Do Not Undervalue Luck

40 comments Written on January 24th, 2013 by
Categories: Demystify, Education, WTF

Too many people attribute their success to their own skill. At some point, when everyone is working their asses off, you begin to wonder if success has quite as much to do with talent, effort and skill, as it does with being in the right place at the right time.

People like Samir Arora of Helios have done incredibly well in the markets. However his tone in this piece named "Do not invest in Indian equities" at outlook has me wondering. The note is arrogant and sarcastic (both aren't bad qualities by the way), telling us ignorant retail folk that:

  • Look, I invested
  • You didn't
  • I made money
  • Now you keep on not investing, okay?

Which, you have to admit, at Nifty 6000, is true (point #3 at least).

Lucky in choosing when to invest

He extols the fact that if you see movies, a PVR investment is up 3 times since 2008.

Life isn’t just about making and investing money; it’s important to enjoy life’s little pleasures. So go watch a movie at the multiplex and munch some popcorn while you’re there. Meanwhile, we’ll buy shares in PVR (up 3 times in four years).

Wait, wait, Mr. Arora. Let's back that up another three years, and go to their IPO in 2006,when they issued shares at a price of Rs. 225. If you were lucky enough to have been alloted shares, of course, since the issue was oversubscribed 11 times - showing that retail interest in stocks was up the frikking wazoo, and right up that alley you're currently standing in, Mr. Arora. In that frenzy, PVR listed at Rs. 266 on opening day, an 18% premium. So if you didn't get shares in the IPO you could have tanked up at 266.

And then repented at leisure, because:


You could have watched endless movies between 2006 and now, but the PVR stock has been a dud for most of this time. Now, when you might be seeing a tiny uptick that just about brings it back to even, you find Mr. Arora gloating.

And then, get this: If you put your Rs. 225 in a fixed deposit giving you 6% per year (post tax), you would have made Rs. 338 by now; the PVR stock adds up to just Rs. 276 (including the Rs. 12 or so in dividends).

If you bought in the IPO you were plain unlucky. And it's not just retail - even FIIs and institutions have cut their exposure to this stock, from a total of 49% holding in 2006 to 22% in 2012.  In fact, from 2008 till now, retail (as in non-institutional) holding in PVR is up substantially.

The problem isn't whether retail holds this stock or not. It's the timing of the purchase. If you got in at the depths of 2008, you were most likely darn lucky.

Hide the Unlucky

Assuming the lack of luck, means that every loss that you make is attributable to sheer lack of talent. Lack, perhaps in identifying Arshiya, where the stock has dropped from 130 to 39 in just January 2013, and where Mr. Arora has a significant stake.

There are countless examples of duds. While you could have watched movies in PVR, you could have used a mobile phone as well. And more people are using mobile phones today, compared to 2008, than watching movies. Yet, nearly every mobile company has been a dud. The mobile infrastructure players too - like GTL infra - are down substantially. India has a shortage of power, no? Power companies are on life support in the stock markets. More people are flying airplanes than ever? The stocks aren't exactly flying anywhere.

We're still making money

Sure, you could say that net-net, we're still making money. Yes, net-net is the point. But whatever little strategy you have, it involves a substantial amount of guess work. You can only guess what the future looks like, based on some figures that someone has given you. Those figures may be wrong.The assumptions may be wrong.

When they are, you can attribute those to luck.

When those assumptions work out, it's the same lady that's doing it: luck.

We could avoid the hubris of attributing our success to skill, when what we do is quite as much about luck as it is about skill.

I've been incredibly lucky. Luckier than my dad who lived in a village and walked a long distance to school, and made his way up the ladder the hard way. Lucky to have had the opportunity to study and go to college, when millions don't. Lucky to have a government fee structure of Rs. 2,000 per semester in the college I went to. Lucky to have graduated in 1996 in the heart of India's IT revolution, giving me a great start. Lucky to be in India's great growth story through the 00s. Lucky to be able to write this in a kinda-sorta-free country.

