We expected a minor rally before a decline, but the decline happened without a minor rally
The domestic market witnessed mayhem among blue-chip stocks today, settling with deep cuts on reports that the government may review the double taxation treaty with Mauritius, a major channel of funds into India. Stock-specific news also contributed to the slide.
The market opened with minor gains, with investors cautious due to concerns over the possible ripple-effect of the debt crisis in Europe. The Sensex resumed trade at 17,925, up 54 points from its previous close and the Nifty was six points higher at 5,372. The opening on the Sensex was its intra-day high and the Nifty scaled its high soon after, touching 5,377.
But the market soon plunged into the red on rumours of a possible default on loan repayment by promoters of GTL. Talk about a likely review of the double taxation avoidance agreement with Mauritius also added to the woes, pushing the indices to the day's low in the first hour of trade. At the intra-day lows, the Sensex dived 557 points to 17,314 and the Nifty retraced 170 points at 5,196.
The ADAG pack-Reliance Communications (down 8.35%), Reliance Infrastructure (down 6.16%), Reliance Capital (down 5.06%) and Reliance Power (down 4.46%)-were hammered down after the announcement on Friday that RCom and Reliance Infra will be replaced on the Sensex by Sun Pharma and Coal India from August.
The market bounced back from the day's low and was range-bound in subsequent trade, ending sharply lower. The Sensex closed at 17,507, a huge 364 points drop and the Nifty finished at 5,258, a 109 points slump.
These closing lows on the Sensex and the Nifty were last seen on 11 February 2011. The market has broken recent bottoms and has reached the level touched four months back. The indices are set to fall further with no immediate support in view. To know where the market will head in the next few days watch for tomorrow's move. If today's lows hold, we can expect some stability.
The advance-decline on the National Stock Exchange was a dismal 153:1281.
The broader indices suffered more. The BSE Mid-cap tanked 3.18% and the BSE Small-cap declined 3.26%.
All sectoral gauges settled lower. The BSE Realty index (down 4.16%) was the top loser. It was followed by BSE Oil & Gas (down 3.42%), BSE IT (down 2.50%), BSE Auto (down 2.46%) and BSE Power (down 2.28%).
The top losers on the Sensex were Reliance Communications (down 7.89%), Reliance Infra (down 6.07%), Tata Motors (down 5.15%), Reliance Industries (down 3.89%) and TCS (down 3.69%). The only gainers were Bharti Airtel (up 2.35%), Hindustan Unilever (up 0.36%) and Hero Honda (up 0.16%).
Markets in Asia, which were mostly in the green in morning trade, settled mixed as Credit Suisse cut its forecast for China's growth in gross domestic product (GDP) for 2012 from 8.9% to 8.5%, citing persistent inflation, slowing growth and continued tightening as the major factors. This apart, Hong Kong Financial Secretary John Tsang expressed caution on the "unusually strong" real estate market. The discouraging situation in Europe, with the key bourses trading lower, also added to the woes.
The Shanghai Composite declined 0.76%, Hang Seng fell by 0.44%, the KLSE Composite fell by 0.27%, the Seoul Composite was 0.60% lower and the Taiwan Weighted tanked 1.22%. On the other hand, the Jakarta Composite gained 0.18%, the Nikkei 225 added 0.03% and the Straits Times rose 0.28%.
Back home, institutional investors-both foreign as well as domestic-were net sellers in the equities segment on Friday. Foreign institutional investors offloaded stocks worth Rs390.56 crore and domestic institutional investors withdrew funds worth Rs35.37 crore.
The subsidy burden has affected the valuations of state-run oil companies and consequently the interests of shareholders. The government must implement the recommendations of the Kirit Parikh Committee to completely decontrol prices of petrol and diesel immediately, as well as remove the burden from upstream companies
For the last so many years, in the name of subsidising petrol, diesel and domestic fuel like kerosene and gas for the people, the Government of India has been passing on a substantial part of the burden of oil subsidy to upstream oil companies, who have faithfully carried out the orders of their masters, by giving large discounts to downstream oil companies, thereby causing a deep dent in their profits year after year. The magnitude of the burden can be gauged from the following figures.
