Managing China funds: A lesson for legends like Anthony Bolton
Anthony Bolton, the legendary money manager failed in China, a country where the rules regarding fraud are hardly relevant since the government has a monopoly on information. Mr Bolton not only violated his own rules of investment but he failed to learn the Chinese ones
Anthony Bolton is a legendary money manager. He managed Fidelity International Special Situations Fund for 28 years. During that time the fund managed to deliver an incredible annualized return of 19%. Among Mr Bolton’s many accomplishments was to predict both the collapse of the market and the beginning of the bull market. In both cases he was a bit early. He warned that the bull market was overstretched in November of 2006, a year before it hit its top, and he predicted a turnaround in the markets in October of 2008, five months before it hit the bottom. Still if you had followed these recommendations you would have missed out on the top 15% and lost about 25%, but only for seven months. Over time you would done very, very well.
In 2010 Mr Bolton was tempted out of retirement to apply his legendary skills to the greatest growth market, China. What better place for a money manager of his calibre? China was the fastest growing economy on the planet. Mr Bolton hailed it as “investment opportunity of the next decade”. So in April 2010 he started his new fund, Fidelity China Special Situations PLC (FCSS.L), with about $700 million dollars and began to invest in China. But it didn’t work.
Initially the fund did well. By November 2011 it had increased from 100 British pound sterling  (GBP) to 124 GBP. Then things began to go wrong. It fell to a low of 71 GBP last September and is now trading at 83 GBP, off 17% over three years. In contrast the S&P 500 has increased 30% over the same period of time. What went wrong? Quite simple. The rules were different and no one told Mr Bolton.  
Western managers are used to dealing with developed market economies subject to enforced rules and regulations. Over many decades, financial analysts and economists have done countless studies into how these markets actually work. They use a variety of analytic financial tools to try to determine value. For example the most general tool is the earnings per share. The most common measure of how much money the company is earning for its shareholders. Money managers are always trying to determine if the company is consistent. Is it transparent? Do the managers have a good track record of creating value for their shareholders? Is it increasing market share? Can the company’s growth be translated into corporate profits?
Money managers employ vast armies of analysts, each vying with each other to discover some salient fact about the company to determine if in fact there is substance to its numbers. Although Mr Bolton did not speak or read Chinese he could rely on a very experienced team. Fidelity had an established research presence in China. Its flagship China Focus Fund managed stocks worth $4 billion. It is managed by Martha Wang, who was born, raised and educated in China. She has over 20 years of experience investing in China. In addition there were 30 regional analysts and 18 portfolio managers. So Mr Bolton had the brain power to analyze a market, a western market.
But the Chinese market and most emerging markets do not work with the same rules. China is a particular problem because of the level of government involvement in the economy. The vast preponderance, if not all, of listed companies are at least majority state owned. Senior management appointments are made by the Communist party.  Even fully private companies are not free from at least government influence over the management. For state-owned companies profit and shareholder value often takes second place to political considerations.
Even when the management does focus on business yardsticks for success are different than in Western countries. Western managers will focus on earnings growth and profit. Chinese are more interested in size, market share and increasing revenue than margins. 
The legal system in developed countries is taken for granted by investors. Since it has been around for so long and is generally enforced, its affects on the market and valuation are unseen. Not so in China. China has laws, but they are enforced selectively when they are enforced at all. Recently China’s theft of US intellectual property has been in the headlines. But there is little to keep the Chinese from stealing from each other. So a major competitive advantage could disappear overnight. 
Over ten years ago when I wrote Investing in China, I quoted a famous Chinese scholar who made the statement that the stock market was little more than a casino. Little has changed. Share value is driven often by speculation. The market is subject to manipulation, insider trading and government interference. While China’s economy has grown dramatically over the past five years, the Shanghai Composite index is actually lower than it was in June 2009.
Mr Bolton’s first mistake was not to translate his tool kit to adapt to socialism with the Chinese characteristic. His second was much greater. He also ignored the most important factor for any investor—the need for complete, timely and accurate information. Western investors just assume that people are telling them the truth. They have not bothered to do a simple economic analysis. Information has value. It is accurate only if the economic incentives are less than the legal disincentives. If you can commit fraud without punishment, then there is no reason to tell the truth. In China the rules regarding fraud are hardly relevant in a country where the government has a monopoly on information.
So Mr Bolton trusted management to his loss. For example he invested in China Integrated Companies which lost 90% of its value after it was accused of fraud and its auditor KPMG resigned. He also lost money by investing in a small-cap fund whose main asset was China Integrated Energy (CBEH). It had falsely reported the level of sales of its bio-diesel product. Mr Bolton thought that his best bet was to beef up his staff for better due diligence and remained optimistic about China. But more staff is not going to help if managers are deliberately trying to distort their numbers. It is a fundamental principal of law and economics that managers as agents will always act in their own best interests unless there is a sufficient legal disincentive.
Finally Mr Bolton failed because he disregarded his own rules. In an interview in 2009 Mr Bolton said he looked at three factors. These were the scale of the rise and fall of the markets relative to their historical averages. Second he uses several measures like put/call ratios, sentiment of advisors, and mutual funds cash positions to judge investor sentiment. Finally he looked at long-term (30 to 40 year) market valuation to see how far valuations had deviated from their norm. None of this information, which Mr Bolton deems so essential, is available in China. So Mr Bolton not only violated his own rules he failed to learn the Chinese ones.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)