There is some skill involved

When opportunity knocks, you gotta open the darn door, not just sit around. So yeah, the people who work hard succeed because they take the luck and make it work for them. That is not unimportant. It's par for the course. Gotta work hard. Or smart. Or something like that. Don't take away the wrong meaning that if it's luck anyway, let me sit and do yoga while I wait for luck to drop money into my bank account.

Focus, then, on getting lucky

This is what one does in much of life anyway. But I digress.

But the true point is: take chances. Calculated, or whatever, but take those chances. If you don't bet, you can't win. For the entrepreneur, it's about creating and following many leads, chasing many investors, hitting different markets; you never know what will succeed. For the investor, it's about taking bets when you're reasonably confident and not waiting forever.

It's also about admitting mistakes (and attribute them to luck if it makes you feel better) and moving on. After all, if it were skill, then you'd never get out of a stock. And that only helps sell Warren Buffett books.

WTF: Reading Too Much Into Bulk Deals

Comments Off Written on July 12th, 2012 by
Categories: WTF

Firstly, apologies for the small hiatus in posting. I am consulting with ICreate, a company that does banking BI (and is founded by two close friends, so excuse my glorification), and we're trying to do great things in a compressed time-frame. And then I have the young V and the younger Z that demand my attention at home, since they are largely confused about what this whole "going to office" business is, what with my working from home for nearly all the time since V was born 5 years ago. So writing has taken a back seat, which is why I deeply apologize.

To come to the meat of this rant, which is a WTF. While data has become more widely available, such data can lead to abysmal reporting if people do not attempt to understand the data properly. Recently I have been noticing that journalists, when they want to report on a company, take bulk-deal data from the NSE/BSE, and then use it to suggest conclusions. Today's Mint report on OnMobile had this gem:

OnMobile rose 8.93% to Rs.36.60 on BSE on Tuesday, with 7.2 million shares being traded on the bourse. The benchmark Sensex index rose 1.3% to 17,618.35 points.

Interestingly, bulk trades in the stock on Tuesday appeared to indicate that buyers and sellers were the same. BSE data showed Crosseas Capital Services Pvt. Ltd and an individual, Devendra Kumar Dharamveer Sharma, bought 891,000 shares and 831,000 shares at Rs.34.95 and Rs.35.58 apiece, respectively. They also sold the same amounts— 891,000 and 831,000 shares—at Rs.34.80 and Rs.35.57 apiece, respectively.

On the National Stock Exchange, Alive Consultants Alive and Devendra Kumar Dharamveer Sharma bought 1.14 million shares and 1.935 million shares at Rs.35.46 and Rs.35.57 apiece, respectively. They sold the same amount— 1.14 million and 1.935 million—at Rs.35.47 and Rs.35.60 apiece, respectively. The entities couldn’t be reached immediately for comment.

You know why they couldn't be reached? Because they are arbitrageurs. They don't care if the company is OnMobile or TarBall or WidgetCo.  If it can be arb-ed, it will be arb-ed.

Crosseas is a known arb-player, and the other fellow is probably a random newbie using Adroit or some other classic-arb software to automatically bridge the differences between the NSE and BSE. (The software takes a buy-sell position in the two exchanges when the differences in price of the same security reach a certain level and then reverse the position when the prices converge, giving the trader a profit net of transaction costs) You don't hold such positions overnight - you always square off by the end of the day.

To any serious stock market participant, a buy and sell bulk-deal is to be eliminated from all analysis. The exchanges only report them because they have to, if the volume of trade is more than a certain percentage (0.5%) of all the shares of a listed company, by the same party, on the same day. These arbitrage trades routinely reach such limits and the reporting of their trades is useless.