It can be seen from these figures that the upstream oil companies have been bearing a hefty burden of subsidy for the last several years just because the central government, which owns a majority shares in these companies, has been directing them to do so, apparently for the following reasons that have been described in the Kirit Parikh Committee report, 2010.
1. To protect poor consumers, so that they may afford kerosene for lighting which is necessary for those who do not have access to electricity.
2. To provide clean cooking fuels like LPG and kerosene at reasonable cost from the social and environmental angle.
3. To insulate the domestic economy from the volatility in petroleum prices in the world market.
Whatever is the rational for the subsidy, there is no reason to make upstream oil companies suffer in the bargain, as the sword of uncertainty already hangs over them, with the subsidy level changing with the change in international oil prices. In all fairness, the entire subsidy burden should have been met out of the budgetary resources of the government, as protecting the poor and the country's economy is primarily the responsibility of the central government and not that of the oil companies, which should be run purely on commercial lines, more so when they are part-owned by private individuals and institutions.
The three upstream companies ONGC, Oil India and Gail were fully owned by the government till 2004. The government divested a part of the equity of Gail and ONGC in February and March 2004 and in Oil India in September 2009. The shareholding pattern of these three companies as on 31 March 2011 was as under.
Since these companies are no longer fully owned by the central government, the minority share holders of these companies too have suffered on account of this subsidy burden imposed on these companies and they continue to suffer for no fault of theirs. If this subsidy burden was not forced on these upstream companies, they would have been in much better financial health, declared much higher dividends, and their valuations in the stock market would have been much higher than what they are today.
The Kirit Parikh Committee, set up to suggest a viable and sustainable system of pricing of petroleum products, submitted its report on 2 February 2010, and recommended complete decontrol of petrol and diesel, but suggested continuation of subsidy on a much reduced scale for kerosene and LPG gas, as it is consumed by the poorer section of society. Unfortunately, the Committee did not feel it necessary to exempt upstream oil companies from the burden of subsidy and it recommended mopping up a portion of the incremental revenue accruing to ONGC and OIL India from production in those blocks, which were given by the government on nomination basis, much before the New Exploration Licensing Policy (NELP) introduced in January 1999.
The Central Government has not yet fully implemented the recommendations of the Kirit Parikh Committee, except that the pricing of petrol has been decontrolled a few months back. All other recommendations are still to be implemented, which means that there is no respite for the oil companies, who continue to suffer from the uncertainty of the subsidy burden, as the international price of oil continues to be volatile for the last several months.
It is generally perceived that the government is reluctant to completely abolish the oil subsidy, more due to political than economic considerations. Whatever be the reasons, there is no justification for making minority shareholders of these companies suffer, as it amounts to oppression of minority shareholders by the majority shareholder, which is neither ethical nor legal.
Section 397 of the Companies Act provides for relief in cases of such oppression by the majority, and the oppressed shareholders can seek a suitable remedy. But here the majority shareholder being Central Government, Ministry of Corporate Affairs will not be the right forum to get this grievance redressed and the investors may have to seek suitable remedy from an appropriate court.
Another dimension to this subsidy muddle is the upheaval caused in the stock market in respect of the market price of these PSU oil companies. The electronic media is full of statements made either by government officials or the company managements on the different versions of this subsidy, which causes considerable volatility in the stock price of these companies. This artificial volatility is neither healthy for the market, nor desirable from the investors' point of view, and the Securities and Exchange Board of India appears to have not taken any steps to contain such statements.
The invisible part of the subsidy mess is the unquantifiable loss caused to the Central Government due to its not getting the right valuations for these oil companies, as the market does not appreciate the uncertainty hanging over the head of these companies, who otherwise are considered jewels in the crown and the pride of the country. The government has, therefore, been forced to defer further divestment from these companies, hurting government coffers as well.
