Friday, December 19, 2008

Read the following news appeared in The Hindu recently:
“No mandate to print policy terms in vernacular”
K.T. Sangameswaran

CHENNAI: An insurance company has informed a policyholder that there is no mandate of law to issue the terms and conditions of policy in the regional language.

The policies are used nationwide, and it is a policy decision of its corporate office to use English. It has been in vogue for several decades.

Its response is pursuant to an order of the Madras High Court on a plea by a city resident.

The petitioner sought a direction to the National Insurance Company, represented by its manager, Direct Agents Branch-Tidel Park, Taramani, to expeditiously dispose of his representation sent in July this year.

Justice A. Kulasekaran directed the company to consider the representation and pass orders on merits and as per the law.

Claim rejected
The case of R. Ayyanar of Anna Sathya Nagar, a mason, was that he sustained injuries in a road accident. While buying a motorcycle, he was informed that the insurance policy would cover all types of accidents, theft and third-party insurance. The company agent assured him that if an accident occurred, the company would pay the entire medical expenses (for personal accident).

As he did not know English, he trusted the agent. The company rejected his claim for the medical expenses. One of his requests to the company was that the terms and conditions of the policy be printed in Tamil, but there was no response. So, he moved the court.

The branch manager said that as for the terms and conditions of policy, the company had to abide by the Insurance Regulatory and Development Authority.

There was no mandate of law by the regulator to issue policies in the vernacular. Until the company was advised by the competent authority, it might not be possible for it to grant the policyholder’s request.
- Is it not true that the same applies to investment in Stocks, Mutual Funds, ULIPs, and many other investments products.

Somehow, either we presume that people who invest in these kind of securities are educated lot & know English well, or we have unilaterally decided that our citizens who do not know English should never invest in these kind of securities!

In a country with such low levels of literacy, how can the newer and better investment products penetrate and reach the rural rich - some of them really sitting on unbelievably huge cash - so that money does not gets locked up and put to better use for one and all?

Ground reality . . . !

Wednesday, September 24, 2008

"Security Analysis" by Benjamin Graham

Last time when i went to Landmark - my favorite destination, next only to Higginbothams, i saw this book " Security Analysis". just then i have completed my shopping of books for a couple of thousands and exceeded my budget for the whole of current year. My friend Sankar writes from US :

Graham and Dodd need no introduction to the practitioners of value investing. The Sixth Edition of their book, Security Analysis, coinciding with its 75th anniversary, was released sometime this month. The central theme of the book is as relevant today as it was, 75 years back.

This book has commentaries by some of the well known persons in the Value Investing universe. Warren Buffett has written the foreword. He has read this book four times...

I had a chance to gloss over some of the chapters, just out of curiosity as a past student of Management. Bruce Greenwald, a Columbia University Professor (where Graham and Dodd taught value investing) has written commentary for the chapters on Balance Sheet Analysis, titled "Deconstructing the Balance Sheet". This is short, crisp and laden with insight. He has mentioned why it is not possible to find the value investing picks like the way Buffett and Ben Graham found several decades back.

Unofficial biography of Warren Buffett by Roger Lowenstein are filled with examples on how these gurus found companies traded far below their true value. Buffett and Ben Graham played the role of shareholder activists in a different way - strongly persuading managements to unlock hidden assets.

In those days it was not uncommon to see dividends amounting to 150% of the quoted price (note - quoted price, not the par value of share) after sale of idle assets. Bruce Greenwald has mentioned this is not the case any longer. True. And he has explained the reasons. The commentary ends with a case study on WorldComm, clinical analysis of key balance sheet data and how it violated the basic tenets of value investing.

The most recent version of Intelligent Investor - a popular version of the value investing principles authored by Ben Graham also has commentaries written by Jason Zweig, with present day examples.
BTW, i am still contemplating .... the price of the book is ... guess ... Rs. 2,670.00 .... my wife will not allow me to enter the house ..... the reason being not only the price but also the space constraint ----my small library with more than 1000 books ( Excluding another 1,000 plus books in Tamil ) .... probably i should look at shifting back to my native place. .. . our old house in chettinad has a built up area of about 25,000 square feet ! i should thank my great grand dad who foresaw this and built it 110 years back ! ... or electronic E- Books may be a solution ?