Reading too much into such bulk-deal data is not worth the internet real estate it occupies. It remains a WTF. (Note that Mint above was just an example, I've seen issues with nearly all financial magazines on bulk-deal-overanalysis)

WTF: Sintex Promoters Didn’t Buy After All

6 comments Written on January 9th, 2012 by
Categories: Sintex, WTF

I noted last quarter - on October 13, 2011 - that :

The promoters of Sintex “plan” to buy 4.78% and take their stake up to 40%, says MD Amit Patel in a post-earnings conference call.


I don’t really get this. Why would you announce a purchase BEFORE you buy? The stock will run away. Typical promoter buys are announced about 10-15 days after the acquisition of shares. There needs to be a SEBI restriction that needs them to announce within a week, but that’s a different story.

It's been a quarter from then, and two things have happened:

a) The promoters have NOT bought a single share. Not a single announcement has come from Sintex to the exchanges post October 2011 - and they have to announce any promoter buys.

b) The stock price has fallen over 42%, from 115 then to Rs. 66 now.

Sintex chart


The point is: Don't trust announcements, especially where they say they will do X, when they can be doing X already.

I really liked Sintex promoters before this and now have a bad taste in the mouth. I have traded the stock - mostly successfully but recently took a loss when the stock fell from 185 to 140 (my 25% wide stop was hit). But the stuff that's been happening recently is triggering big time alarm bells - at this time I would trust the technicals, and distrust all fundamentals.

The current rumours in the market are - a) The Ambani brothers will reunite and b) RCOM may be close to a tower deal. I am Sintexofying those rumours also.

The Fringe Impact of the RIL-TV18 Deal

10 comments Written on January 4th, 2012 by
Categories: Network18, Reliance, WTF

Reliance Industries (RIL) has sold its stake in media entity Eenadu to TV18, in a convoluted complicated deal quite characteristic of RIL and TV18. Let me help you decode.

First, the more recognized sources:

What is the deal?

1. RIL owns stake in Eenadu TV. 100% in regional news and entertainment channels, and 49% in telugu channels of ETV. This was purchased for 2600 cr.

2. RIL is selling part of this to TV18 - the full 100% of the regional news channels, but only half of their stake in the entertainment and Telugu channels. (TV18 will still get the right to buy the rest of Reliance stake, but we don't know at what price)

3. TV18 will pay Rs. 2100 cr. for this, according to their Press Release. Reliance, in it's press release, says the stake in the channels is "being profitably divested". We'll revisit this.

4. But TV18 doesn't have the money.

5. So they're going to fund the purchase through a mega rights issue of Rs. 2700 cr. "Rights" means existing shareholders get to buy in the proportion of their holding, not outsiders.

6. More than 50% of TV18 is owned by Network18 (the parent), which also doesn't have the money even to buy into the rights issue.

7. Therefore, even Network18 will announce a total fund raise of Rs. 2700 cr. Due to the cross holding, the total amount actually raised will be Rs. 4,000 cr.. Out of this, the promoters - read: Raghav Behl and the like - will put in Rs. 1700 cr.

8. But even the promoters won't put most of the money themselves - instead, they will get money from Reliance! They will borrow money from "Independent Trust" which is an RIL entity, and the borrowing will be "optionally convertible" to shares. We don't know more details, but this is quasi ownership, through optionally convertible debentures.

9. Infotel, that RIL investment in 4G and BWA, gets all the Eenadu and TV18 web and media content as a "preferred" partner to sell through its pipes. We don't know when, though.


TV18 gets access to the Eenadu TV portfolio. Raghav Bahl retains control of TV18 and Network18, until Reliance decides to convert its ownership to equity.

Reliance gets official entry into media (till now the holdings weren't so well known), and gets to record a profit. Infotel gets content to sell through its pipe, when that happens.

TV18 and Network18 went up 20% each yesterday, and are up 7-10% today already. Reliance has gone up 2.5%.

Reliance pays itself and makes a profit?

