. Forty per cent of the revenues derived up to December 2005 was from fixed-price contracts.

Offer details: The offer is open from May 19 to 24. DSP Merrill Lynch is the lead manager to this issue.