In the interest of both majority and minority shareholders, the government should not only implement the recommendations of the Kirit Parikh Committee immediately, but also absolve these upstream oil companies from the obligation of subsidy completely, thereby creating an environment of good corporate governance in these companies in which it is the majority shareholder. If it is felt necessary, the government could levy a one-time capital charge on pre-NELP leases granted to these companies as compensation for the loss of revenue in respect of those production blocks, which were leased before the NELP was put in place. This will provide a big relief to upstream oil companies, and minority shareholders of these companies could also breathe a sigh of relief and enjoy the fruits of their investment.
(The author is a banking and financial consultant. He writes for MoneyLife under the pen name 'Gurpur'.)
Customers lured with promises of uninterrupted service are disappointed by repeated disruption due to rain
In the second set of the French Open women's final, Na Li of China fumbled after being in complete control through the first set against Francesca Schiavone of Italy who snatched a 2-0 lead. As the match was heating up, the television screen suddenly turned blue.
Anil Patil (name changed) was left fuming as his Tata Sky connection went blank due to rain showers. "I couldn't watch this very interesting match in which Li beat the defending champion Francesca Schiavone 6-4 7-6(0), as the connection went on and off repeatedly. Li became the first Asian woman to win the grand slam and it's such a pity that I couldn't watch the entire match."
Gaurav Pramanik, another subscriber of Tata Sky, was watching an interesting debate on the International Monetary Fund (IMF) on BBC, when his connection also went off, again due to the rain. "It happens all the time during the rain. If I couldn't watch it live then what is the use?"
Numerous such complaints by people who have subscribed to the direct-to-home (DTH) service reveal that services are commonly down when it rains. Even cloud cover can disrupt the television link. The Internet is crowded with these complaints. Many of these grievances are recorded on www.consumercomplaints.in and www.mouthshut.com.
But while the disruption of service due to the rain is a common phenomenon, it seems that companies promoting their DTH services hide this problem from customers at the time of booking a connection.
Tata Sky's website says, "A few minutes of outage might occur during the rains. This phenomenon is called Rain Outage and happens with DTH platforms across the world. It will result in your television losing reception for some time. We have tried to cut down this time so it might happen only for one or two minutes in a year. This too is automatically detected and gets corrected by itself."
Sun Direct follows suit: "Though provision exists in the uplink system to take care of fading of the signal due to rains, yet heavy rains may result in outage for a few minutes in the DTH signal." DishTV makes a similar claim in the FAQ section on its website.
However, the reality is quite different. Firstly, when you shop on the phone or visit the nearest shop, you are not informed about this 'outage'. Secondly, most of the times services get disrupted for hours on end, while you are left sulking, for not being able to watch your favourite soap or talk show that you must religiously."
Now, some DTH subscribers are going back to the local cable connection due to such problems, which also include visual clarity.
Describing why he switched from Tata Sky back to the set-top box from the cable operator, a senior journalist who requested anonymity said, "During inclement weather conditions I had some problems with the quality of reception from my satellite connection, which is not the case with my cable set-top box. Though customer service was always prompt from Tata Sky's end, I preferred a more pragmatic approach. Again, during the Japanese tsunami, I could tune in to NHK-1 to watch the events unfold live. Tata Sky might have given me this channel, but I would have had to fork out around Rs50 extra (at least) to view the same."
Mariam George, another DTH cutomer who switched to Incablenet because of the repeated interruption in service, said, "Even during moderate rain the connection would go off for hours on end. Two months back, despite no rains, the service didn't function properly for over a month, forcing me to switch my service provider."
She continued, "When I purchased Sun Direct, I wasn't warned about this outage. Despite paying, I was left with no choice but to wait for hours for the service to be re-started."
There are some who are quite satisfied with the DTH service. An insurance analyst residing in the Shivaji Park area says, "It has been more than a year that I took the DTH service and there has been no major problem. There is some interruption periodically during heavy rain, but it is only for a few minutes."
Customers are lured into buying the product with attractive packages and assurances, but the reality is totally different as is evident from the many dissatisfied customers.
Questions about the DTH service addressed to Tata Sky, Sun Direct and Dish TV by e-mail were not answered.