Reliance is paying TV18 promoters who will buy into a TV18 rights issue which gives TV18 the money to buy from Reliance. That is what this deal is, and the beauty is in the books:

Reliance has sold part of its media investment, at what they say is a profit. That means they get to record a profit in the Jan qtr or whenever the deal is finalized. (And they funded that purchase, so they "bought" profits!) The funding part is a balance sheet item and changes nothing on the profit and loss statement.

Now Reliance bought for 2600 cr. and TV18 is buying for 2100 cr. - where is the profit? Reliance retains a part of their media holding in Eenadu, which I am sure will be valued at >500 cr. (some banker will certify it - who's to disagree?). That gives Reliance the profit - we don't know how much, though - that might only be visible next qtr.

RIL and Media companies?

A source - anonymous - writes about how, through a web of companies, Reliance has been building its own entry into the media space. The deal goes through Nimesh Kampani (who fronted the ownership, buying into Eenadu in 2008, and who is close enough to have mediated talks between the Ambani brothers) and then a slew of cross-held private companies.

Who's going to buy into the rights issue?

Apart from the promoters, that is. They haven't got the prospectus to SEBI yet, and I'm looking forward to the juicy details. We don't know the price (Network18 is less than Rs. 60 a share, and TV18 less than Rs. 40 - both are significantly higher than their pre-announcement prices).

We don't know who will buy - the share is likely to go up to "excite" people, and will be managed quite well by speculators.

Strangely, a good part of promoter stake is owned by "Senior Professional Welfare Trust"; This is the entity which borrows money, using Network18's holdings as collateral! Oh, such circular logic - these two companies deserve each other.

And wait, let's look at the market capitalization of these companies:

Network18 has 14.26 cr. shares. Even at today's price of Rs. 53, that's a market cap of 756 cr.

TV18 Broadcast has 36.21 cr. shares. At today's price of Rs. 38, that's a market cap of 1376 cr.

Both these companies are raising 2700 cr. each through rights issues. That is quite remarkable, and it'll be interesting to see who buys in. It'll take an awesome bull market to pull this off - and to get the FIIs and mutual funds to buy in as well. It'll depend on the pricing of the issue, and then the market price.

Is there a trade?

I'm not touching Network18 right now. (I can't stand the market manipulation in the stock - not blaming entities, but this share behaves as if it's rigged). But the trade in it will be to let the euphoria die and then short it.

As for Reliance, this won't impact them much.

Disclosure: no positions.

Now open to more questions and revelations. Thanks for reading.

BSE Cancels All Mahurat Trades

5 comments Written on October 28th, 2011 by
Categories: WTF

The BSE cancelled all futures trades in its recently introduced derivatives segment, on Mahurat Trading on 26 Oct.

It was rumoured that using algolrithm trading methods-high frequency intra-day trades using software-a Delhi-based broker had played havoc with sensex futures. While the low for the day in sensex futures was 14,000, compared to the sensex close of 17,289 in the cash segment, the average price for the broker was about 15,000. It was said on the Street that if the trades in derivatives were not annulled, the loss to this broker alone could have run up to as high as Rs 100 crore. The segment's turnover was rumoured to have been Rs 27,000 crore, compared to BSE's recent high figure of about Rs 500 crore.

You can bet your derriere that if you or I had done something silly like this, no one would have come to our rescue. But yes, if a broker loses 100 cr. due to his OWN mistake, they’ll cancel all trades – and if by any chance you had made a profit buying from him and then selling later, sorry, but that’s cancelled too.

I hope algorithms will keep this in mind for subsequent trading.

WTF: Network 18 Pledges Holdings To Help Promoters Increase Stake?

10 comments Written on October 17th, 2011 by
Categories: Network18, Stocks, WTF

Network 18 has something funny going on. According to me, the company is helping its own promoters buy more shares.

