Share prices back in no man’s land: Tuesday Closing Report

While the uptrend has suddenly lost steam, don't expect a sharp selloff

The market came tumbling down today after the Reserve Bank of India (RBI) raised key interest rates by a more-than-expected 50 basis points in the fight against inflation. The Nifty fell below the 5,613 level to close 105 points down at 5,575. But while the uptrend in the market has been interrupted, the drop may not be severe. While today's fall was supported by higher volumes, above the past 10 days' average, in the previous three trading sessions the market had tried to climb higher with a higher high each day.

The market opened marginally higher, tracking its Asian peers that were trading in the positive in early trade. The Nifty resumed trade at 5,688, up eight points from its previous close, and the Sensex opened up 21 points at 18,898. Nervousness ahead of the RBI's quarterly monetary policy review kept the indices range-bound. The indices touched their intra-day high in the first hour, with the Nifty up at 5,702 and the Sensex at 18,945.

But immediately after the announcement of the sharp rate hike, the market plunged and the losses expanded as trade progressed.

The decline hurt all sectoral indices with rate-sensitives like capital goods, realty and banking leading the slide.

The market touched the day's low in the last 30 minutes, with the Nifty falling to 5,560, down 142 points from the day's high. At the day's low the Sensex was down to 18,482. However, the market closed off the lows, the Nifty at 5,575 (down 105 points) and the Sensex at 18,518 (a loss of 353 points).

The advance-decline ratio on the National Stock Exchange (NSE) was 509:1297.

Among the broader indices, the BSE Mid-cap index declined 1.87% and the BSE Small-cap index fell 0.80%.

The BSE Realty index (down 3.55%) was the biggest loser, followed by BSE Capital Goods (down 3.49%), BSE Bankex (down 2.46%), BSE Auto (down 2.14%) and BSE Power (down 1.88%).

TCS (up 0.39%) was the lone gainer among Sensex stocks. The losers were led by Reliance Communications (down 5.53%), BHEL (down 4.46%), DLF (down 4.26%), Mahindra & Mahindra (down 4.20%) and Larsen & Toubro (down 3.84%).

There were three gainers on the Nifty-Power Grid Corporation (up 0.46%), TCS (up 0.27%) and HCL Technologies (up 0.12%). The major losers were RCom (down 6.13%), IDFC (down 6.06%), BHEL (down 4.55%), M&M (down 4.45%) and Kotak Bank (down 4.35%).

The RBI raised key rates by a steep 50 basis points. Accordingly, the repo rate has been increased to 8% from the earlier 7.5% and the reverse repo rate to 7% from 6.5%. The central bank, however, kept the cash reserve ratio (CRR) rate unchanged at 6%. This is the 11th time since March 2010 that the RBI has hiked interest rates in a bid to control inflation.

Markets in Asia registered gains in the range of 0.47% to 1.28% on earnings optimism. The US deadlock over raising its debt ceiling seemed to have taken a backseat, as companies like Cannon, Kao Corporation and Baidu Incorporated reported better-than-expected earnings.

The Shanghai Composite gained 0.53%, the Hang Seng surged 1.25%, Jakarta Composite climbed 1.12%, the KLSE Composite added 0.14%, the Nikkei and the Straits Times rose 0.47% each, the Seoul Composite advanced 0.85% and the Taiwan Weighted jumped 1.28%.

Back home, institutional investors, both foreign and domestic, were net buyers of stocks on Monday. While foreign institutional investors pumped in Rs315.72 crore in shares, domestic institutional investors bought shares worth Rs224.25 crore.

Glenmark Pharmaceuticals today said it has received $15 million (over Rs65 crore) from US-based Salix Pharmaceuticals Inc as an advance payment to upgrade its plant for production of Crofelemer, used for treating diarrhoea. As per the terms of the agreement, Salix had agreed to pay Glenmark $21.6 million (about Rs95 crore) as a commitment fee in five equal annual instalments, with the first annual instalment due in July 2012. Glenmark Pharma rose 2.89% to close at Rs338.50 a share on the NSE.

