The title is a famous line for poker players, but it is perhaps more germane to individual investors. They remain suckers because nobody wants to protect them, or is even interested in protecting them.
Consider Jet Airways, now being taken into bankruptcy by SBI. It ought to have been taken earlier. The Jet Airways IPO was made in March 2013, and the lead managers, the crème-de-la-crème of I-Bankers including Deutsche, HSBC, Citi, UBS, DSP Merrill and Kotak, priced the issue at ₹1,100 per share, calling the pricing ‘investor-friendly’. Given that the stock has lost 97 per cent of its value since, in 6- ¼ years, the pricing was hardly investor-friendly.
Pricing of issues is predicated upon feedback from QIBs (or qualified institutional buyers), who are the big institutional investors. This is wrong for many reasons. First off, QIBs are putting in OPM (other people’s money) not theirs, so they aren’t as careful as an individual investor is with his hard-earned money.
So the price justification offered by marquee I-Banks, is not really an honest guideline for the individual investor. In the case of Jet Airways, the market price was barely higher than the issue price for a few weeks, and consistently below it thereafter.
This columnist made a suggestion to SEBI years ago. Why not include a table, at the start of each prospectus, of the track record of the lead managers? This should include the name of issue/ date/ Sensex at the date of the issue/ Sensex today/ issue price/ price today. All basic information. And objective. Let the investor decide, based on the track record of the lead manager, whether he should go along with the investment. It would be an additional input, not the sole criteria.
A quick look around the room would make the individual investor realise that it is he who is the sucker.
Ok, so suppose the investor decides to subscribe to an issue. He then gets the Annual Report, and relies for the accuracy of the financial statement on the auditor. Yet, several auditors, including Deloitte, one of the big 4, are being investigated for not conducting audits fairly. So can financial statements be relied on?
What about debt mutual funds? Those should be safe, right? Especially the ones rated investment grade by rating agencies, right? Well, no! The recent default by Dewan Housing led to an overnight drop of over 50 per cent in the value of certain debt funds that had invested a big chunk of public money into them, including, pointedly, where the group was a partner in a fund house with Pramerica (Prudential Insurance, a Fortune 500 company). There are no prudential lending norms imposed on mutual funds as there are for banks, about undue exposure to a company/group.
A quick look around the room would make the individual investor realise that it is he who is the sucker.
So then this sucker pins his hope on regulators to come to his rescue. Yet, for CIS (Collective Investment Schemes), most of which were ponzis, SEBI washed its hands off the scams, stating that it was not the regulator. In the case of NSEL, even the FMC (Forward Market Commission) claimed it was not the Regulator. RBI, which had also been alerted about the potential of a scam, did not take action. Neither did the Ministry of Corporate Affairs.
Investigative agencies know which side of the bread is buttered. Politicians see the direction of political winds. The judiciary leans towards the culprits by granting them adjournments, prolonging the suffering of victims. There is no one protecting the investor.
Recently I heard a commentary on Bloomberg following the protests in HK against a proposed extradition law that was ultimately shelved. The commentator observed that foreign investors do not trust the pathetic Chinese judicial system, but fully trust the efficient Hong Kong system, hence it is in China’s interest to have one country, two systems. All the big Chinese companies, Alibaba, Baidu, TenCents, have listed on the HK stock exchange and become world sized.
We should learn the value of a judicial system people can place trust in. By not doing so we hurt our investment prospects.
India, too, has set up an International Financial Centre, in GIFT City, Gujarat. It should become, like HK, one country, two systems. GIFT should have its own judicial/arbitration system, independent of the country’s judicial system and which cannot be overridden by it. Investment will flow in.
India wants to invest $1.5 trillion in infra alone in the next decade. That’s $150 billion/year. The domestic IPO market threw up ₹83,000 crore ($12 b.) That’s 8 per cent of our requirement. Where on earth will the money come from?
PM Modi has wonderful and well-thought-out plans to make India a $5 trillion economy by 2024. These can be achieved if the focus is on good governance, as promised before the 2014 election. This means a government for the people and not for the crooks.
It is time we cracked down on crime and ensured that the judicial system completes its cases within months, not decades, and that it leans towards victims, not scamsters. Else, forget the India dream.
(The writer is India Head — Finance Asia/Haymarket. The views are personal.)