Author: Prashanth Krish

BSE and NSE combined have one of the largest number of listed companies in comparison to any other country but that number hides the fact that a lot many of them are very inactive and highly illiquid. This illiquidity is used by unscrupulous brokers / traders to actively manipulate the stock. Much of this is done via round tripping where a set of individuals buy and sell among themselves while at the same time ensuing that the price is on a continuous bullish path. Once the stock reaches a certain level, positive news start to flow about the company and volumes become higher as retail folks enter into the stock. The stock generally does trade higher even as the early entrants make a quick exit and when its finally in the hands of the retail (read weak hands), the stock starts to plummet not due to selling but lack of buying. The concept is known as Pump & Dump and is active and visible in many a stock.

Let me take the example of one company – Starcom Information Technology Ltd earlier known as Jatia Finance Limited. The data I have is from 2008 onwards when the stock was relisted though its original listing happened in 1996. The stock traded in single digits till 2000 when it got suspended (most probably, not sure). It came back in a new avatar in 2008 and got relisted at twice the price of delisting. The stock has no financials backing up but still is currently trading at 344 commanding a market cap of 172 crores. The last results available for December seem to show it having Zero revenue and a loss on account.

More interesting than the fact that it has gone up so much is the way it went up. From last April when it was trading at 87 it has reached the figure of today with an average trade per day of 8.40. Even this average is reached due to a few days of higher number of trades. Of the 195 days it has traded in the above period, it has had 1 or two trades on 52 occasions. It would have been virtually impossible for a retail trader to Buy or Sell such shares.

Such shares are dime a dozen on BSE and in a attempt to ensure liquidity is available, SEBI has now come out with a concept of Call Auction. The Call Auction is not entirely new since markets have been using Call Auction to determine the opening price (this after the lack of time and orders on the day after UPA won the 2^nd time resulted in a upper freeze).

What is Call Auction.

From Investopedia: At a call auction, participants place orders to buy or sell units at certain buying or selling prices. Orders collected during a call auction are matched to form a contract. Call auction rules vary by auction.

Here is what happens in the Indian scenario;

The call auction will be done at every hour starting from 09:30 hours. Following are the steps

Step 1: Clients will be able to place Orders / Modify the same or Cancel the same for the first 45 minutes of the hour. So, from 9:30 to 10:14 to 10: 15, such action will be allowed (the last minute is not known to ensure that its random in nature).

Step 2: Once 45 minutes are up, the entry options are closed and the orders matched. This will last for 8 minutes and end at 10:23.

Step 3: The next 7 minutes are buffer time to purge all existing orders that were not executed as well as closing out the current session and getting the price ready for the next session.

SEBI said stocks having an average daily trading volume of less than 10,000 shares with the average daily number of trades of less than 50 and classified as illiquid by all stock exchanges (where the scrip had been listed) as criteria for illiquidity.

The above setup which is now being implemented seems to have raised some hassles. But I for one believe, this is a positive step that will go a long way in providing liquidity for a great number of shares as also restricting the rampant manipulation that takes place under the current open market operations.

I am personally of the opinion that genuine investors are better off not investing in stocks which are illiquid since when one wants to exit, there may not be a buyer in sight and the slippage cost will be huge.

It does not matter if a stock has gone up 200% if the liquidity is so low that one cannot exit 100 shares without a major slippage. This will be avoided to a certain extent by the above procedure.

The alternative which is practised in most major developed markets is to have market makers who are and shall provide two way quotes at any given point of time. If India too follows such a policy, that shall ensure a decent spread with any investor being sure of an exit when he wants to instead of exiting when the buyer makes an bid.

While I have for a very long time encountered guys downright hostile about India, Social Media seems to have accelerated that process somewhat. Twitter seems to host a lot of guys who seem to see nothing positive about India. Of course there is a huge gulf between thsoe who are pro-congress and those against. For the former, everything is a positive and for the later, nothing is. But as they say “The Truth Lies Somewhere in the Middle” which I believe applies equally well for India as well.