Onco Therapies, a wholly-owned arm of Strides Arcolab, has received US Foods and Drugs Administration (FDA) approval for Gemcitabine injection, a generic version of chemotherapy drug Gemzar marketed by Eli Lilly and Co. Gemzar is prescribed for the treatment of ovarian cancer, breast cancer and non-small cell lung cancer. The US market for Gemcitabine is around $700 million as per March data. Strides Arcolab was up 1.75% and closed at Rs374.25 on the NSE.

Thermax has entered into an agreement with US-based Amonix, Inc to bring the new concentrated photovoltaic (CPV) technology for solar power generation to India. Through this partnership Amonix will offer high-performance solar power generation systems and the company will be the engineering, procurement and construction (EPC) partner to provide turnkey solutions to customers in India. Thermax declined 3.13% to Rs590.60 a share.


Will PHFI become transparent and accountable under Narayana Murthy?

The Infosys founder’s entry to PHFI only strengthens the dominance of Big Business on the board of the organisation. This organisation which decides on public health policy, remains non-transparent and unaccountable, despite enlargement of government representation on the board

Big Business dominates the governing board of the Public Health Foundation of India (PHFI). As many as 10 of the 31 members of the PHFI governing board represent business groups. They include powerful names such as Mukesh Ambani, Shiv Nadar, Purnendu Chatterjee, Uday Khemka, Harpal Singh and now NR Narayana Murthy. In addition, there are board members who represent entities that have roots in business organisations, such as Ashok Alexander of the Bill and Melinda Gates Foundation.

Their fabulous wealth must have given them some special understanding of public health policy issues and qualified them to be on the board of an institution that will deal with such issues. But what does one say when the government ignores even obvious conflicts of interest, such as the presence on the PHFI board of Harpal Singh, whose Fortis Group is a private healthcare and medical education provider and has a direct interest in the shaping of the government's health policy.

Babus don't stand for transparency

After a recent recast of PHFI, there are as many as seven central government bureaucrats-serving or retired-on its governing board. They include some of the most powerful babus, including TKA Nair, principal secretary to the prime minister, and Dr Montek Singh Ahluwalia, deputy chairman of the Planning Commission.

These 'public servants', however, have shown no interest in making this publicly-funded, public-policy-influencing organisation RTI-compliant and open to scrutiny of the Comptroller and Auditor General, statutory regulators or parliament and legislators. On the contrary, in March this year, Dr Ahluwalia, in his capacity as the deputy chairman of the Planning Commission, reinforced the culture of secrecy and unaccountability by declining a request by Satyanand Mishra, the chief central information commissioner, to bring all public-private partnerships (PPPs) under the RTI Act 2005.

Thus, the organisation that NR Narayana Murthy, chairman emeritus of Infosys Ltd, now chairs, can function like a private club with none of the hassles of transparency and accountability, but large chunks of public-funding available to it.

Figuring out Mr Murthy's motivation

Will Mr Murthy end up lending his 'driven-by-values' reputation to a shadowy and non-transparent organisation?

That question occurred to me partly because I have personal knowledge of Mr Murthy's financial support to the cause of greater transparency in public life through annual RTI Awards organised by Public Cause Research Foundation (PCRF), an NGO that is managed by Arvind Kejriwal, who is currently the main coordinator of the Jan Lokpal movement. (I have worked with PCRF for a year.)

On 12th July, I sent an email to Mr Murthy, explaining the issues surrounding PHFI and underlining the contradiction between his public profile and his new job. I also urged him to use his good offices to do something to unravel the network of unaccountable, private interests behind PHFI, rather than lend his reputation to this deception.

Murthy's reply was prompt, but intriguing. "I have just accepted the position and have not yet met the president of PHFI. Therefore, I cannot comment on the issues you have raised. Please raise specific questions and I will take them up with the authorities and request them to provide answers," he wrote back.

That is curious, because many of the issues I had raised relate to PHFI's non-compliance with the RTI Act and non-disclosure of important information which is apparent from its website.

Here are some key questions about PHFI.
1. What statutory authority and public accountability does PHFI have to arrogate for itself the power to influence public health policy in India, either on its own or through membership of government committees?

2. Why are details of PHFI's constitution and registration not in the public domain?

3. How does PHFI propose to resolve conflict of interest situations arising out of the fact that Fortis Group, a private healthcare and medical education provider with direct interest in shaping public health policy, is represented on its board through Harpal Singh?