Let me put forth some evidence. Read the rest of this entry »

WTF: 34 million “Poorer” Indians due to the Recession

2 comments Written on February 10th, 2010 by
Categories: WTF

A tweet from @inquestioner went “Scary,34 million joined the ranks of the poor in India because of the recession that everyone was in denial of.UNDESA figurs.” [sic]

I usually find these figures very global-warming type – meaning, highly suspect and jugaad methodology - so I thought I’d investigate. In the “World Economic Situation and Prospects, 2010” report, Page 35, they say:

The reduction in employment and income opportunities [due to the slowdown] has led to a considerable slowdown in the progress towards poverty reduction and the fight against hunger. Estimates by the Department of Economic and Social Affairs of the United Nations (UN/
DESA) suggest that, in 2009, between 47 and 84 million more people have remained poor or will have fallen into poverty in developing countries and economies in transition than would have been the case had pre-crisis growth continued its course (table I.3). This setback was felt predominantly in East and South Asia, where between 29 and 63
million people were likely affected, of whom about two thirds were in India.

So the figures for Asia are between 29 and 63 million people – that is a huge enough range for me to say “WTF” anyhow, but let’s not digress – and 2/3rd are in India, so for us it’s between 20 and 42 million people. 34m is somewhat in the middle if you are slightly mathematically challenged, but let’s not bicker about a few million here and there.

The important thing is how they arrived at it. They said – okay, India’s growing at 9%. If it continued to grow at 9%,  then X number of people would be poor. But because of this slowdown, we have Y poor people, and Y is larger than X. Therefore, this figure Y-X is the number of people that have been reduced to poverty by the slowdown.

Let’s not talk X and Ys. Let’s talk real numbers.

Assume we had a 100 poor people. Let’s say that for every 1% growth, we reduced poverty by 1 person. So with 9% growth, we are left with 91 poor.

But we grew only 6%. So, post the recession,  we have 94 poor people. 94 is less than 100. That might sound like a good thing. But no.

The UN-DESA way of looking at this – and their glasses must forever be half empty – is: Goddamn recession did not take 3 people out of poverty, so 3 people got poorer.

Another way of looking at it is: 6 people got out of poverty. 6 is good. Even 1 is good, come to think of it, but 6 is definitely good. And it is wrong to focus on the 3 number. 

For one, 9% growth was not sustainable; it was extraordinary. It was likely to be 6-7% averaged over years, so one year we’d do more, another we’d do less. Extrapolating a pre-crisis growth figure is silly; in that way, I could extrapolate the “Hindu Rate of Growth” of 3% pre-1992 and say damn, 600 million people are out of poverty today since 1992 because we grew more than expected.

Second, the focus on the smaller figure throws real achievement out the window. There are no real figures in that sheet – but I can imagine that if this calculation yields 34 million “poorer”, then the absolute number of people we got out of poverty must then exceed 60 million. That means, we got 6 crore people out of poverty, post recession – less than the 9 crore we expected. That statement paints an entirely different picture.

Finally, I must say the statistics are screwed up because it uses per-capita income to determine poverty levels – yet, if money was earlier more concentrated in a few rich people, and post recession got better distributed among the entire population, the poverty figures UN-DESA quotes will be overstated. They acknowledge this, though:

It should be noted that the estimates presented here take into consideration the impact of the downturn only on growth in income per capita compared with continued pre-crisis trends. Hence, these should be interpreted in the first instance as a slowdown in poverty reduction owing to a drop in the mean per capita income of developing countries. For lack of additional information, the estimates do not take into account likely changes in income distribution.

That statistic is simply gleaned from macro-figures. We aren’t told how many people are really poor (buying power wise), how many of these are urban/rural, how many are in organized/unorganized sectors, what’s the birth/death impact and how the numbers are moving. Those stats may tell us where we need to focus, where achievements are good and where we can improve. What we can’t afford is to have global statements like “the recession made 34 million people poorer” – because it is a hollow statement with conveniently extrapolated matter, and yields nothing. It truly makes us poorer.

Girish Shahane has a good post about this too.

So once in a while, I will rant. This is that time. Thanks for listening.