Monday, September 15, 2008

Lehman Bros : Intelligent Analysts - who predicted the Future . . . ? ? ! !

25,000 jobs were lost in one day.

Points to ponder....

Can things change so swiftly in less than 6 months? If so, why Risk Management Systems are not in place?

Is there a problem with level of disclosure? If so, are the stockholders and their own employees shortchanged? (A good number of their own employees were shareholders as well...)

This certainly affects common man in U.S. who has no clues on what CDOs, CDSs, net repo borrowing positions... will it affect Indian markets?

As of this moment, we do no know the fate of of another company struggling for

...Lehman: We're Not Bear, and We're Not Screwed
Posted Mar 17, 2008 12:24pm EDT by Henry Blodget in Investing, Recession, Banking

After reading our "
Lehman Too Big To Fail?" post this morning, a high-level Lehman insider quickly reached out with two key reasons why Lehman (LEH) isn't in the same predicament as Bear Stearns (BSC). (Pictured at left, Lehman CEO and Chairman Richard Fuld.):

The Fed's new move -- giving broker-dealers access to the discount window -- changes the whole ball-game. If the Fed had made this move last Wednesday, the insider argues, Bear wouldn't have been toast. Lehman's liquidity ratio is far stronger than Bear's was. This assertion is supported by a couple of analyst reports, which we've excerpted below.

We're not experts in mid-hurricane broker-dealer balance sheet analysis, so we'll leave the dissection of these arguments to those who are (anyone?). In the interests of balance, however, we did want to add a follow-up to our earlier note.

Analysts: Lehman Not Bear
Deutsche Bank's Mike Mayo:

"Lehman is Not Bear. 1) It has more liquidity, 2) It has support among its major counterparties, evidenced by an extension on Friday of a $2B working capital line with 40 banks (one issue w/Bear Stearns [BSC] seems to be that counterparties pulled in lines). 3) Its franchise is more diversified given almost half outside the US and an asset management business that is more than twice as large relative to its size (BSC was more plain vanilla). 4) It has a seasoned and experienced CEO (Bear's CEO was new). We maintain our Buy rating given a belief that LEH will weather this storm and our estimate of a price to adj. book value ratio of 83%.

"The industry issue seems more liquidity than solvency, and LEH protected itself more fully after it's problems similar to BSC in 1998. At year-end, it had $35B of excess liquidity combined with $63B of free collateral, implying $98B available for liquidity, or $70B more than needed for $28B of unsecured short-term debt (which includes the current portion of long-term debt). While it also has $180B of repo lines, we take comfort that 40 banks extended credit on Friday and believe that some of the repos are likely to be termed at least to some degree."

Buckingham Research's James Mitchell and John Grassano:

"Given the rapid deterioration of liquidity at BSC last week, we thought it was paramount to evaluate the liquidity positions of the other four major stand alone broker dealers. While we never thought it would come down to such a dire scenario (admittedly our mistake) -- a company with $35 billion in liquidity effectively being shut down -- through this analysis it seems clear that BSC was in a somewhat uniquely challenging situation when the market's confidence in the company vanished.

"For example, as noted above, total liquidity (cash, other liquid assets, and the borrowing value of unencumbered assets) at BSC was $35 billion. As a percentage of total assets, this was the lowest in the group at 9% and the only broker dealer to be below 10% - despite being the smallest firm. In contrast, the second smallest firm, Lehman Brothers (although double the size of BSC), has the highest percentage of liquidity at 25% of total assets.

"Secondly, we would point out that BSC had significant 'net' repo borrowing positions (repo financing minus repo lending) of $74.5 billion - more than double its liquidity position and compared to just $19 billion at LEH. In other words, as other firms refused to provide repo financing to BSC, the company didn't have enough overnight repo loans outstanding that it could call in to repay the financing. This mismatch put a significant strain on cash in the short-term as competitors terminated repos. While BSC had a significant net lending position in its securities lending/borrowed book, securities lending agreements are typically longer than overnight (unlike most repos), and thus could not be pulled fast enough to pay down the repo lines. And even including the securities loaned/borrowed, BSC was the only broker in a 'net borrower' position in terms of collateralized agreements (all other were in a net lending position).

