Gloom all over - This ones from Neemrana - Swaminomics

Government spokesmen claim that, after dipping in 2008-09, the economy will accelerate again next year. But some of the world’s top economists opined at last week’s Neemrana seminar, organised by National Council of Applied Economic Research (NCAER) and National Bureau of Economic Research (NBER), US, that the global economy might get worse rather than better in 2009, affecting India too.
Analysts thought initially that the global recession would end by mid-2009. After all, trillions of dollars were being pumped into economies through fiscal and monetary measures of unprecedented magnitude. This, analysts felt, would surely revive spending in flagging economies.
Alas, that’s not happened. Retail sales in the US were disastrous in November and December. One US economist at Neemrana opined that the big US economic stimulus had raised spending by $400 billion. But this was insufficient to fill a demand gap of $600 billion caused by the recession. This gap eroded sales, causing job cuts that will cut income and spending even further. Corporations don’t want to invest, and it will take time for government infrastructure investment to fill the gap in private investment.
To encourage spending, the US government sent out cheques worth $80 billion to consumers. But consumers spent only $12 billion of this, saving the rest. After years of overspending, consumers are chastened and recanting, so the stimulus is not working. President-elect Obama has promised a second stimulus of $825 billion. It’s unclear whether this will work any better than the Bush stimulus.
After initially sniggering at the US capitalist model, Europe finds itself in deep trouble too. Recessions create fiscal deficits, and stimulus packages even more so. But some European countries already have such high public debts that they bar the risk of defaulting on repayments as their economies sink, a fate once reserved for Third World countries. Iceland is the worst hit, but may be small enough to be rescued by the IMF. But the IMF lacks the resources to rescue all tottering East European countries.
The really bad news is that mainline Eurozone countries like Greece are now in danger of sovereign default. A sequential run on the credit default swaps of European governments seems to have begun. Market rates suggest a 10-15% chance of Greek default. Greece’s national debt is a high 90% of its GDP, of which 20% has to be refinanced in a few months. It’s unclear how Greece can be rescued if it defaults. If Greece goes under, Italy, a G-7 country, will be next in line — its public finances are almost as bad. Britain can devalue to survive a financial crisis, but this option is not available to troubled Eurozone members tied to the euro, including Ireland, Portugal and Spain. Ailing banks in Eastern Europe are mostly owned by West Europe, so a banking collapse in the former could lead to massive contagion in the latter.
Indeed, the very conceptual foundation of the Eurozone, as one where a common currency ensured credit to all on good terms, is now in doubt. Wages and pensions are too high in some countries relative to others. The problem was masked in good times. Now that the tide is going out, it’s becoming clear who was swimming naked.
Another top economist said at Neemrana that three aspects of the global crisis had been underestimated. One was the vicious downward spiral where financial distress caused production distress, which caused yet more financial distress. Second, the vulnerability of banks had been grossly underestimated. Third, nobody anticipated the speed with which galloping commodity prices in the first half of 20008 would be followed by collapsing prices in the second half.
As a result, he said, the world faces a shock of unprecedented proportions. Growth in advanced economies will fall in 2009, for the first time since World War II. Asia may seem in better shape than others , but this is largely because of the lag in transmission of the crisis from the West. Soon, Asia will be hit badly too. And India will suffer along with the rest of Asia.
Another top global economist declared that the crisis was structural, reflecting a serious global misallocation of money in recent years, which had created many bubbles that had now burst. Pumping in more money could not resolve the problem, since it amounted to an attempt to reflate the old bubbles. Instead painful structural change was needed, he said, and this could take years.
The mood of these top global economists at Neemrana was far gloomier than i had expected. While hoping they are wrong, we must be prepared for their being right.

How to spot a SCAM

FOR some it’s clearly winter, for those spoiling for a fight with neighbouring countries it’s a time for bellicosity and for many it’s a period of abstinence and renouncement. But, for Corporate India, this is, undeniably, a season for corporate governance. The nice-sounding, and sanctimonious, phrase moves from conference halls to board rooms this month as Satyam occupies business mindspace, boggles the popular imagination and becomes the new “shock-and-awe” item of the season.
The term ‘corporate governance’ tends to make an appearance and leave a strong impression mostly during times of market crashes and slow economic activity. During go-go times, no one cares. Even the Satyam skeletons would have stayed firmly locked up, rattling some consciences occasionally.
But, this time, long faces are discussing the issue seriously on television channels, equity analysts are saying they knew all along that India Inc was seriously in deficit and many company promoters are looking over their shoulders every so often.
Does this end here? Hopefully. But, if one is to hear all the doomsday artists and professional corporate watchers, this could just be the beginning of a long procession of companies waiting to be outed. So, here’s a favourite parlour game: how to spot and detect the next wrong ones. Look out for these traits:

1) This one is a sure give-away. Be suspicious of companies suddenly launching on unrelated diversifications with great gusto. For instance, a chemicals processing company starting a floriculture project is a sure sign that it is planning some land-related scam or is using up shareholder’s money for a hare-brained project to be launched by the promoter’s son.

