In your interest.
Online Personal Finance Magazine
No beating about the bush.
Overwhelming greed seems to pip investment rationale, even to those who are better equipped with the fundamentals of investment
Each passing day, newspapers and TV channels report how some unscrupulous business house offering miraculous money multiplying ‘opportunities’ to the public vanish into thin air, leaving investors licking deep wallet-wounds. Some retired senior citizen even report to have lost all their hard-earned life-time savings, which they had invested in various get-rich-quick schemes. Reading such reports, one wonders what is it that makes such ‘scheming’ business houses successful, although the press has been reporting Ponzi schemes which inevitably do the vanishing trick leaving investors in the lurch. Don’t such repeated acts of financial cheating make us investing folks all the more wary of tall promises and urge us to ask ourselves-how can these businesses offer such high returns in such a challenging business environment and deteriorating domestic economic conditions?
The success of such schemes can be attributed to several layers of urban and rural population which have been rising slowly but steadily from their hitherto hand-to-mouth existence, to reasonable earnings and living standards due to changing economic fortunes. They have investible surpluses (however meager), which they would want to put away for a better future, but do not have the basic knowledge of investment, let alone financial prudence! This translates into thousands of lower middle class households, eking out a living in Tier-III towns, having small surpluses that are looking for a good return on their small savings. Private finance firms promoted by business houses exploit these conditions and plant ideas of how their schemes could help them beat inflation, whereas bank fixed deposits (FDs) offer interest rates lower than inflation, eating away into their savings!
Every Indian faces challenge on account of inflation eating away into interest bearing, but relatively safe bank deposits. However, the fact remains that the more important aim of any investor - capital protection - is thrown to the winds, while attempting to beat inflation! Loss of capital is one aspect that every investor, big or small, needs to be concerned about. Return on investment is not the only criteria – return of investment is paramount. This is because while comparing investment options, a small investor takes this as given and does not even think of such tragic eventualities as loss of capital. In reality, this question ought to prop up in the minds of small investors. Each time an offer with super-duper returns on their investment are offered to them! Another question that investors do not ask is: How come these business houses can offer such high returns in a competitive business environment? Obviously, overwhelming greed seems to pip investment rationale, even to those who are better equipped with the fundamentals of investment.
There is one important aspect that unscrupulous scheme offers bank on - that investors would not mind investing a small portion of their investible surpluses in such schemes. It is tempting to try it out with smaller amounts and then invest higher amounts in such schemes, if they taste success. Invariably, this trick seems to work for conmen! Several small investors trying out their hand at such get-rich-quick schemes (offering as high as 5%-10% per month at times), translates into cash flows of several crores of rupees for such business houses! Most of the investors barely recover their invested amount. Yet, what is more intriguing is that once they get returns for some months initially, their faith in the scheme soars sky high, prompting them to invest more!
A simple back-of-the-envelope calculation would tell us that even @10% per month, in three months, they have got only 30% of their investment back. Although it is too early to judge them on return of capital, there is a false sense of belief built around returning them 10% per month, when banks cannot offer that even in the whole year! What is more, they even rope in other relatives and friends to invest in the scheme citing their own ‘success’. This is indeed a disastrous step-risking souring of relationships, in addition to the company defaulting on interest or principal repayments.
The basic problem is that most of us undergo education at schools and colleges, in which “investor education” is not taught-this is not part of the syllabus in any stream. Fundamental aspects of investment such as return on investment, safety of invested amount, liquidity and capital appreciation, investor rights etc. are least understood subjects and are learnt only the hard way – by losing money! The one who puts all his savings into such schemes needs to learn about the adage of financial prudence- “Do not putting all your eggs into the same basket” – and remember it when it mattered most.
Several such small investors make fly-by-night financial product offers hugely successful by ‘investing’ their small and big investments. Conmen regroup and form other financial syndicates to come back again to the public to raise monies, only to vanish again and reappear in different avatars. How long will this conning activity continue? Both widespread investor education and strong regulatory controls on raising public moneys are the need of the hour. Each and every one needs to know that ‘too-good-to-be-true’ schemes are just that – Scams! One fervently wishes that enlightened members of the public ought to pledge not to support such schemes with even one rupee of their hard-earned money. Instead, one could donate that rupee saved for a good cause, if one would like to kiss it goodbye anyway!