4. Since judicial determination of corporate liability in the Bhopal gas tragedy has left a deep sense of injustice, what in PHFI's view should be done in terms of holding polluting industries responsible for the consequences of their action and inaction, and for protecting public health? Does it recommend a new and stricter law?

5. What is PHFI's stand on the public health risks involved in expanding nuclear power generation? What would PHFI suggest in terms of policy?

(This is the second part of a series that began on Monday. To read the first part click, "Will PHFI be any different under Narayana Murthy?" In the third part tomorrow, Kapil Bajaj writes about the answers he received from Mr Murthy in response to the questions raised above. Kapil Bajaj is a Delhi-based freelance journalist and blogger. He has worked for the Press Trust of India, Business Today, and other organizations. His current interests are democracy and public policy.) 


Local level supervision is critical to ensure consumer protection in microfinance

Self-regulation in the microfinance business has not worked for various reasons. Most importantly, it involves the distribution of small sums, almost totally in cash, to people who are vulnerable, and in areas so widely spread out that it is quite impossible to ensure fairness on a day-to-day basis

Just after the microfinance crisis of 2005-06 in Krishna district of Andhra Pradesh, when around 50 branches belonging to two of the then largest microfinance institutions (MFIs) were shut down by the state administration, I heard several microfinance industry stalwarts arguing that a code of conduct, together with competition, would ensure protection of low-income consumers. However, as the events of the last few years have shown, that has sadly not happened and there have been serious violations with regard to the rights of microfinance consumers.

Two aspects are noteworthy here: (1) Neither has competition between many MFIs been able to fully address consumer protection issues on their own, and (2) nor have codes of conduct for responsible lending (often cited as a substitute for regulation) been able to improve the business practices of many MFIs.

One, as far as I have seen, in many places in India (Andhra Pradesh included) competition has merely ensured that some MFIs repeatedly provided a rather limited group of consumers with a flood of standardised loansi resulting in over-lending, multiple-lending, etc. Further, practices surrounding the delivery/distribution of these financial services, including access to transparent information, have always been under question. Therefore, much more than competition is required to ensure efficient and fair markets, especially with regard to delivery of microfinance services to low-income people. This is because MFIs are indeed selling the most attractive product (money) on the face of this planet to a large set of vulnerable people, who are struggling even for their day-to-day survival.

Two, in the Indian microfinance sector, self-regulation, through such voluntary codes of conduct, has not worked because of several reasons: (a) The institutional capacities of industry associations (MFIN or Sa-Dhan) have often been limited. (b) Microfinance markets are highly concentrated and dominated by a small number of large MFIs, as a result of which conflicts of interest are also very high. (c) The legal framework for microfinance services is underdeveloped and perhaps even flawed, as it does not take into account the special nature of microfinance. And, (d) the available laws and regulations (like the Reserve Bank of India's code of conduct for NBFCs) are not enforced due to lack of sufficient (local level) supervision and oversight.

In fact, when the Sa-Dhan code of conduct was introduced in 2006-07, I had a very open mind and felt that it may act as a useful first step, particularly if the regulator (or supervisor) oversaw the implementation of this code and reported on its ground level effectiveness. However, that did not happen and it is clear that mere paper codes are not sufficient to improve business practices and the operational model of MFIs. If only the Sa-Dhan code of 2006-07, or MFIN code of 2009-10 had been implemented on the ground, then, we would not have had the 2010 (and ongoing) microfinance crisis at all.

Hence, it is imperative for the Government to consider introducing special consumer protection provisions (in its regulatory architecture) for microfinance and this must be backed by appropriate (local level) supervision so that the relevant laws and provisions are actually enforced on the ground. I was naïve to think that good central level regulation and supervision (either through the RBI or any other body designated by the Ministry of Finance) would alone be enough to ensure responsible microfinance business. However, based on the lessons from the 2010 crisis, I am now fully convinced that local level supervision is a must to ensure client protection in real time.

