Saturday, 23 October 2010

When reality pales into insignificance

Imagine a company which was for decades a byword in inefficiency. It pollutes like hell. It has 400,000 workers, none of whom can be sacked, although it needs far fewer. Most of the places it operates in are rife with insurgency, where the government's writ doesn't run very deep. Corruption is endemic. Technology is antiquated. There's a mafia which operates almost exclusively thanks to its presence. It struggles to transport its production to its customers. Governments set prices, allocate stocks and fix wages - not the market.

You get the drift ? Now this company wants to sell its stock to you. You would run a million miles. Right??

Wrong ! You actually fall over yourself in trying to invest in its stock. Welcome to the crazy world of stock markets.

The company, is Coal India. It is a government owned monopoly that has been around for decades and for most of that period was of dubious financial capability. And yet, for the last few days, everybody around me seems to be subscribing to Coal India's IPO - the government is offloading 10% of its stock. Even the famed Rajalakshmi, who's probably never seen a lump of coal in her life, is applying. The IPO has been oversubscribed some 15 times.

Does any of this make sense ?? Of course it does. The IPO was priced at a discount. There is an opportunity to make a quick buck. The equity culture in India is unbelievable. The aforesaid Rajalakshmi, for whom a Balance Sheet is a concept that could very well be from Mars, sits in front of the telly watching the stock ticker creep by on CNBC every day. Investing logic is derived from "buzz" - if everybody is doing it, I must do it too.

Coal India is a monopoly. India's demand for coal, and power is not going to come down for many a decade. Its IPO got the highest credit rating from CRISIL - the domestic credit rating agency. Voila - the ugly duckling has suddenly become a beautiful swan.

Everybody seems to be happy. The punter who's subscribing is waiting to make a quick buck. The government is grinning from ear to ear as the musical sound of the cash pouring in is heavenly. The bankers who "advised"" on the IPO have made fat fees. The employees are burping loudly, having been given the opportunity to make the quick buck themselves. The company itself is finding it wonderful to be in the headlines for the right reasons.

I am scratching my head in bewilderment. Did somebody say the stock market was supposed to be an efficient mechanism to allocate capital ?? As the Americans say, Wall Street and Main Street seem to be operating on two entirely different planets.


zeno said...

I am a proud rajalakshman :P and would be much more prouder, if i could get a 10% ROI on it within the first hour :)

zeno said...

An awesome opening!until i read the second para, i was thinking, you were talkin about some fictitious company that possibly couldnt exist!

Ramesh said...

Good luck. If you get allotted, you would make your return, of course. I am still reeling with shock at the idea of Coal India being a market darling.

Anonymous said...

panatha kari aakathaa nu thaatha soluvaru..inga karia panamaakaranga :)
intha share vithu vara kaasu karuppu panama?? :D naai vitha kaasu kuraikathu solvanga..kari vitha kaasu???

Sandhya Sriram said...

all rajalakshmi's put together will make a miniscule proportion to the whole subscription

it is the financial institutions and global investors who play the biggest part. the hype of over subscription is largely a phenomena to drive prices up and after the initial euphoria is over, they would know when to exit leaving the losses for the rajalakshmis of the world..I somehow believe that stock markets are match fixed.

anyways - the good part however is that atleast some disinvestment is happening. the fear of share market and responsibility to share holders would drive atleast some improvement in performance of these giant white elephants.

RamMmm said...

A 'rock'ing post and zeno, you 'rock'. :-) I was all smiles at it. I missed the opportunity to be a Rajalakshman. :-)

Ramesh said...

@Sandhya - Yes individuals really don't matter, but make the maximum buzz. And what you say about disinvestment is very true - there will be true accountability and proper governance when a company is listed.

@gilsu - haha - your humour is superb. money from coal is "black money"- only you can think of such one liners.

@RamMmm - Zeno is a cat.

Vishal said...

Great title to the post Ramesh - says it all. I can perfectly understand your bewilderment. For the famed Rajalakshmi also, short term profits make sense and not the logic of financial theories. Nobody really questions the history of the company and its background.

Good for the company as long as it can provide proper governance and keep at bay all those previous malpractices. In this case, I doubt.

Deepa said...

Your blogs are one of the interesting reads that I follow. Its so distressing to sift through the whole (mis)information bombardment all around. Loved the post.

One parallel I can draw with the Stock markets is the movie Dabangg!! Lot of hype, lot of drama, star-mania (even if completely misplaced), but great entertainment with pop-corn! To speculate in these markets you need a lion's heart, which only Salman Khan possesses, not me!

PS: Don't ask me who Salman Khan is! :)

Ramesh said...

@Deepa - Now I have to buy pop corn and go see Dabangg, which I had never heard of till now. Have vaguely heard of the said gentleman though, he of the somewhat violent disposition !!

Ramesh said...

@Vishal - As Sandhya says, individual investors don't really count, but create the maximum buzz. Yes, uit will lead to better governance - wonder what Paswan and the like who have been accustomed to being fed and housed by Coal India feel about it.

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