Tuesday, December 28, 2010

Indian Americans making it big in USA politics_why are we proud?

By now, a reader of the English media would have heard the name of two elected USA Governors(not our impotent Indian versions but the equivalent of directly elected Chief Minister) of Bobby Jindal and Nikki Haley. That, along with Obama's historic victory in the 2008 USA Presidential elections, often prompt unflattering comparisons with Indian politics, whether an Obama would have got elected here.

I agree that India still has dynastic politics, and that only relationships(like the Nehru family daughter-in-law controls the Congress), TINA factor(allowing the first Rajya Sabha Prime Minister) or amazing achievements(Dr APJ Abdul Kalam Azad) has led to the so called 'diversity' in politics. But still, they never had to convert/change their religon.

While religion is(and should remain) a personal choice, both Jindal and Haley voluntarily embraced Christianity, the former in high school and the latter post marriage. This was much before they entered politics. While I'm not implying that politics was the reason for choosing the convenient religion,  it appears that only by trampling on your foreign/cultural heritage, you can make it big. That, thankfully, is not necessary in India.

 In the USA, religious issues are entwined with politics in such a fashion that being a non Christian would often be a death sentence, politically. Even Obama brushes aside his Muslim roots and brandishes his Christian roots. So next time we hear of an Indian American making it big, I think we should applaud only if he has done so, with his religious identity intact. This is not a 'everyone should stay in the well' mentality but a critical one. ET seems of the view that this phenomenon is confined to the Republican party where being Christian counts.

Sunday, December 26, 2010

There's a tide in the affairs of men..really?

"There is a tide in the affairs of men, 
Which, taken at the flood, leads on to fortune; 
Omitted, all the voyage of their life 
Is bound in shallows and in miseries"

These famous lines (from the play Julius Caesar) are used to demonstrate the importance of seizing the initiative. After all, Cassius persuades Brutus to join the conspiracy against Caesar-and that changed the course of history.

With due respect to the noble sentiments expressed above, Brutus was 'drowned' by the tide he took at the flood. He, and the other conspirators, met their end in the subsequent war against Mark Anthony. That brings us to the point whether these lines are appropriate as a motivational tool? After all, the person who acted on them met his end.

Should'nt we instead use this an as objective lesson to

  • Avoid being influenced by sentimental appeal/metaphors
  • Look before you leap.

Monday, December 20, 2010

Will IFRS reduce 'financial engineering' risk for investors?

Enron, WorldCom, Lehmann have been (in)famous scams covering a plethora of accounting, legal, business, financial and ethical issues. But a common thread has been structuring transactions to window dress a better profit as per financial accounts. 'Rule based' accounting standards such as US GAAP are so complex that invariably some loophole or the other is left. And it is such loopholes which enable companies to legally comply with(but violate the 'spirit'/'intention' of the law) GAAP while having poor operating results. Sample the following
  • Instead of creating a wholly owned subsidiary, Enron had its top management(the CFO) become a partner/director in a operating SPV which was wholly financed by Enron, which sometimes even guaranteed their external debt from banks . The economic substance remained the same-that Enron ran the risk of its capital being lost- but this was not reflected in books of accounts
  • WorldCom faced declining revenues due to sector problems. It entered into capacity swaps with AT&T and others. These swaps were just exchange of inventories but were recorded as sales to boost the topline(bottomline remaining unchanged)
  • Lehmann did not want to reveal its portfolio of illiquid securities. It therefore decided to 'sell at quarter end and  buyback later' its illiquid assets. The gimmick named 'Repo 105' overstated the liquidity while complying to the letter of GAAP
  The structuring of the above transactions had little economic rationale save window dressing. While analyzing the above scams, calls have been made to simplify GAAP and shift to a principles based accounting system like IFRS.This simplistic argument misses the point that due to the IFRS-US GAAP convergence, it is quite likely that the new IFRS will be interpreted similar to  the erstwhile US GAAP.

Investors therefore should not let their guard down even under IFRS. They now must contend with the chance of fair value fraud(to be explored in subsequent posts).

Sunday, December 19, 2010

Banks can force Vedanta's Rights issue at face value if debt default.

As an investor in Cairn India, I am tracking the Vedanta deal avidly. When Vedanta issued a circular(available here) to its shareholders seeking transaction approval, there were some surprising nuggets.

A consortium of banks have arranged bridge finance which is meant to be repaid by
  • IPO of a copper company
  • Issue of unsecured loans
But in case the bridge facility is not repaid, a concession has been extracted from Vedanta(page 14) that
In the event that any amount of the bridge facility is outstanding nine months plus 30 days following
Completion of the Acquisition...... or.Vedanta has irrevocably undertaken to implement a pre-emptive rights issue of Ordinary Shares to raise an amount equal to up to two times the amount then outstanding under the bridge facility to fund the repayment of any remaining balance of this bridge facility (net of costs, fees and expenses), such amount to be determined by the Banks.The price at which any Ordinary Shares of Vedanta are to be issued in connection with the rights issue will be determined by Vedanta and the Banks at the time of issue provided that, in the event no agreement is reached, the price at which Ordinary Shares shall be offered pursuant to the rights issue will be equal to the nominal value of the Ordinary Shares (being US$0.10 per Ordinary Share)
. ......

For a share trading at 2700 pence or so, this provision is quite insulting albeit boilerplate. There is not even a token reference to ...discount over Last traded price/ arbitration. Straight away the reference is to nominal value. Of course, the shareholders will get a bonaza but the question is is this rationale?

Naturally, the directors have glossed it over stating that
"The Vedanta Directors expect that any equity issue required in accordance with the
Standby Equity Underwriting Letter will be undertaken at a price which is at a significant premium to
the nominal value of the Ordinary Shares utilizing the Company’s existing authorities to issue shares
granted by Vedanta Shareholders at this year’s annual general meeting of the Company. Should any
additional authorities be required, these will be sought from Vedanta Shareholders prior to the
implementation of the rights issue

Whether the shareholders would have approved such a clause is interesting. Anyways, do the banks know something which the layperson does not? Future events will reveal that

Sunday, December 5, 2010

How Publishers are defeating second hand books and piracy

At IIMA, we use several textbooks(all original and generally Indian reprints). While contrasting them with our Indian books, I used principles of marketing and microeconomics to understand certain things and thats what is being presented in this blog post. Besides the conventional price discrimination, there are other tactics all perfectly legal..to prevent mere ebook downloaders from profiting.

  1. Enclosed CD's:- I agree that in quantitative subjects like Decision making, statistics and the like, shifting material to the CD does make sense and is cheaper than expecting students to access the net/ type into Excel. But for subjects like Marketing, OB..the use is dubious. 
  2. Password linked student websites: Nearly every publisher uses this tactic to ensure that only those students with access codes can use the companion websites to learn. While some access codes can be legally purchased, they are quite expensive and.
  3. Case Studies: As any management/law student knows, the case studies are best analyzed in class with the teaching note prepared for the Prof by the case author. By shifting text to case studies, the value is shifted from text to cases('which are hard to copy without teaching notes')
  4. Audio Book/E Learning linked books: The Apple Ipad is eagerly awaited by publishers as a safe way to monetize their digital content.