In your interest.
Online Personal Finance Magazine
No beating about the bush.
The regulatory framework in emerging markets is either bad or nonexistent. In the World Bank’s annual report on the ease of doing business the highest BRIC is China which barely makes it into the top half of countries. Brazil is the only BRIC that makes it into the top half of Transparency International’s corruption index
We often expect leaders, professionals, and experts to know and understand the facts. The truth as to what is and what isn’t. Otherwise how could we expect them to make wise decisions? It is then both disturbing and profoundly unsettling to realize that they just accept the most common of assumptions as reality without question.
For example, Muhtar Kent, Coke’s chief executive spoke to the Financial Times about China. According to the article Mr Kent said that said “in many respects” it was easier doing business in China, which he likened to a well-managed company. “You have a one-stop-shop in terms of the Chinese foreign investment agency and local governments are fighting for investment with each other.” Fascinating.
What seems to have escaped Mr Kent is a process known to every con artist. In order to convince your mark to open their wallet, you have to gain their trust. You can do this by letting them win a few hands, by making it easy to play the game or promising large quick rewards. What the mark does not understand is that the game is not being played by the normal rules, but by ones that suit the con artist.
Mr Kent feels certain that Coke will make money in China because it is easy to do business. This has been true. In first half of this year, Coke sold more than one billion cases of its products in China which is double its sales five years ago. From Mr Kent’s perspective this market has great potential. What he seems to have ignored is that it has great risks.
Mr Kent’s entire product rests on a brand. Cola-flavoured sugar water is not hard to imitate. So without protection for his intellectual property his product becomes a commodity and the margins disappear.
In China they pirate intellectual property on a massive scale. Not just high-end Gucci bags, but just about anything that has a brand is being counterfeited. These include Michelin tyres, John Deere combines, Bubble Wrap, Tiffany jewellery, Nike and Timberland footwear, Marlboro cigarettes, Viagra, Colgate toothpaste, Kit Kat chocolates, Tide detergent, GM, Nissan, Ford, Mercedes car parts, mobile telephones, toys, clothing, industrial adhesives and even batteries.
Mr Kent also seems unconcerned about a country that routinely slanders foreign firms. Dell, General Mills, Lipton Teas, Colgate-Palmolive, and Sony all have been targeted. In one case China banned importing foods made by Schweppes, Unilever and Coke itself. These foods were tainted by an ingredient produced by a Chinese company that was only identified by foreigners.
It is not just Mr Kent who is making the mistake, but US Federal Reserve Chairman Ben Bernanke as well. Mr Bernanke suggested that the United States could learn from emerging markets. He pointed out that emerging market growth shows “the importance of disciplined fiscal policies, the benefits of open trade, the need to encourage private capital formation while undertaking necessary public investments, the high returns to education and to promoting technological advances, and the importance of a regulatory framework that encourages entrepreneurship and innovation while maintaining financial stability.” The question is exactly which emerging market did he have in mind?
The regulatory framework in emerging markets is either bad or nonexistent. In the World Bank’s annual report on the ease of doing business the highest BRIC is China which barely makes it into the top half of countries. Brazil is the only BRIC that makes it into the top half of Transparency International’s corruption index.
As to public investment, perhaps only China can be said to make any of those. Brazil has the world’s third-largest road network, but 88% of it is dirt. Traffic is a mess in almost any large city in an emerging market.
As to capital formation and entrepreneurship, senior executives are so unhappy about the Indian government’s painfully slow or inconsistent decision-making that they are focusing their investments on Africa or Latin America. China has consistently starved private firms of capital. Russian prime minister Putin suggested that anyone who starts a new business should be rewarded with a medal for bravery because of their willingness to take on the mass of paper work, poor rules and corrupt bureaucrats.
As to education, India’s vaunted outsourcing industry cannot find enough graduates with sufficient skills. As a percentage of gross domestic product (GDP), China spends less on education than Uganda. The once great Russian education system has been totally corrupted. Anything from school places to university degrees are available for a price.