RTI Judgement Series: PIO and FAA failed to discharge their duties
The CIC said this was a blatant case where without any reasonable cause, both the PIO and FAA denied information to an elderly person about an affidavit claimed to have been filed by him. This is the 119th in a series of important judgements given by former Central Information Commissioner Shailesh Gandhi that can be used or quoted in an RTI application
The Central Information Commission (CIC), while allowing an appeal, issued a show-cause notice to the Public Information Officer (PIO) in the Department of Trade and Taxes (DTT) at the Government of the National Capital Territory of Delhi (GNCTD) for not furnishing information within the prescribed time limit under the Right to Information (RTI) Act.
While giving this judgement on 15 October 2009, Shailesh Gandhi, the then Central Information Commissioner, said, “The PIO and First Appellate Authority (FAA) have both failed to discharge their duties under the RTI Act. This is blatantly a case where without any reasonable cause information has been denied to an elderly person about the affidavit claim to have been given by him.”
Delhi resident Radhey Shyam Aggarwal, on 15 June 2009, sought information regarding copy of a no objection certificate and affidavit filed by him from the PIO of DTT at the GNCTD. Here is the information he sought from the PIO...
Copy of NOC/Affidavit of Radhey Shayam Aggarwal from the file of M/s Aggarwal Traders, TIN No.  in TIN/VAT no.07090325518 applied by Arun Kumar Gupta from Ward No19.
The PIO denied the information. He stated, “It is to inform you that as per Section 98 of Delhi Value Added Tax (DVAT) Act such information is prohibited, the same cannot be provided under RTI Act.”
Aggarwal, not satisfied with the reply, filed his first appeal. While upholding the PIO’s reply, the FAA in his order said, “I have gone through the reply given by the PIO, and do not find any infirmity in the same.  It is true that the PIO is prohibited under Section 98 of the DVAT Act to divulge the information to a third party.  Rather I would like to add M/s Aggarwal Traders has a fiduciary relationship with the Department of Trade & Taxes.  And as per Section 8 of the RTI Act, 2005, the PIO is not obliged to give any information relating to the said dealer to a third party (in this case the appellant).”
Not satisfied with the PIO’s reply and FAA’s order, Aggarwal, then approached the CIC. In his second appeal, he stated, “The PIO’s reply is illegal. The FAA has wrongly upheld the response of the PIO by holding that the PIO is prohibited under Section 98 of the DVAT Act to divulge the information to a third party and that M/s Aggarwal Traders has a fiduciary relationship with the Department of Trade & Taxes.”
During the hearing, Mr Gandhi, the then CIC, noted that the PIO without any application of mind has refused to give the information claiming that the VAT action does not permit to give the information. 
“In the instant case the appellant, an 80 year old senior citizen, had asked for a copy of an affidavit which he alleges was falsely given in his name to the Department. The PIO refused to give him the information purportedly given by him,” the CIC said.
Mr Gandhi said, “The FAA, in what appears to be collusion to deny and harass the citizen, suddenly claimed that the department gets the information in a fiduciary relationship. The department obtains the information in fulfilment of regulatory requirements but the FAA apparently would like to claim other relationships with people who prevent false affidavits.”
While allowing the appeal, the CIC directed the PIO to provide the information to Aggarwal before 30 October 2009.
Further finding the PIO guilty of not furnishing information within the time specified under sub-section (1) of Section 7 by not replying within 30 days, as per the requirement of the RTI Act, the Commission issued a show-cause notice to him.
Decision No. CIC/SG/A/2009/002075/5158
Appeal No. CIC/SG/A/2009/002075
Appellant                                             : Radhey Shyam Aggarwal
Respondent                                         : NS Bhoria
                                                                  Public Information Officer & VATO
                                                                  Govt. of NCT of Delhi
                                                                  Zone-III Office of Deputy Commissioner
                                                                  Deptt. of Trade and Taxes, Room No. 1201,
                                                                  12th Floor, Vyapar Bhawan,
                                                                  New Delhi-11002. 