P.S. Why is this relevant to trading? One comes across this kind of fallacy all the time – the subprime crisis was exacerbated by people running excel sheets extrapolating data and lost connection with logic (once it boils down to “House prices always go up” the logic failure is evident).  LTCM failed because they assumed “Normal distributions” but it didn’t live up to its name. And the efficient market theory fell flat on its face because despite all sorts of mathematical proof, it simply was non-existent. (My feeling is that it’s attractive to a lot of people for it’s simplicity, so they like indexing/asset-allocation/passive investing even if the the data may not apply to India)

WTF: Returns from the lows, or from the highs?

3 comments Written on January 14th, 2009 by
Categories: WTF
Rediff's article: Stay calm, don't panic by Anil Rego try to mollify investors who got in at the peak of a bull run that it's all ok, the Sensex recovered really fast after that.

As one can see, someone who invested in peaks, saw troughs, but if s/he had waited patiently would have gained significantly from the stipulated levels at which s/he had bought. Another key point to note is that the deeper the cut, longer it took to heal.
Unfortunately, this makes little sense for those that got in at the peak of the bull run.

Look at the results one or three years later. In two instances (1992 and 2000), even after three years, the returns were negative from the peak. In 1996, the returns after three years was even - only in 1990 did it grow substantially. (But remember, three years after 90 was the end-game of a very dramatic bull run too, and the index subsequently went even lower)

Looking at the current market - even today we are up 30% from the lows of 2250 on the Nifty, but does it count for much? Will it go 30% from HERE in three years? The data, as shown in the article, seems quite unattractive; on an average if the index only recovers 50-60% from the lows in three years, the return from today is an abysmal 7-8% a year compounded.

Data can be twisted to look really good; the article will make those that invested at the bottom happy - all the four of them. But there's little solace for those who got in at the top, most of whom are hoping to get out "at cost price". The opportunity cost today is a 8% per year one could get post tax in other, just as risky instruments like the Tata Motors bond issue.

This is just a WTF.

WTF: Satyam buys its mirror image, loses 50% in share price, backs off

23 comments Written on December 17th, 2008 by
Categories: Satyam, WTF
Late yesterday Satyam's founder Ramalinga Raju, who has been looking at the company's war chest sitting idle when there are good uses of the damn money, decided to take action. The best thing to do, he and his board decided, was to buy companies named the mirror-inverse of Satyam, i.e. Maytas.

For $1.6 billion, Satyam would buy Maytas Properties ($1.3 bn) and Maytas Infra ($0.3 bn) and get into the "infrastructure" space, building ports and roads and buildings and all that. You might wonder why a software and IT company would do this, but Raju's personal input was helped by the Satyam questionnaire for new recruits:

1. Can you code Java or C# or C++ or indeed any programming language? (Check all that apply)

2. If there is no programming project available, can you:

  • Lay bricks in an orderly fashion
  • Oversee cement blocks
  • Paint a wall (or a ceiling)
(Check all that apply)

Presumably most people had checked all, effectively giving him a multi-skilled workforce, so Raju decided he now had the ability to do what he did with I.T. Services to the Infrastructure space. We don't currently know what he did with I.T. Services, to be honest, but we'll assume that he did something.

By a quirk of fate, it turned out that the "Maytas" companies were largely owned by the Rajus themselves.

Maytas Infra is public, and the last price was Rs. 481 - and has 31% owned by the Raju family (actually 36%, of which Satyam's only buying 31%). Satyam had paid Rs. 475 for that would of course pay higher to other shareholders - Rs. 525 for the remaining 20% (which would be through an open offer). The total cost for this company - which earned a respectable 37 crores in the first half of 2008-09 versus an even more respectable 90 crores for the full 2007-08 - was a decent Rs. 1500 crore or so; a public company after all deserves to be paid a little bit of premium.

Maytas Properties on the other hand was a private company in which the Rajus owned 35%, and whose web site lists helpful questions and answers such as:

3) What are the formalities specified under the Indian Income Tax Law, if any, that one has to complete before or after selling any property, commercial or residential?