History they say is a wonderful teacher. Too bad we don’t listen to it. We take bits and pieces of it that suits our agenda while ignoring the rest. Many for instance seem to suggest that India is what it is (a failure) because of our first Prime Minister, Jawaharlal Nehru was said to be romantically linked to Edwina Mountbatten.

While that information has been in public domain for long, what is interesting is that it now seems to be bigger than his other mistakes including but not limited to his views on Socialism vs Capitalism.

 But what interests me more is that, while there are a lot of guys who dislike India for what it is, it has not stopped them from taking advantage, be it the cheap cost of living (by their standards) or the good cheap schooling that is available. In fact, recently one acquaintance of mine went on to suggest that he shall send his son to study outside once he finished his college. While I wondered why then and why not now, I dare not ask him at what to me seemed like pure hypocrisy.

 But the key question we should ask ourselves is, Are all things bad here and All things good outside? Is the Glass Half Empty or Half Full? Is there a future for the country despite its failings or are we already doomed?

 As the saying goes, The grass is always greener on the other side. We presume to know the positives of other countries while ignoring their failings. We compare their Institutions to ours without thinking for a moment as to how they came out to that level. Comparing Harvard to any Institution in India makes little sense since just like Rome wasn’t build in a day, neither did Harvard. Harvard for instance is the oldest running University with Billions in endowments. Indian Institutions on the other hand aren’t even half that old and many have issues in even running them due to paucity of funds, let alone have funds to invest in other asset classes.

That said, like a lot I do believe that we could have achieved a lot more than what we have, but what we have is what who we are and we have to make do with that. Yes, many of our politicians are nothing less than scoundrels, but a search on Google would show that not many citizens are proud of their politicians, no matter how good we feel about the country from the outside.

 India is a country like no other. You can travel a 1000 kilometers in United States and find little difference in terms of either culture or language or customs, in India travelling just a 100 kilometres (especially in South) can show the huge change. I was born and have lived my entire life in the state of Karnataka. While Karnataka has a Official Language of Kannada which is the dominant language used through the state, there is great deal of difference in usage of words and syntax across the region.

Before the British colonized India, India as a entity was never there. While great kings like Ashoka, Akbar and Chandragupta Maurya at different times had control of nearly the whole of India, not many were able to conquer kingdoms south of the Vindhya’s. And of course, Assam and the North East never came under any king of Delhi except for a very brief period when India was ruled by Aurangzeb.

Its this history and the wide difference that made Winston Churchill say  “India is just a geographical entity. It is no more a country than the equator”. It was matter of great doubt as to whether India will remain a single geographical entity for even 10 years after Independence or would it disintegrate into small provinces like it was before the coming of the British.

We believe that our politicians are the worst creatures in the world while first world politicians are like a baby who would not know what bribes mean. But is that really so? Are we ourselves squeaky clean to be able to point fingers at others? In Tirupati temple, the ability to pay directly corresponds to the amount of time you have to wait in a Queue. More the payment (with a official receipt to boot), lesser the waiting time. And we never complain as to why temple needs to distinguish between those with the ability to pay and those without.

There is a saying in the Indian scriptures which says ‘Yatha Raja Tatha Praja”. We seem to have used it to conveniently hide the fact that we ourselves aren’t angels either. While its true that there is a lot of corruption at the top, it does not codone the small corrupt acts we act upon. Its time I believe we should hold ourselves to account for our Omission and Commissions. After all, its only from the bottom feeder that even the big whale survives. Take that out and the top have nothing to feed upon.

I believe that there is a lot of things for which we should be proud. But most of us seem more interested in pointing and re-pointing to our weakness than our strengths, focus of on our failures than our successes and overall become pessimistic instead of being objective and hence optimistic. When a person is facing bad times, we say “Bad times don’t last forever”. Why should not we accept that things can and will change here too?

Writing a blog on Narendra Modi is always risky. You tend to get branded one way or the other, there just does not seem to be any middle ground. Its either you love modi (and get called as a fan boy) or hate modi (and get called with many names).

