- Corporate governance:-The Anglo-Saxon market model calls for an independent Chairman, to represent the interests of the non management shareholders. But in the Indian context, family owned/promoter dominated companies still dominate, and there is no institutional objection to this. So when the occasional expose occurs of management bribing government officials(Everonn), being jailed(Unitech, Ansal), voting themselves fat pay(Sun TV) etc, it does not reflect on the competence/personal integrity as much as it reflects the culture of entitlement/sense that it is 'payback time' for the blood/sweat/tears invested in growing the company. Therefore, even if the share price temporarily slides in response, it is not likely to have a long lasting effect
- Financial disclosures:-It is still NOT mandatory for Indian companies to publish a quarterly cash flow statement, and virtually noone does so. That does not make the analyst job easier, to explain the quarterly results fluctuation. But that is just the tip of the ice-berg. Despite having accounting/auditing standards which are globally converged, not all auditors/CFOs are able to apply them well. For example, some annual reports still report inventory with the statement as valued and certified by the management, despite the accounting regulator ICAI issuing an edict against them. So before relying on them, it is better to read the notes threadbare, and then once again. For me, that revealed example of a fertilizer company hiding exceptional one-off gains in other income, huge contingent liabilities of a telecom company which were doubtfully classed, shoddy internal audit/controls systems not being made subject of audit report exception etc. The media recently hyped off Kingfisher's going concern qualification BUT this was published much before Oct-11. Was the press sleeping then? Hence, I suggest that the investor should look for red flags even more carefully for Indian firms.
- Uncritical financial media:-Sadly, we do not have a Tehelka in the investing space. The closest which comes to that is 'Money Life'(but even they do not equal Tehelka). Financial press(especially Economic Times) are usually reduced to the role of rewriting corporate press releases or foreign news items. Rarely has a financial jugglery been first reported in the Indian press. Papers like Mint are valiantly striving on, but with little success. But, once the slighest whiff of a scam breaks, then all outlets and TV channels carry it, and the market goes haywire while investors try to figure out what hit them. Hence, the person who can catch the breaking news first, profits.
- Lobbies/Cartels:-The infamous Pyramid Samaira case(involving fake SEBI letters, use of mule's demat accounts, fictitious open offer rumours) was the rare instance of publicly exposing market manipulation. Another example was Kwality, where circular trading boosted the share price to sky high levels. While SEBI detected these and passed punitive orders, the fact remains that cartels can still have a field day, and regulators like Bollywood police, step in when the party is over. Therefore, before buying a momentum driven stock, ask yourself the chances of it being bear driven. Indicators would be non institutional activity, repeatedly hitting circuits etc.
- Political/Regulatory:-It is bandied about in investing circles that the son of the ex-finance minister is a major player in the Indian stock markets. One can only speculate at the super profits made possible by having advance information of Govt policies. This would hold for draft policies which have impacted stocks in the past(Mining Bill/Land Acquisition Bill) as also regulatory orders/judicial orders(Sugar SAP in UP, Mining Ban, R-ADAG lawsuit in SC). Hence, much as I would dislike it, being politically well connected would make you ahead of the curve in these developments, to benefit from the resultant special situations.
Wednesday, November 23, 2011
Some India specific reasons for special situations-and how to play them
Too often, I've made the mistake of applying strategies which have worked in the 'developed markets', to the Indian markets. What I forgot were the vast differences in corporate governance, financial disclosures, critical financial media, existence of trader lobby/bear cartels and political.regulatory uncertainty. Each of these lead to special asset situations, which are not having global analogues. I dissect these points below with examples wherever possible, with a suggested playbook approach