2) Beware of companies which have huge related-party transactions. This is one old (and successful) model of siphoning off cash from the company. It is also a not-sosubtle way of ‘inflating’ sales. About 50% of one large, and listed, real estate company’s sales are to a group company (which stays resolutely private), but the money to be received from the same company somehow does not jive with the sales number. In this way, the listed company uses public money to build projects, sells them to the private company, shows pumped-up sales, but the buyer (the private company) is over time shown as incapable of paying up, the receivable is written off from the listed company and when the sales eventually happens, the shareholders of the private company gain the most. Cost is borne by the public, but profits stay with only the promoters.

3) Keep your antennae up for companies which suddenly change their accounting policies. Many companies suddenly change either their depreciation policy or even their revenue recognition policy. A change in the depreciation policy allows many companies to either reduce their actual losses or helps balloon profits. Many corporates also suddenly change how they acknowledge revenue accretion. In many cases, this helps show a sudden increase in sales, resulting in better valuation on the stock markets.

4) Another red flag: Companies that suddenly show a dramatic jump in sales, when nothing extraordinary has happened in the economic environment to justify the spurt in growth. One media company which went public a few years ago, showed a spectacular jump in its total revenue a couple of months before filing its prospectus. Recently, another technology company showed a 900% jump in sales over just six quarters ended September 2008! People should be beating a path to this company’s door for some clues on how to locate undiscovered multitudes of buyers.

5) Many companies, during good times, entered into some exotic foreign exchange derivative contracts, hoping to punt on the movement of currencies they had no clue about, such as the Swiss franc. In good times, all’s acceptable. But, come crunch time and all these derivative contracts have now shrunk in value. But, the companies that bought these fancy products are yet to recognise the forex losses on their profit and loss accounts. It’s a bit like a time bomb ticking away in the accounts. Some companies have disclosed their exposure, but are refusing to provide for it, hoping it will go away one day like a bad dream.

6) Ditto is the case with many companies which had loaded up on forex debt, like a famished urchin landing up at a free, five-star buffet. Today, they are shying away from showing the losses on these debts, especially since the rupee-dollar has moved adversely from the time they had contracted the debt. Expect to hear more about a fancy term called Accounting Standard 30 in the coming days.

So, what’s the lesson from this time? Sorry to sound cynical, but as long as the system stays what it is, there might be just a few more revelations, and then it’s back to business as usual. C’mon, we’re all forgetting the basics. Can you ask people to keep a tight rein on greed in a market that’s asking everybody to buy that fancy yacht, or that bejewelled watch, in the space of a heart-beat? Perhaps, it’s better for all of us if we were to accept this silver-tongued beast as an irrefutable part of our lives.

SCAMS

Company Involved (Year of Scam Expose'): CRB Capital Markets Limited (1996)

Amount Involved: Rs 1200 crore

Type of Fraud: Chairman Chain Roop Bhansali, was accused of siphoning off Rs 12 billion in the CRB scam. CRB was accused of using its SBI accounts to siphon off bank funds, claiming it was encashing interest warrants and refund warrants.

Impact: The Unit Trust of India and the Gujarat government also incurred losses.


Company Involved (Year of Scam Expose'): ITC – Chitalia's Fera Violation(1996)

Amount Involved: FERA violations were estimated at around $80 million.

Type of Fraud: In June 1996, ED started FERA investigation into the export transactions between ITC and the Chitalia group of companies (EST Fibres) during 1990- 1995.

Impact: The Chitalias and several directors of the company including ITC Chairman KL Chugh were detained but later released on bail. ITC in turn slapped a suit on Chitalias for $15 million, Chitalias in turn sued ITC for $55 million, which they claimed ITC owed them.


Company Involved (Year of Scam Expose'): Home Trade (2002)

Amount Involved: Rs 6000 cr

Type of Fraud: Eight co-operative banks, like Valsad People's Co-operative Bank and Navsari Co-operative Bank from South Gujarat, collectively lost over Rs 80 crore due to bad investments by the Home Trade. It was also linked to Rs 82 lakh forgery in a central government undertaking EPF scheme.

Impact: Home Trade chairman Sanjay Agarwal and Director Ketan Seth were arrested


Company Involved (Year of Scam Expose'): DSQ Software (2003)

Amount Involved: Rs.595 crore

Type of Fraud: Dinesh Dalmia's Company DSQ Software was accused of dubious acquisitions and biased allotments made in the year 2000 & 2001.

Impact: Dalmia was arrested in 2006 and is currently serving jail sentence.


Company Involved (Year of Scam Expose'): Nagarjuna Finance (2003)

Amount Involved: Rs 98.37 crore

Type of Fraud: Executives of Nagarjuna Finance, an promoted by KS Raju, was accused of failure to return about Rs 100 crore to depositors in 1997-98.

Impact: NFL could repay only Rs 54.8 crore as at December 2003.

Company Involved (Year of Scam Expose'): Satyam (2009)

Amount Involved : Rs. 7000 cr.

Type Of Fraud : Inflated Balance Sheets.

Impact : Founder Arrested.