But like it or not, I believe there has been no other politician who instils both fear and hope and neither there is a politician about whom so many have written so much

Riots is defined in Wikipedia as under

“A riot is a form of civil disorder characterized often by what is thought of as disorganized groups lashing out in a sudden and intense rash of violence against authority, property or people. While individuals may attempt to lead or control a riot, riots are thought to be typically chaotic and exhibit herd behaviour, and usually generated by civil unrest.”

Modi was (in his view), was the person at the right place at the right time and he has like it or capitalized it big time. India has seen hundreds of riots, some small, some  bigger than 2002. What changed in 2002 was the fact that it was the first that a Electronic Media coming of age was able to document and report live. While most other riots were limited in space and causalities, the Gujarat riots was wide spread and the casualty figure was higher than most.

While most of the focus has been on one man (Modi), what has been missed is more than what is being debated. Its not normal for instance that people suddenly start pelting neighbours with stones or burn them to death. And there are quite a few things that are the characteristics of only India. We just don’t have the infrastructure to deal with the riots when they happen. Most cities for example have policemen with just a lathi to do the duty. While there are reserve police which are called when things start to get out of hand, its usually late in the day. Adding to that is the fact that since the Police department comes under the Home Ministry, its hands are effectively tied. 

While Riots generally start off with a simple issue, the underlying reason is usually more than that. Take for instance the Riots in England in 2011. What started off as a simple stray case of police having had to shoot a suspect turned into a full fledged war between the police and protestors over many cities. The reasons ascribed range from massive unemployment among blacks (who are a minority community in UK) to social deprivation to family breakdowns.

But what differentiates Riots in India with elsewhere is not just the speed with which it’s controlled (and with limited human causalities) but also how the law is implemented. While the Riots took place in early August in England, by September much of the sentencing of those convicted was over. Compared to that, we take decades to even start writing a charge-sheet.

For instance  Laloo Prasad Yadav has recently been charge-sheeted over a scam that took place in 1996.

“Justice delayed is justice denied” is a legal maxim meaning that if legal redress is available for a party that has suffered some injury, but is not forthcoming in a timely fashion, it is effectively the same as having no redress at all.

By delaying justice, it does 2 things. The person who is on the wrong side of the law is effectively being told that no matter what, its unlikely that he will ever be prosecuted and 2 since the guy who has been wronged would feel that it would have been better for him to take the law in his own hands and meet out the justice.

What we also lack is something like the United States Federal Witness Protection Program. Most high profile cases hence end up having to acquit the alleged victims due to witness turning hostile. Without a dedicated program such as the one run in

US, its faulty to even assume that convictions where the witness testimony is crucial will ever happen since risk of intimidation and other methods of manipulation remain high.

The big question is, Will the government contemplate setting things right or should we wait for another pressure point to activate yet another tragedy?

Dear MMS,

First of all, I am not a celebrity nor a supporter of your party nor a politician by any length of imagination. So, this open letter may remain just that a open post with no one reading. Still I felt the need to write this since for small persons like me, the Internet is the only way to express our views and feel satisfied that I / we have done our duty in trying to put across our views on how the country should march ahead (not that you have a deficit in the number of Advisors, I think you would have one too many).

Till 2004, you were known as the man who opened up India‘s Economy, the man who could be looked forward to a great and glorious India. A man who was kept on the same pedestal as Nehru & Gandhi. If Nehru and Gandhi brought us Independence in one way, you brought for a large majority of us, Independence in another way – Financial Independence so as to speak.

While getting jobs were a major issue in Pre MMS era, Attrition came to be known as the key word post 2000. But post 2004, when the we had the dream team (think of it as the replica of The All-Time ODI Dream Team in Cricket) with you being the Prime Minister and Chidambaram being the Finance Minister, our hopes have kept on sinking. While first it was said that the Left which was the major cause of you having to neglect your core philosophies, post the Nuclear deal, even you have lost that excuse. Its now as if that you and the team are no more the same that was in 1992.