Both Mr Kent and Mr Bernanke are powerful men. Perhaps what they really admire about some emerging markets is that decisions can be carried out without messy debate. But the point of the debate is to find truth, and that is the one thing that they themselves have ignored. Fortunately for investors, stupidity can be very profitable.
(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).
The quarterly survey across eight cities finds fall in confidence caused by poor global outlook, high domestic interest rates and inflationary concerns. Still, investors expect Sensex to climb to over 20,000 by year end
The Indian Investment Confidence Index (ICI) is at its lowest in two years, due to the combined impact of the global economic slowdown, high domestic interest rates and inflationary concerns, according to a survey conducted by JP Morgan Asset Management across eight cities in July. However, a majority of investors and advisors in India expect the benchmark Sensex to trade between 20,000 and 22,000 by the end of this year.
Interestingly, the retail confidence index although 4.2 points down from the previous quarter, ranked the highest (137.5). The advisor confidence index was a distant second (124.9), whereas corporate confidence was at the lowest (109).
Christopher Spelman, whole-time director and chief executive officer of JP Morgan Asset Management says, "ICI for the current wave has been impacted by a significant fall in the outlook on the global economy, domestic interest rate hikes and inflationary concerns. Despite this negative news flow, the Indian financial fraternity maintains a positive outlook with a majority of investors and advisors expecting the benchmark index to trade between 20,000 and 22,000 by the end of this year. Another interesting finding is that young investors (age 22 to 25 years) appear highly enthusiastic about investing in mutual funds."
ICI, which was launched in August 2009, captures the confidence of retail and corporate investors, and financial advisors on the Indian economic and investment environment on a quarterly basis.
The numbers were calculated on the basis of responses received from 1,623 respondents (retail), 50 corporate treasuries, 269 independent financial advisers (IFAs), 20 banks and 20 national/regional distributors (N/RDs).
Banking and financial services emerged as the most attractive sector for investment among retail investors and advisors. Investors appear to have turned cautious as preserving capital emerged as a popular strategy among 40% of retail investors surveyed. Further, just 40% of investors were likely to turn "somewhat aggressive" about their investment strategy in the coming six months, as compared with 57% in the previous quarter.
In corporate treasuries investment activity showed noticeable decline across all instruments. Money market mutual funds remained the most popular debt instrument. It is interesting to note that 50% of corporate treasuries expect to maintain the current investment level in liquid funds ahead of the Reserve Bank of India's regulation on limiting banks' exposure in liquid funds to 10% (effective from January 2012).
The survey found that IFAs (independent financial advisors) in Mumbai are a despondent lot and their confidence is the lowest this quarter. Easy to understand when one finds that personal networking continues to be the most preferred source of information for investment decision making among retail investors.
Arun Jethmalani, managing director of ValueNotes, the independent market research agency of JP Morgan that conducted the survey, says, "Growing vulnerability of the global economy and uncertainty in the domestic investment environment have taken a toll on investment confidence, dragging the ICI down to its lowest ever. Interestingly, confidence within India Inc. appears to be shaken the most, amidst rising inflationary pressure, poor governance and corruption; even as the advisor community is a little more optimistic about financial investments."
The ombudsman scheme for the capital market, approved and notified by SEBI eight years ago, has not been implemented by successive chairmen for mysterious reasons. Will the market regulator, under its new chairman, introduce the scheme at least now to safeguard the interest of investors?
One of the weakest areas in investor protection in the capital and securities market has been the poor grievance redressal mechanism. The 2009 Swaroop Committee report states that the investor population in our country has declined from 20 million in the 1990s to just over 8 million in 2009. One of the main reasons for this steep fall in the investor population can be attributed to the rampant malpractices observed in the capital market, the short-changing of investors at various levels, and the absence of any mechanism for expeditious and satisfactory disposal of investor complaints in a time-bound manner.