Social entrepreneurs and activists have been educating the lay public through street skits. Magicians have been debunking fake religious heads for performing “miracles” that are nothing but a sleight of hand. They are spreading the word not to repose “blind faith” on those claiming supernatural powers. Similarly, some financial “wizards” seem to be offering “miracle financial products” to struggling masses and they too ought to be debunked in a similar manner. More recently, ad campaigns on television channels on several social ills, for example, consumer protection body, has launched a series of successful “Jaago Grahak Jaago” ad campaigns on all TV channels. Investor protection campaigns need to be propagated on the same lines.
On one hand, tighter regulations are needed to ensure that any firm raising money from public gets his proposed scheme approved from the Government before embarking on the offer. Also, the Government through the various branches of the Public Sector Banks could also take up this cause of investor education and spread prudent financial decision-making skills to small investors so that the savings can be brought into the mainstream economy instead of losing it all to scam operators. Instead of promoting complex financial products like mutual funds, investment-cum-insurance products, which are all too confusing even to the financially savvy amongst us, investment programs should be structured by SEBI, RBI and other regulatory bodies jointly.
Jaago Niveshak Jaago!
Five business news channels, so many newspapers, magazines and websites would not be able motivate traditional Indian investor to invest in equity and other variable return products unless the investment climate in the country is not changed significantly
He is not worried about his investments beating inflation. He abhors equity and believes it to be a gamble. Mutual funds are a strict no-no for him. He believes that investments in physical assets are as important as financial assets. He chases bank deposits and believes that insurance in an investment and not just a risk covering instruments. Media’s attempt to change his mind set towards investments has hardly worked. He continues to be the same over generations. There are no prizes for guessing it right. Welcome to the world of the traditional Indian investor, the investor who has existed for ages and has been successful as well. He has contributed significantly to the economic growth by generating one of the highest savings in the world. The recent events in the financial markets have brought focus back to this kind of investor. The turmoil in the market has shifted focus back to the strategy of this investor.
Before moving ahead let us look at traditional Indian investor and his investments. Investors generally make investments in two kinds of assets- financial assets and physical assets. Financial assets are bank deposits, insurance and equity while physical assets are gold, real estate and some white goods used on a day-to-day basis. As per the data released by the Reserve Bank of India (RBI), investors in the country invested in financial assets as follows over years:
From this, it can be safely concluded that the majority of Indian investors are extremely conventional in approach and have no out of the box thinking. The investor has stuck to the same investments over a period of time. It is very obvious that bank deposits and insurance have been the most preferred investment option for the traditional investors. Shares and debentures are hardly preferred by the investors. The highest savings in shares has been around 7% which has fallen substantially now. The RBI data related to projection of savings during 12th five year plan gives a bigger picture of how savings are going to be in financial and physical assets over a period of five years ( Refer: table below). It is clearly evident that bank deposits will continue to be as high as 50% of total savings. The share of insurance in total savings is also going to remain strong while that of shares and debentures will once again be consistently low.
What is the DNA of traditional Indian Investor?
Looking at the data and the nature of the financial savings made in India, the obvious question that comes to mind is why do Indian investors invest in traditional financial assets or to be more precise, ‘sarkari’ kind of assets? Why is bank deposit more important for this investor than investments in shares? Is the investor worried about volatility and is completely risk averse? The answers are both yes and no. Majority of Indian investors struggle to save because of low-income levels and hence do not want to risk their hard earned money, so they invest in traditional investment assets. It is not about financial education. In India five business news channels, so many newspapers and magazines and websites keep on bombarding investors with need for investment in equities for consistent wealth creation but this has somehow not worked. Therefore, this category of investors is fairly aware about investment options. The traditional Indian investor in keen on preserving his wealth as the ability to take risk is limited.