It is in this environment that you came up with FDI and I for one felt happy that maybe finally the real MMS is beginning to take charge. While its another matter that you were made to with-draw, the fact that you did take the call gladdens my heart with hope that maybe not everything has gone to dogs. Maybe there is still some hope left despite the fact that we have now lost close to 7 years which will take a toll in the future. A study I read said that any major reforms took 5 years for its full benefits to be visible. So the good deeds done during 1999-2004 have had a major play in my opinion (alongwith the global boom in everything). But now we are back to a stage where we either have to take crucial decisions or let others (China, Brazil, even smaller countries) walk away with the glory of the win while we continue to whine about on our state of affairs.

One of the biggest problems facing India is lack of Infrastructure. Every city is said to be in ruin (be in Mumbai or Bangalore, we have our fair share of problems that will take years if not decades to resolve), connectivity is missing for a large part of India. Connectivity is carried out in 2 major ways – Road and Rail. While there has been some amount of progress in Road

Transportation, we for some reason have left the Railways to rot (though compared to Pakistan, we seem to have kept it in much better shape – the one we were handed over by the British).

When we got Independence, the Railways occupied the dominant position of transport in India. But since then it has been on a steady decline. While we have minister after minister announcing launching of new trains (most of them to their home states), we are also seeing a gradual erosion in the infrastructure which is being blamed for the number of accidents that happen regularly.

The Railways have been loosing market share for a long time now. While it commanded 78.50% of Freight Traffic and 60% of Passenger Traffic in 1950-51, this has now come down to 25.75% and 17.68% (Please see the pic taken from a report here http://twitpic.com/7r5iss ). This despite the fact that Rail Transport is one of the cheapest and most efficient way to transport goods and people. But without adequate infrastructure, people are forced to check out other means even if that means paying extra. After all, time is money for everyone and one cannot compensate on time in order to save a few bucks.

One reason I fathom for this kind of fall has been the fact that while on one hand the Railways by themselves having determined that they are social institutions and hence cannot charge higher fares are unable to raise fresh resources and on other hand, the government which is always short of cash is unable to fund it for developing better infrastructure. While we seem to have 10 Billion Dollars to save one single Airline, we don’t have similar amounts to ensure that more infrastructure is developed by Railways which in turn will give a strong boost to the Economy and the hinterland in India as well.

One of the best ways to generate money is to dipose of the state owned Public Sector Enterprises. Most of them are on the way downhill with one after another going into loss. But if the same can be rid off and when I say sell, its not Sell to the Public via IPO at inflated prices – aka NMDC / NHPC among others but Sell in the way the NDA government did – total disinvestment. The amount so generated can be put to better use generating more employment via Infrastructural projects than supporting a couple of thousand staff (all of whom will not get retrenched either, the sale can have conditions for the same).

In my opinion, it would take the disinvestment of just 1 or 2 PSU’s to generate a sum of around 1 Lakh Crore per year. If this entire amount was given to Railways for putting into development of infrastructure, I can assure you that within the time that this government will end, the amount of infrastructure development by the Railways will match or even put into shame the amount of infrastructure development done during the last few decades.

All it needs is someone high enough to take the call and that person can be you. With Didi being in charge of Railways, I am sure she won’t object to the sale if it was promised that the entire amount will come to the Railways for use in developing new infrastruture.

So, can you take such a call?

Regards

An Aam Admi

PS: A real good report on Modal Split between Rail and Road Modes of Transport in India – Prosenjit Dey Chaudhury can be read here http://www.vikalpa.com/pdf/articles/2005/2005_jan_mar_17_33.pdf

 

Hello,

I am currently half way through the Book – Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed and its already making me scared. Scared not about the possibility that some day we may enter into another world war but scared that any financial implosion can have devastating consequences on a lot of people in India. People like my dad who after working for decades now is depend upon the bank interest that he gets for the deposits he has made.