4 years ago

I have filed F A to Office of CIC, and then Second Appeal to CIC of Chennai Tamil Nadu.More than 6 months were passed no responses from them who are the controlling / implementing of RTI Act in Tamil Nadu. So, Kindly confirm for the issue of final orders and the copy of Judgement if released in Appeal No. CIC/SG/A/2009/002075.
My e mail Id: [email protected]

Economy & Nation Exclusive
Allegations of NDTV’s Many Shenanigans

Sanjay Dutt, director of Quantum Securities and a long-term shareholder of NDTV has alleged that chairman Prannoy Roy received irregular promoter funding of Rs375 crore by pledging NDTV shares which, according to him, is against the RBI rules

In August 2011, Moneylife wrote: “NDTV got listed in 2004 and is trading below its listed price after seven years. It has given a negative return of 19% compounded in the past five years and a total shareholder return (TSR) of negative 66% for the same period. Its viewership claims, like those of all TV channels, are impossible to verify. Its credibility is at a nadir (after the recent phone-tapping controversy) and its finances are in a mess. NDTV has rarely made money from operations. For the past few years, its consolidated operations have been making cash losses and it has been running on money made by selling loss-making subsidiaries to strategic investors.”

We further pointed out how marquee institutional investors always line up to acquire this loss-making company’s bits and pieces and exit at a loss at regular intervals, only to make way for other big name investors! The latest was DE Shaw which provided an exit to Goldman Sachs in 2011 by acquiring a 14.2% stake. After this, NDTV acquired a significant investor—Abhay Oswal, who owns nearly 15% of its equity but seems to have no presence on NDTV’s board of directors. Mr Oswal happens to be the father-in-law of Navin Jindal, an industrialist and Congress Member of Parliament.

In all these years, no investor has complained, or uttered a word of public criticism, about the losses and operations of this strange company. But, a few weeks ago, Moneylife received an email from Sanjay Dutt, director of Quantum Securities P Ltd, a name familiar to all those who watch the business TV regularly. Mr Dutt said that his firm is a long-term shareholder of NDTV and holds over 1% of its equity capital. He also disclosed that he had worked as a consultant with the group from 2006 to 2008 and has been a personal friend of the current CEO for over 15 years. But, more about that later. Mr Dutt was writing to make some startling allegations about NDTV’s capital structure.


He alleges that chairman Prannoy Roy received irregular promoter funding to the tune of a massive Rs375 crore by pledging NDTV shares which, according to him, is against the Reserve Bank of India (RBI) rules. The loan was made to a company called RRPR Holdings Private Limited in October 2008 against the pledge of NDTV shares.

RRPR Holdings has a capital of only Rs1 lakh and is 100% owned by Prannoy and Radhika Roy, says Mr Dutt in a letter to Dr KC Chakrabarty, RBI deputy governor, in April 2013. RRPR Holdings’ only asset and business is the 29% equity holding of NDTV. He further alleges that the loan to RRPR Holdings was made without even a mandatory haircut and, at times, in excess of the company’s market value. Of course, the loan was backed by the personal guarantee of a director.

Mr Dutt has obtained certified information from the Registrar of Companies (ROC) to back his allegation and written a formal complaint to RBI’s department of banking supervision at the end of April, with copies of his findings. All these documents are also available with Moneylife. Mr Dutt further alleges that the pledge of promoter holding has not been made public, as mandated by the listing agreement of stock exchanges.

I wrote to NDTV’s CEO, Vikram Chandra, seeking a response to Mr Dutt’s allegations. Within a couple of hours, I received a 1,600-word response from KVL Narayan Rao, executive vice chairperson of the NDTV group. Curiously, the letter did not answer Mr Dutt’s simple allegation about promoter funding in violation of RBI norms. Mr Rao wanted a couple of days to respond to those. Instead, he wrote about how Quantum Securities, a brokerage firm, was an active trader in NDTV shares. Mr Rao called Sanjay Dutt a ‘stock market manipulator’ who had settled charges with the Securities & Exchange Board of India (SEBI) by paying Rs53.41 lakh under a consent order.