"Lastly, BSC's sizable prime brokerage business also contributed to its downfall. And we can see that in the "net payables" data. Customer payables include, among other things, free credit balances of prime brokerage clients. With gross payables of $87 billion and net payables of $35 billion, this was a sizable liability for an institution the size of BSC. Basically, when prime brokerage and clearing clients made a 'run on the bank' (i.e. demanding their cash balances back), this put an additional and sizable cash burden on BSC."

Thursday, August 14, 2008

The Relavance of Small Broking Houses
-Letter to Money Life
Dear Ms. Dalal,

One day a senior citizen walked into my office; he was emotionally disturbed and was upset about something. As a member of a RSE and hailing from a family having its roots in the business of share broking as early as 1930s, we still have the habit of meeting the new clients/ first time investors personally, before we handover their affairs to our dealers. Used to this “bad” habit, I met this old gentleman who was in his seventies. I spent almost an hour with him!

This was his story: he is retired from military services about two decades ago and he has all his savings in his bank account only. Fifteen years back, his bank manager whom he trusts suggested applying for a new issue and he did so. Though he got an allotment of small number of shares, he was told that they are not at all trading due to the fall in the market in 90s.

A couple of years ago he was told by a neighbour who trades in the shares that his shares have started trading again and hence he approached a big broking outfit. The regular advertisements in the news papers & magazines and the huge hoardings put out by this broking company convinced him that they are the right people to encash his investments. He was impressed by the interiors and the reception he had.

But it was a short lived one because things changed the moment they assessed the unimpressive size of his portfolio. He was made to wait in the lounge for a very long time and after frequent visits he could finally open a demat account to dematerialize his shares for selling them later. He was made to sign a lot of paper without proper explanations. He was cursing himself for entering the capital markets. He never thought he has to go through so many procedures without being explained. As a old man he was apprehensive while he was made to sign the dotted lines.

He was terribly upset at the kind of treatment meted out to him and the change in the attitude of the staff at this broking outfit, which has its branches all over India . Somebody has suggested him to try out a “small broker” and hence he has come to me! He was so happy that he could finally speak directly to somebody responsible & knowledgeable –i.e., to the Broker himself! After explaining him about the purpose of demat account and the latest procedures to open a trading account with a broker, I put him on to my dealer.

Two days later, after collecting his payment from our office, he walked into my room. He was visibly moved. He was in tears! My wife - a post graduate – also works with me in our office; he called both of us and blessed us! He was a lonely man; He said both his children are settled abroad and are never going to comeback. He was very happy about the way we handled his account. He told us that, at one stage he wanted to get out of the equity markets due to earlier experience and after this interaction he would like to reconsider his decision.

This is not a “chicken soup for the equity soul” ……! This is a real incident..

A Country with less than 1 % of its population investing in stocks, this breed of smaller traditional brokerage firms – who are instrumental originally in creating the equity markets in India – are doing a wonderful job to retain & bring the small investors to the markets. But in a world which thrives on media glitz, no body has recognised this fact. I am glad that you have done it.

The traditional broking houses act more responsibly because of their long term relationships with the clients. In some of the firms, the relationship dates back to a few generations and are close family friends. Brokers are part of the investors” family and attend all their family functions without fail. It also helps them in jointly planning their investment needs and set their goals based on the family’s needs. These brokers try to be more sincere in advising their clients because if things go wrong, they are answerable not only to the investor but also to the people from the extended family who call them “uncle” and “bhaiyya.

Thank you once again for recognising the need for and the usefulness of the smaller and traditional broking houses.

Listing of Stock Exchange

Those who list others’ stocks should list their own
Nagappan V

Financial Express
Posted online: Friday , July 04, 2008 at 21:14 hrs

Is “profit” a dirty word? If you don’t go by the Marxian definition, the answer is negative. Last year, there was a paradigm shift in the way the stock exchanges in India looked at the word “profit”. From being pure play SROs, they have now become “for profit” organisations after the demutualisation exercise.

The exchanges also known as companies, limited by guarantee so far, have converted them into companies limited by shares. Shares were issued to the trading members and then to outside investors.

In Jiddu Krishnamurthy’s parlance, the typical inner conflict of the “regulated being the regulator” got resolved and the exchanges need not necessarily be called SROs hereafter, as the “self” (the brokers) is restricted to only 25% in board representations and less than 49% in the shareholding of the exchanges.