Like most Indians, he is scared to stocks & has not much interest in investing in real estate which has meant that majority of his mearage savings are in the bank. Right now, he is literally happy to get as much as 10-11% interest on his deposits especially since they being invested in Public Sector banks, carry very little risk. While the bank risk of a bank defaulting & defrauding investors is not a worry I have (it has not happened in the last few decades) but am more worried about the Rupee loosing value to a extent that a default is not even scary.

As countries grow and money is continuously printed, the value of money does shrink. Without this, we will have no inflation and hence zero growth & in a way start getting into deflation. But on the other hand, too much of inflation too is pretty bad. On one hand, the value of the rupee keeps going down while prices move in the opposite direction. But interest rates have a limit & above a certain level, inflation can take a path of its own regardless of the underlying fundamentals.

For some time now, I have been bearish on the Indian Markets due to a variety of reasons including the continuing saga in Europe. But as I read this book, I realize the gravity of the problem that can crop up if things do not go as per the ECB plan. By removing the Prime Minister George Papandreou, Greece and hence the Euro may have gained some time, but I believe it’s just a matter of time before Greek either defaults or has to be supplanted with more money to ensure that it does not go under.

But Greece is the least of the problems, problems are spreading across the Euro Zone and it’s difficult if not outright impossible for the ECB to take evasive action & limit the domino effects that it can have. Interst rates are already rising for other European nations since the Greek episode has made investors wary of financing them cheap. Also the way the Greece situation is being resolved has meant that those who bought Insurance against such a scenario. New York times reports and I quote

“The deal to allow Greece to write off 50 percent of its debts to private investors without setting off credit default insurance protection has also left many investors feeling vulnerable”

This has meant that if similar procedure is followed in other countries, those long on the bonds despite having adequate hedge by way of Credit Default Insurance may still have to take a significant loss. Since this risk has to be considered & there is no protection, the only way is to ask for higher interest for the additional risk they are bearing.

Today,  Mohit Satyanand, a noted Economy / Fianance writer for Outlook Money tweeted that 10-year GOI bond yields crossed 9%. This is pretty high compared to historical standards but since our GDP is growing around the same levels, its atleast acceptable in a way for the time being. On the other hand, a country like Italy which had a GDP growth of 1.5% is now paying around 6.5% for a 1 Year Bond. This is way beyond it’s capacity and its a sure fire way towards disaster.

All this is happening despite ECB buying bonds of all the ailing countries as much as it can. The question that comes is how much more can they go and what next. The Interest that ECB is itself paying is going through the roof and it will have its implications. When they cannot sell any more bonds (demand is already down with today being one of the low days when they could just get to fill up the ask), the only option left will be to print notes and buy the bonds. This is what the US Fed did when it faced its Lehman moment and has in a way been continuing to do till now.

Unfortunately mindless printing of currency does have implications. Money so created has to go somewhere and the way it went before was to commodities / bullion resulting in strong rallies across the board. This has very strong negative implications for India since on one hand, we are faced with a slowing economy, a rising interest rate structure, a depreciating rupee and if commodities go through the roof, it has to be the final nail in our coffin.

RBI is near to exhausting all its mechanisms (normal ones) under which it could bring down the inflation rates without there being much destruction of long term growth. They have tried this despite reforms not initiated by the government which has been the single biggest reason for RBI’s failure to control inflation. Continuously raising interest rates can lead to either of the following 2 scenarios

1. Stagflation: Due to continuous rise in commodities (and this will naturally include food based items as well), we will have a strong inflation but growth will either stagnate or worse start to fall off.

2. Deflation: I doubt that with the kind of money floating around, we will face deflation any time soon. Deflation can happen if RBI raises interest rate to such an extent that growth goes into the negative sphere.

No matter which of the above 2 happens, we will be screwed, but the bigger problem is how our banks will cope with the problem and what effect it will have on the purchasing power of the Rupee. Honestly, I really have no idea what is the best way to preserve our capital since a fall from grace will affect every asset class across the barrier. The only difference will be what will come back & what will not.

The above view may look like a dire prediction and may not happen, but remember, Time and Tide wait for none.

Cheers 

Prashanth