There is another group of investors, which is affluent and can take risk, but has learnt over a period of time that investment in variable investment products can be rewarding but also killing many times. This investor has been investing in the equity market but gradually, he seems to be disillusioned. The bitter experience over a period has made this investor realize that it is better to keep away from equity. The proof of the pudding is in the eating and you cannot convince an investor to invest for long term, if the returns are not good.
The traditional Indian investor is a very intelligent breed and knows his interest very well. The famous saying that ‘a bird in hand is worth two in the bush’ drives him. Is he doing harm to himself by not investing in equity and other variable return products? The answer is no, as long as he is meeting his financial goals. In the current market turmoil, he is sitting pretty and is not worried about what next.
Is the traditional Indian investor good for Indian economy?
While some may argue that the traditional Indian investor is doing harm to himself, by not investing in risky, but potentially rewarding products, the fact remains that he is a boon to the Indian economy. He is a cheap source of capital and helps the economy channelize necessary savings for future investments. The deposits made by him help utilize the resources for investments in the economy. Debt is a comparatively cheaper source of capital compared to equity, and investors in India have contributed to this in a significant way, by making investments in debt products. The physical savings made by these investors sometimes become unproductive and needs to get channelized for more productive usage.
Is the investment profile going to undergo changes in India in the days to come? It is difficult to answer this but the fact remains that investors cannot be motivated to invest in equity and other variable return products as long as the investment climate is not changed significantly. Volatility is a part of equity investment but manipulation needs to be controlled. Better corporate governance and confidence building measures can bring more investors into the fold. But it looks difficult in the near term. The ‘Traditional Indian investor’ is here to stay.
Here is how Holcim, Ambuja and ACC have repeatedly short-changed investors. Those making a noise today abetted the previous cases of malfeasance
Ambuja Cement Limited (ACL) announced a layered deal to amalgamate Holcim (India) Pvt Ltd, with itself under which ACL will acquire a 24% stake in Holcim India by paying it Rs3,500 crore. This will give Holcim an additional 10.85% stake in ACL, while giving away a 19.42% beneficial interest in ACC Ltd. Then, when Holcim and ACL are amalgamated, Ambuja Holdings will end up with a 50.01% stake in ACC.
Anil Singhvi, former chief of ACL, calls this a fraud on minority shareholders, because it amounts to taking out Rs3,500 crore of cash from ACL by paying a premium, while diluting its shareholding by 30%. The Securities & Exchange Board of India (SEBI) has chipped in saying it proposes to examine the deal closely from the minority shareholders’ perspective.
If SEBI does step in, it will be for the first time in two decades of complex manoeuvres involving Gujarat Ambuja, ACC Ltd (once a Tata company), Holcim and their group companies, which invariably gypped minority shareholders. The only difference would be that Anil Singhvi, who used to be a part of those deals, now wears the hat of a good-governance pundit.
In 2000, Gujarat Ambuja Cement acquired a 14.5% stake in the Tata-controlled ACC, with a Rs925-crore, two-stage ‘strategic alliance’ designed to give minority shareholders a raw deal. The shares were acquired at a 150% premium to market price without the mandatory open offer to retail investors, using a loophole in the takeover code. It caused such a furore that takeover regulations were rewritten, but the companies got away with the deal.
Then, in 2005, another complex structuring saw Swiss cement major, Holcim acquire a 67% stake in Ambuja Cement India Ltd (ACIL) and the single largest shareholding in ACC. It was again touted as a ‘strategic alliance’ rather than a sale. Ironically, the transaction was also at Rs370 a share. Anil Singhvi presided over that deal. This was immediately followed by the sale of Everest India Ltd to the Adani group. At that time, I had speculated that the founders Narottam S Sekhsaria and Suresh Kumar Neotia were looking for a way out of management and an amicable separation of businesses. That happened in 2011 with the transfer of a small stake. For minority shareholders, there are three lessons. First, that they get a raw deal from Indian promoters as well as foreign acquirers. Second, multinationals can play a long game with overseas transactions that will never be known to the public, since Indian regulators are easily persuaded not to dig deep. Third, minority shareholders usually end up accepting that they are never co-owners and have to be satisfied with getting less, so long as they still make money; otherwise, they sell and go.