Let us try and understand the nature of microfinanceii and the kind of financial assets that it creates. Microfinance loan assets have several peculiarities that need to be carefully considered while devising regulation and supervisory arrangements, especially related to consumer protection-irrespective of whether MFIs (different legal forms) or business correspondents (various types of legal entities) are involved in the last mile financial intermediation. There are four major peculiarities:
> Microfinance loan assets tend to be predominantly small in amounts, but large in number.
> While the transactions are also small, they are, however, numerous (repetitive) and most often, predominantly cash oriented; this makes it difficult to trace the source as well as end use.
> The geographic diversity is huge and these assets tend to be spread over large tracts of remote rural areas and/or thickly populated urban slums which make it rather difficult to physically locate them.
> While many of the lenders ask for KYC documentation, it must be noted that what is provided is far from accurate. Therefore, it is very easy to show the same assets for different lenders and re-deploy the (surplus) funds in other activities, especially given the fact that different people can have the same names and initials in remote villages, whose names can also have been duplicated.{break}
All of these make supervision of micro-finance rather difficult as even establishing the identity of the micro-finance borrower and, hence, the loan asset is rather difficult. This is a very critical issue to be noted. Therefore, unless and until the supervisor has the presence and clout, especially at the local point of sale and collection, which all state governments have, it would be next to impossible to identify the real microfinance clients on the ground and provide them the necessary protection. Make no mistake about this.

Given this scenario, I am fully convinced that neither the RBI nor any other body (with peripheral presence in the states) can provide real protection to low-income microfinance consumers. Without any doubt, given the above physical and other special characteristics of microfinance, it is clear that only the state governments have the wherewithal to supervise microfinance locally and ensure protection on the ground in real time.

That said, let us hereafter try and look at who should supervise microfinance from the perspective of what any consumer protection legislation should do on the ground?

I think that all of us would agree that the focus of any consumer protection legislation must be on the relationship and interaction between a low-income customer and MFI/equivalent delivering various financial services. In broad terms, it must ensure that vulnerable (low-income) clients are not exploited and/or treated unfairly. Again, this calls for close monitoring of the MFI-client relationship and this again can be done only locally, either in the villages or urban slums. Again, this is an aspect that neither the RBI nor any other equivalent body will be able to accomplish effectively. This again is something that only the state governments can possibly do.

The case for state governments to supervise consumer protection in microfinance becomes even stronger when one considers the substantive features of any such consumer protection legislation. To be effective, any consumer protection legislation should ensure that MFIs provide low-income people (consumers) with:

  •  Transparent information - by providing full, plain, adequate and comparable information about the prices, terms and conditions (and inherent risks, if any for the new savings and mutual fund type products) of various microfinance products and services.
  •   Choice of products and services - by ensuring fair, non-fraudulent, non-coercive, legally valid and responsible/reasonable practices in the selling, advertising and marketing of microfinance products and services, and collection of payments, etc.
  •   Appropriate redressal mechanisms - by providing inexpensive and speedy mechanisms to address complaints and resolve disputes in a fair and transparent manner and especially at the local level.
  •  Privacy aspects - by ensuring control over access to personal financial information and its non-use for other (not-so-legal) purposes.

Now this requires local presence, especially at the point of sale and collection. Again, neither the RBI nor any other central institution can monitor this on a day-to-day basis, especially given the scale, remoteness and huge levels of decentralisation prevalent in the Indian microfinance business.

Therefore, the case for having state governments perform the supervisory role, especially with regard to consumer protection aspects, is very strong and cannot be dismissed. Using any other arrangement including regional/state level RBI offices, state level microfinance councils and/or offices of any other central supervisory institution is surely a recipe for disaster. Mark my words, if that were to happen, we will surely be facing a larger microfinance crisis in a few years to come and that is certainly a risk that we simply cannot afford to take.

i Mostly consumption loans and some small production loans
ii As an illustration, I use microfinance loans and the same logic can be derived for other kinds of products. Also, much of Indian microfinance has been really micro-credit.

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments.) 



Nagesh KiniFCA

6 years ago

Yes, Mr. Arurnachalam is absolutely right in calling for a more effective local level supervision on the MFIs.
They have been doing a great job in accessing and funding the hitherto unpenetrated sector in rural india.
The outreach of the Regulator, the RBI is good enough, needs to be enhanced with a result oriented mechanism set up by their own DBOD and with the ICAI.

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