Friday, December 31, 2010

Corporate Governance and Equity Markets in India

One of the most talked about subjects in equity markets particularly in India is corporate governance and often for wrong reasons. Many of the greedy and brittle promoters collude with brokers and some independent individuals to manipulate the share prices and still claim that they follow accepted international (Not just Indian) standards in corporate governance. Once in a blue moon, they get caught only to claim their innocence in media and to SEBI. I would get surprised only if these things are not happening and not the other way around.


The Reasons for Weak Corporate Governance

Promoters start the company and work really hard to bring success to the new venture in spite of unbearable bureaucratic struggles. Almost all the promoters bribe officials along the way to get things done and this is not an unknown territory to any of us. Bribe and flexibility has become part of our lives and it is natural for human beings (Promoters) to feel that it is legitimate to subvert the system to make some money as they are the ones who have done all the hard work to bring the company to this level. It is another matter that they were able to achive this kind of success because of shareholder money and also they took home exorbitant amount of money as CEO Salary and perks. But how many people are ready to get satisfied with that when our porous laws allow them to make some easy money? Manipulating the share prices does not involve too much risk as in the case of some serious frauds and scams but brings easy money to everyone involved.

The probability to get caught is very minimal in India and if they get caught, it takes lifetime to prove the wrong doing. Even if they are guilty of wrong doing, they have already made enough money for few generations anyway. We do not have the "Working" system (Laws are there) to punish the individuals and prevent such things happening. Most importantly our tolerance level is the highest in the world and we forget things within few weeks and in fact we accept these things very easily. Don't we vote for criminals? Don't we vote for candidates who make false promises? These things have become usual in our country where even Poolan Devi was a MP. How many investors stopped investing in stocks just because there was share manipulation? In fact Foreign Institutional Investors bought more this week than the Domestic Institutional Investors. The reason is that they know these things have been there for many years and only few people and companies get caught. So, the reality is we need to live with all these manipulations, scams and frauds to make money in stock market.

Bank managers take money to approve loans in India since the days of Akbar and Babur and it is funny that our Central Bureau of Investigation (CBI) came to know about this only now. Almost each and every individual who is getting loan is bribing officials and they name it as 'Commission'. LIC Housing Finance Scam came to the lime light only because “Money Matter Financial” was doing this as a business, else it would have been business as usual. So, corporates need to evolve as real corporates and not family run businesses to expect good corporate governance and we are far away from it. Until that happens we need to invest in equity markets assuming that most of the companies do some kind of manipulation in financial statements, tax returns, contracts and share price. I would get surprised only if a company does not do any of these things in India. Not that I am supporting it but I am accepting to live with the reality else I will face the risk of swimming against the tide.


Recent Corporate Governance Issues and Market Volatility

As we have witnessed, there was a housing finance scam as well as share price manipulation issues in some companies. Markets reacted as if these were not expected in a country where Harshad Mehta kind of scams are possible almost everyday. Many stocks belonging to good growth sectors fell steeply and some fell as much as 50-60%. Shrewd investors should have taken this opportunity to invest in good stocks as things will only become normal in a matter of couple of months.

Below are some of the stocks that came down steeply (Many of them recovered swiftly within few days).

ARSS Infrastructure

Parekh Aluminex

Arshiya International

Hanung Toys

Gitanjali Gems

LIC Housing Finance

BGR Energy

Reliance Infrastructure

Bajaj Corp

HDIL

Anantraj Industries

JSW Energy

SKS Microfinance

Sunil Hitech Engineers

Aban offshore

Indiabulls Real Estate

Indiabulls Financial Service

Central Bank

Amar Remedies

IFB Industries

Gandhimathi Appliances

Videocon Industries

Bajaj Electricals

Patel Engineering

Godrej Consumer Products

Hitachi Home and Life Sciences etc...

I can name many more stocks that gave good opportunities during this period. For example, I bought BGR Energy when it came down to Rs. 560 because of negative news flow and the next day it went up to Rs.700 and still trades in that range. I took a calculated risk as I thought BGR has a good management and they would deal these things appropriately.

Parekh Aluminex came down to Rs.215 from Rs.600 and I do now know how many people took that risk of buying at Rs.215. This stock moved up swiftly and now it is trading at Rs.330 and if someone offers me 50% within a week, I will take it any day.

Arshiya International also moved up significantly and it came down for no reason I believe. So, it is up to us to take calculated risks if we find ourselves in situations like the ones we have witnessed recently. Only thing we need to remember is that time has answers for all the problems and our markets survived even bigger threats in the past and came out only with renewed vigour. My suggestion is to accumulate good stocks, Get rid of bad ones and stay invested. Pressing the panic button only erases your wealth in stock market.

Note: The above mentioned stocks came down significantly during the recent scam announcements but most of them appreciated since then. So, please use your judgment if you are considering to invest in any of those. As you know the price at which you buy the stock is one of the most important things that will decide your returns.


Kumaran Seenivasan

www.stockanalysisonline.com

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