The Reserve Bank of India (RBI) had on 14 June 1995 introduced the banking ombudsman scheme, which has been functioning reasonably well under the guidance and supervision of the central bank. The banking ombudsman scheme has been revamped a few times since then, to provide a satisfactory complaints redressal forum for all customers of commercial banks, and it has resulted in a considerable improvement in customer services and a substantial expansion in banking services.
So, in early 2003, the proposal for an ombudsman for the securities and the capital market was discussed at a meeting of the Legal Advisory Committee constituted by the Securities and Exchange Board of India (SEBI). The Committee, headed by former chief justice of India MN Venkatachaliah, suggested the framing of the Ombudsman Regulations for the capital market, by SEBI, pursuant to its function under section II of the SEBI Act, 1992. Accordingly, a concept paper on an ombudsman for the securities market was prepared and a copy of the draft regulations was put up on the website of SEBI inviting comments from the public in May, 2003.
In all earnestness, taking into account the responses received from the public, SEBI notified the SEBI (Ombudsman) Regulations 2003 for the establishment of the Office of the Ombudsman to redress the grievances of investors in the securities and capital market. (Notification number SO 953(E), dated 21 August 2003.) This was followed by two amendments to the regulations, the first one on 5 December 2003 and a second on 9 November 2006. (Source: SEBI website)
It is said that 'mysterious are the ways of God'. In our context, we could adapt that to say, 'mysterious are the ways of SEBI', for nothing appears to have been done in the past eight years either to appoint an ombudsman, or to set up the office of ombudsman to implement the August 2003 notification issued by the regulatory body itself. Surprisingly the whole scheme has been put in cold storage by the successive chairmen for unknown reasons, while investors continue to suffer at the hands of unscrupulous players in the capital market.
There are numerous examples of how even reputed companies flout rules and regulations with impunity, and SEBI has been able to do precious little to protect the hapless investors. An extreme case of failure to honour the commitments made at the time of the public issue is that of ONGC, a Maharatna company in the public sector, who has not settled the claims of investors arising out of its maiden public issue of 2004, as is evidenced by their own admission in the quarterly results published by them for the last seven years. (Read 'ONGC's mockery of investor services'.) SEBI has been a mute spectator to this, and the company is ready to launch its follow-on public offer shortly.
It is gathered from the statistics published on the SEBI website that during the past 20 years of the existence of SEBI, from 1990 to 2010, more than 27.06 lakh complaints were received by the regulator and 25.46 lakh of these complaints have been resolved, with about 1.6 lakh complaints unresolved. This is an average of over 135,000 complaints a year and an average of over 500 complaints received by SEBI each working day. With the steep fall in the investor population, the number of complaints too has come down during the past few years. Nevertheless, these statistics certainly justify the need for a strong and efficient grievance redressal machinery in the interest of developing the capital market along healthy lines.
SEBI should now conduct a thorough investigation into this matter and answer the following questions to restore the confidence of investors in the capital market and trust in the institution of the market regulator itself.
1. What is the reason for not implementing the ombudsman scheme in the capital market for the last eight years, even though it was duly notified in 2003?
2. Who is responsible for such callousness in not implementing the scheme that was already notified by SEBI?
3. Is the notification and amendments that were issued still valid, and if so can the ombudsman scheme be introduced now without any further delay?
4. How can SEBI prevent such things from happening in the future, as such inaction undermines the credibility of the regulatory body which is expected to set an example of good corporate governance?
5. Can investors whose complaints have not been settled to their full satisfaction during these past eight years, be permitted to refer their complaints to the ombudsman now, in order that they get a fair deal?
Apart from serving the needs of investors, the biggest advantage of setting up an independent ombudsman is that SEBI, which has enough on its plate, would be relieved from this onerous responsibility and could devote more time and attention to other critical issues that affect the capital market. Therefore, SEBI, in its own enlightened self-interest, should set up the office of the ombudsman without any further delay and create an environment of justice and fair play for the benefit of aggrieved investors in our country.
(The author is a banking and financial consultant. He writes for Moneylife under the pen name 'Gurpur'.)