According to Mr Rao, the company had yet to receive a response from Mr Dutt about whether he had indulged in similar trading in NDTV shares. The SEBI order of January 2013, which is on the regulator’s website, shows that Quantum Securities was accused of synchronised and circular trading in GHCL shares and paid Rs33.41 lakh in a consent deal, while Sanjay Dutt and Prenita Dutt, together, paid Rs15 lakh to settle charges against them.

Mr Rao then goes on to tell us that Sanjay Dutt was a consultant with NDTV and that he was paid a hefty Rs2.6 crore for his services over less than two years. This included several foreign trips to structure overseas subsidiaries for its foray into ‘non-news areas’. He was also given some shares in subsidiary companies which he had to forfeit when he left the company in 2008, allegedly because he could not get along with people.

Mr Rao says that Mr Dutt holds a ‘grudge’ against NDTV and has ‘misused’ and ‘distorted’ confidential information obtained as a consultant to level charges against the company in letters to various regulators as well as to NDTV’s board of directors.

In fact, according to him, Sanjay Dutt’s actions do not fall in the realm of ‘shareholder activism’ but are ‘blackmail, extortion and defamation’ which ‘amount to criminal offences under Indian Penal Code’. 

This then raises another question. Why has NDTV not initiated action against Mr Dutt so far? Clearly, neither side is telling us the whole truth. Mr Dutt is clearly not your usual activist investor; but it is also hard to imagine that a mere ‘grudge’ would motivate him to start a war against an extremely powerful media house like NDTV. As a person who has been in the organisation, Mr Dutt is also fully aware of NDTV’s phenomenal reach and connections in the Congress government.

On the other hand, what is holding NDTV back? Why has it not initiated action against Mr Dutt, if it is fully aware of his allegedly ‘defamatory’ letters to multiple regulators? Is it far more convenient for NDTV to simply use its clout to silence the regulators? Have any of them asked NDTV raised these issues about the frequent changes in its equity capital and Mr Dutt’s allegations?

Since Mr Rao says that Sanjay Dutt has written to NDTV’s board of directors, have the independent directors raised these issues? Surely, all of NDTV is not scared of what Narayan Rao calls Mr Dutt’s ‘bouts of uncontrollable rage and anger’?

Incidentally, Mr Dutt studied at the Doon School, is a chartered accountant, like Prannoy Roy, and is an IIM-Ahmedabad alumnus. The Quantum Securities’ website says that he was with the firm since 1994, but does not mention why he gave it up to act as a consultant to NDTV for the two peak years of the most ferocious bull market that India has seen.

An earlier version of the website listed the economist Dr Surjit Bhalla as a third member of the Quantum Securities management team. Dr Bhalla’s Oxus Fund Management was a division of Quantum. Dr Bhalla is on several SEBI and government committees and used to be close to NDTV, but is now independent.

Ironically, Quantum’s website, at one time, had listed among its ‘prominent’ clients Dr Prannoy Roy. Is there more to this unravelling story than meets the eye so


Here is the detailed letter we received from Mr Rao, after sending this article for printing...

And here is the response from Mr Dutt on Mr Rao's letter...

Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected]




3 years ago

Same information was already came in Sunday-Gardian few years back


4 years ago

Nice article. But my only issue with this is that you should have masked all the email IDs of the indivuduals. You shouldn't have exposed their personal information. Just saying :-)


Sucheta Dalal

In Reply to CHANDRASEKHAR SKS 4 years ago

Yes indeed. Appreciate your feedback. WE will do it right away.


4 years ago

Unfortunately, promoters of most of the public listed companies are interested only in Public funds and not public accountability.

Moreover, chances of well known names misusing the system are higher than an ordinary promoter as they have greater reach amongst the regulators and political leaders.

Jose Koshy

4 years ago

Is it wrong to pledge one's personal holdings and take a Loan ? Not informing the stock exchange will be an issue. Post Oswal buying into NDTV, is Pranoy & Co. still the promoters ? Though the exchange says they hold 61.45 % of the Co.

Debashis Basu

4 years ago

Its a publicly listed company, not private linen


nagesh kini

In Reply to Debashis Basu 4 years ago

There is no distinction between "public" and "private" for the companies' statutory auditors.
They are answerable. But will take shelter under "fiduciary relationship". A right case for the Regulators SEBI for the cos and ICAI for the auditors!
Sometimes even the Auditors' also be subjected to Audit?

R Balakrishnan

In Reply to Debashis Basu 4 years ago

Not in that sense... Just wondering how these listed vehicles become a playground for wrong doing and private dirt gets thrown about.If public shareholders still hang in.. why?

R Balakrishnan

4 years ago

Washing private linen in public?? Is there something to choose between the two? Wonder..

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