The demutualisation process is not complete — in the true sense – unless the ownership of the exchanges is really broad-based, apart from having a core promoter group (CPG). The CPG is insisted upon even in the case of membership to premium exchanges and this ensures accountability.

This is the case with most of the successful business organisations today.
To take care of this, the ownership by a single entity/persons was restricted to 5%, whereby the exchanges will have at least 20 investors.

If we take a close look at the exchanges demutalised last year, they have a handful of new investors ranging from 20 or 25 to 49, as there may be a possible technical hurdle of a public issue, if the number of investors cross 50. In the strict sense, these people may be called angel investors or PEs, who are invested in these exchanges with varying motives, barring a few exceptions.

Some might have invested with the motive of developing these exchanges and bringing in value addition with their experience and expertise. This has happened in the case of the leading stock exchanges in India. But a few others have invested with a view to build value, leverage the licence and other hidden assets, and exit later. But they are in a quandary.

Now, the moot question is, how do they exit these illiquid investments? The choices before them today are very limited. They are illiquid today because they are held by only a few investors and there is no mechanism to trade in these shares. There is a need for listing these securities not only to provide liquidity but also to encourage more investments into this highly technology-driven sector.

Forget about the viability. It is extremely difficult to create infrastructure and start an exchange today due to various constraints. In a country where less than 1% of the population invests in equity, there is a lot of scope for the development of capital markets.

For the existing stock exchanges to flourish and prosper, they need big investments in technology and human resources.

Thanks to the IT sector and other sunrise industries, human capital has become expensive. Technology, though not as expensive as it used to be, needs constant upgradation. This involves higher revenue expenditure as well. Exchanges need these resources to design and launch new products and be competitive. How do you raise these resources?

Listing or self listing of the shares of these exchanges will provide liquidity to investors. The possibility of easy entry and exit in these investments will give investors a sense of security and a better comfort level. This in turn will ensure the possibility of more investments coming from retail investors as well. Raising capital becomes comparatively easy for the exchanges to upgrade themselves, for expansion activities, and to ensure healthy growth.

Is listing required only for raising further capital from the market? Or is it to provide an exit route for present shareholders? Not really. The broader issues are addressed better when listing takes place. It paves the way for more transparency in the affairs of the exchanges, it ensures good corporate governance, it improves operational efficiency, and brings in accountability to a larger audience than at present. The listing ensures better price discovery more methodically and the investor community benefits at large.

Now, the next question is whether to allow these exchanges to list in their own exchanges or in other exchanges?

While listing only in a different exchange might remove any doubts in the mind of the investor about the possibility of undue bias or favouritism that may arise in the process of self listing and maintain the integrity of the listed company (exchange), there may be situations where conflict of interest may still arise, as both the parties – the listed exchange and the exchange where it is listed – are in the same “business” of stock exchange!

Is self listing then the only solution? Then, the question of integrity, conflict of interest, undue bias, etc, sets in. Stock exchanges the world over have gone through this process of demutualisation and listing of their shares. It would be appropriate to see the example of Australian Stock Exchange ASX as they are the pioneers.

One of the first stock exchanges to demutualise, ASX went through the process as early as 1998. Lets see how they handled the issue of self listing; ASX - the Exchange, ASIC – Australian Securities Investment Corporation as the regulatory body, and ASTC – ASX Settlement & Transfer Corporation Pty Ltd entered into a MoU on September 1998, wherein, ASIC will be responsible for supervision of ASX’s compliance with the listing rules.

The idea was based on the assumption that, potential conflicts can be avoided by the regulator assuming the responsibilities of a SE as a special case. IOSCO also finds this more apt.

Separation of this regulatory function may be a solution. Globally, many leading exchanges like SGX of Singapore, Canada, Hong Kong have gone for this kind of separation. SGX, which got listed on November 23, 2000, has appointed a conflict committee to deal with such issues. The composition of this committee has been approved by MAS, their regulator.

The world is continuously evolving and there cannot be one single solution suitable for all. We have to carefully explore options and we have to begin somewhere. With proper checks and balances, self listing could be a right choice to start with. Self listing or cross listing, in all fairness, an entity which lists thousands of securities should be trusted to list its own securities.

The author is director, Madras Stock Exchange and chairman of the Federation of Indian Stock Exchange (FISE). The views expressed here are personal and should not be construed as that of any of the organisations he represents.