You have to obtain Permission under section 230A of the Income Tax Act if the value of the property to be sold is more than 5 lakhs.

Regular readers of the Income Tax Act would know that Section 230A has been removed since 2001. But these are minor errors of course, and no one reads the FAQ anyway, right?

Maytas properties lists a 75 acre SEZ, 2 small projects that are in construction , and a massive 300 acre project called Maytas hill county. The hill county project lists 2500 sq. apartments in far, far, far away land, at the not-quite-going price of 1 cr. (additional charges extra, going by the online site). The business model for all of this is, in my not-at-all-humble opinion, f***ed.

Satyam would take Maytas Properties over completely, paying $1.3 billion, or Rs. 6,500 crores for it. We don't yet know why, but the fact that a young Raju is the CEO of the company might have helped. It's not what you do, it's who you know.

Unfortunately some silly people thought this was not such a good idea, primarily because they weren't the Rajus. "What the F?" was a thought common in a lot of investors minds; who expressed it by selling-their-ass-off Satyam. The stock ended down 55%, a mindblowing record of sorts for Satyam, especially when the Dow ended UP 4.2%.

This has been a shocker for Raju, who was like - dude, when Citi can get away with it, when AIG can get away with it, and soon when GM and Chrysler can get away - why not me? This logic was lost on the average investor of Satyam's ADR, who could see, in the extreme fogginess prevalant in stock investing, the sucker in this deal: them.

Fortunately of course, the Raju's owned only 8% of Satyam, so the stock fall is not likely to dent their newly found fortunes. Or so they thought, until some folks got really belligerent against the deal, and quoted tax and company laws to hell and back, giving Raju the heebie jeebies of being a Madhoff and not a Citi: the difference being getting away with it.

In consideration of not getting ass-whipped in public, Satyam withdrew the "buyout" offer. So the case is now (sorta) closed, with Raju saying he was "surprised" by investor reaction to the deal, but would withdraw in deference of the fact that they seemed to have at least one brain cell working.

(He's gotta find out how to fund those stupid 1 crore projects in godforsaken land in some other way now, which is what is "surprising", I guess - why couldn't Satyam do that instead? So much easier to just pay him 8,000 crore (or an appropriate percentage) but some random jokers had to put a spanner in the works. )

Note: the tongue-in-cheekness of this post is only surpassed by the incredulousness, if there is such a word (okay, incredulity), felt by the author. WTF?

WTF: Business World on RBI

2 comments Written on November 8th, 2008 by
Categories: WTF
Business World has an article on the RBI: "Lost in Minutiae". I find glaring inconsistencies in the article, like:
The latest measures of the reserve bank of India (RBI) giving banks access to more cash at lower interest rates will no doubt be welcomed by the market; a market does not exist which does not love handouts. What is important about the measures, however, is what they tell us about the points of weakness in the market.

First, there is the obscurely worded permission given to foreign financial institutions to borrow abroad. These institutions are at home in a foreign country, and do not need RBI’s permission to borrow there. It seems to be suddenly worried that so many foreign investment institutions are dumping Indian shares and shipping the proceeds abroad, and to be telling them that they can borrow abroad to continue holding the shares.

DOes this refer to RBI's "RBI allows Non-Deposit taking NBFCs to raise Short Term Foreign Funds with Prior Approval"

That has zilch to do with "foreign financial institutions". Non deposit taking NBFCs = Reliance Capital also, as far as I know. That this is not a big deal for foreign banks is not a concern of the RBI.

The RBI circular simply says NBFCs can tide over this crisis in the short term, but raising money abroad. I can't find any other RBI circular targeting only foreign banks.

Second, there is a cut in the cash reserve ratio (CRR) from 6.5 to 5.5 per cent in two instalments. Just what this delay in reduction achieves, apart from showing how important RBI is, is unclear. RBI says that the reduction will release Rs 40,000 crore into the economy. It will do nothing of that sort. It will increase by that much the credit banks can give without breaching the minimum CRR requirements. But banks are not obliged to give the credit; and given the uncertain financial status of potential borrowers in a shaky economy, banks are not likely to give fresh credit in a hurry. In these circumstances, the CRR serves no purpose. It is the banks' own cash that they are not allowed to use without RBI's permission.
Is he kidding? It is not the bank's own cash, CRR is a percentage of deposits. Deposits are liabilities, cash is an asset. WTF?

CRR is basically a percentage of deposits that have to be maintained with RBI. SLR is another thingy - currently 24% - of all deposits that much be invested in specific government bonds or SLR-able instruments. Effectively, right now, RBI says you gotta put 24% of deposits in SLR, and 5.5% of deposits with RBI. The remaining you can do whatever you want with.

It's different in different countries - UK has no statutory requirement of a CRR, the US has 10% if a bank has over 45 million in deposits etc.

To say this is RBI asking banks to deposit part of their "own" cash is plain ignorance. This is a part of the banking system worldwide, and is either statutory or voluntary-with-enforced-reporting. If there was no CRR, the RBI wouldn't have reserve cash to provide temporary liquidity for a certain bank that had either a run or needs money urgent. And it reduces lending to that extent because if a banks has to keep cash in RBI, it can't lend it out.

Although RBI refuses to let banks use their own cash, it can never afford to let them run short of cash. So it graciously permits them to borrow their own cash under the laughable LAF — Liquidity Adjustment Facility — and charges them interest for doing so.
What's weird about this - haven't you heard of overdraft facilities tied to fixed deposits? Effectively your bank is lending you your own money...and at a higher rate of interest. Now the banks are having the RBI do it to them. Poetic justice. The RBI is a bank. That's the middle initial. WTF.

Again, the author uses "own cash". Can't be a silly mistake there.

A fortnight ago, RBI had given banks special permission to lend to mutual funds which were facing a run, but only up to 0.5 per cent of banks' deposits, which RBI prefers to call Net Demand and Time Liabilities. Why the facility should be related to banks' liabilities and not mutual funds' is a secret RBI is not about to reveal.
Grr. There are client risk limits that are not in this announcement, and have always applied on an individual bank basis, and that is alongside a bank's individual exposure limits, for heaven's sake.

What RBI really said was - you can lend to MFs AND you can borrow that money from the RBI through the LAF/Repo window. For that you gotta give SLR bonds as security if in the process you go below your SLR limits, then we will forgive you.

You could earlier lend to MFs but that money had to come from deposits only (beyond the SLR and CRR limit) - but now we see you're being a prick so we'll give it to you to give it to them. For a short time. Because they're screwed otherwise. This is a temp measure so keep your exposure short term to the MFs. And you can't borrow like a mad dog, just 0.5% of your total deposits ("time and demand liabilities").

Now, apparently, it is not only mutual funds that are in trouble; it has spread to non-bank finance companies (NBFCs) — mostly organisers of big equity and debt deals. So banks will be allowed to lend money to both up to 1.5 per cent of their deposits. The favour is not only temporary but ad hoc as well, available only till RBI looks up from its other concerns and reviews it. At that point, it will be further extended, though RBI would never say that.
This gives the impression the author says "RBI is giving banks permission to lend money". Hardly the case.

What it's saying is: You are supposed to lend. You are not doing so. So I will.

But the RBI act doesn't allow me to lend directly. So I will give it to you, and you give it to them. You take the interest rate spread (diff between what I ask from you, and what you ask from them).

RBI's circular of 1 November is a typical case of its orotund, pompous and obscure style.
The RBI *is* pompous and obscure. ("orotund"? WTF? You use "orotund" and call someone else "pompous"???) But this is hardly an example of that pomposity.

These are the kind of articles I will label "WTF" - short for "What the F?".

Note: I am an outsider to banking. I find this article glaringly inaccurate. What do the bankers think?