Jan 142015
 

India's Shadow Chase

Ref:15/Article/01 of 14 January, 2015                                                               By Kalidas (Anil Selarka)

The Elections are won on rhetoric. The slogans are invented based on the current perceptions of the masses so that they can be addressed by playing them up in loops until the election process is over.

BJP led by vibrant face of Narendra Modi judged the mood of the people against corruption and scandals correctly and orchestrated national campaign of Congress hatao, desh ko bachao. (Remove Congress, Save the Nation). He galvanized the nation with his indomitable spirit reminiscent of Sardar Vallabhbhai Patel, a renowned freedom fighter and close ally of Mahatma Gandhi. Modi used modern technology, like conveying his views through Face book, and secured massive and convincing mandate from the people by leading BJP (or Bhajap) into a single party majority in the parliament.

PM Modi, equipped with massive mandate and clean image against the backdrop of tainted politicians of Congress, had to face uphill task of dealing with the stark reality – high inflation, slow growth, high current account and bloated budget deficits. All he needed was the massive amount of money in the coffer. He recounted his election promise of bringing back into the country massive amount of black money suspected to have been stashed overseas, especially in Tax haven like Switzerland which he singled out without doing enough home work.

Narendra Modi in pensive mood

Narendra Modi in pensive mood

When a doctor wants to treat a disease, he has to diagnose it with clinical accuracy. He should have facts straight, all X rays and pathological reports on his table, have the expert colleagues endorse his diagnosis; and then only he could venture into critical surgery. Wrong facts, reports, analysis, concepts and prejudices invariably lead to wrong diagnosis that would lead to wrong medicines, thereby killing or paralyzing the patient on his operating table.

Modi is a politician, not an expert on economy. His belief backed by popular views that the lakhs of crores of black money were lying outside India was terribly wrong – I will prove it later. He did not have basic idea – why, how, when and where the black money was generated and then stored. He thought that all black money were in the form of “physical currency or electronic money” and must be in bank account, which was outrageous and wrong. He, and for that matter Finance Minister Arun Jaitley and RBI Governor Raghuram Rajan, do not have faintest idea whether or not so called money are stacked overseas in physical or electronic form or in some form of other assets. Pic10_Black Money Dr. Subramanian Swamy and his bizarre claim…. Modi was backed in his belief by so called Harvard educated economist – Dr. Subramanian Swamy of his own BJP party, who filed PIL (Public Interest Litigation) in Supreme Court to bring the black money back home, estimated to run into several lakhs of crores. He also alleged that more than 1.2 million bank accounts of the tax dodgers in India exist in foreign banks. Dr. Swamy never backed up his claim how did he acquire or arrive at the numbers. Although he proclaims to be an expert economist educated at Harvard University of United States, never did he give a single constructive suggestion to improve the core economy or any other social issues in his last 40 years of his political and parliamentary career.

Not so easy to open Foreign Bank Accounts…….
Being NRI living in United States and Hong Kong alternately, I know for sure how difficult it is to open a bank account in normal course. Most banks in United States and also in non- US countries are governed by Patriot Act (a US Law) under which banks and financial institutions are required to observe strict rules (known as KYC or Know Your Customer rules) for opening an account. They open the account only after satisfying potential customer’s full identity with a view to eliminating the possibilities of money laundering later.

Further, the banks in foreign countries usually insist on minimum balance from USD 1250 to 4000 in normal accounts and over $25,000 for premium accounts. Let us evaluate his outlandish claim of foreign bank accounts.

Not every bank account overseas held by some Indian names are tax dodgers from India. As per Government of India’s survey in 2012 <http://moia.gov.in/writereaddata/pdf/NRISPIOS-Data%2815-06-12%29new.pdf>, about 21.90 million Indians or about 5 million families live abroad known as NRI (Non Resident Indians) and PIO (Persons of Indian Origins). Most of them are poor laborers living in Malaysia, Sri Lanka and petty job earners in Middle East (See the above cited report).

However, the rich Non Resident Indians of about 5 millions live in wealthy countries like US, UK, Germany, Japan, Hong Kong, Singapore and other tax havens. Most of such bank balances are tax paid legal money as they pay the taxes to their host governments. Just because their names are sounding “Indian” does not mean their savings belong to tax dodgers of domestic Indians. If we presume that of alleged 1.2 million accounts overseas were held by domestic Indians with average balance of $100,000 per account (Rs 60 lakhs) – no wealthy man would open foreign account with small amount – total amount that would have been held by local residents abroad would be $120 billion ( 1.2 mil x $100,000 = $ 120,000 million) or Rs. 720,000 crores or Rs 7.20 lakh crores ($ 1 Million = Rs 6 crores @ Rs 60 per dollar). The potential tax loss to the national exchequer (Income Tax Dept.) would be 33% or Rs 2.40 lakh crores. This is absurd as proved later.

Remitting alleged money abroad via “hawala” routes… It is extremely dangerous to send the money abroad using “hawala” trades. One has to depend on the unknown hawala trader to pay honestly abroad in a bank account. Also, the cost of hawala is anywhere between 3% to 5% depending on the experience of the concerned local Indian remitter. Most hawala trades are being conducted through Dubai (60%), Hong Kong (10%), Singapore(15%) and London (15%). Advanced countries including Switzerland are rarely used since large remittances attract the attention of their respective central banks.

Ever since UBS (Union Bank of Switzerland) disclosed thousands of names of US Investors considered potential tax defaulters, major investors have started distrusting “Switzerland” as preferred destination. UBS lost over $60 billions from under its management. Once considered almost second largest bank in the word after Citibank, UBS has paled into insignificance. HSBC, Switzerland who disclosed over 628 names to Government of India will also face the same fate. No one would trust HSBC if it does not respect the privacy of the investor customers. The actions by UBS and now HSBC in Switzerland would dissuade major investors from parking the money in Switzerland. Not every local Indian can remit or would remit money using hawala trades. He does not trust even a local friend or family member with paltry sum of Rs 1 lakh. Where is the question of his trusting unknown hawala traders with Rs 60 lakhs (= US$ 100,000 @ Rs 60/$)?

Wild and absurd estimates of black money parked abroad… The estimates of the Government of India or that of Global Financial Integrity (GFI – a think tank based in Washington DC) in United States, that over $500 billions (Rs 3,000,000 or 30 lakh crores) are being held by local Indians is therefore grossly inflated and highly unrealistic. ($1 = Rs 60; $1 million = Rs 6 crores; $1 billion = Rs 6,000 crores) Money in circulation is different from total capital and revenue assets of an individual. For instance, an Individual’s total assets including home, gold, car and cash may amount to Rs 1 crore at market value, but real cash saved in bank accounts or in hard cash may not exceed Rs 10 lakhs. If an individual earns Rs 1 lakh every month, he earns Rs 12 lakhs in a year. (Monthly income x Velocity or a factor of 12 for entire year). If he saves Rs 1 lakh per year after taxes (1/12th of his gross earnings), it would take him at least 8.25 years to accumulate the savings of Rs 10 lakhs in cash.

Businesses, where most black money is generated, the money rotates 4 to 6 times a year. That is, Rs 1 crore cash/credit/bank balance could generate sales revenue of Rs 4 to 6 crores per year (based on trade credit of 3 to 2 months respectively). If his net profit margin is say 6%, his savings after personal expenses would be hardly 1% of gross revenue (sales). In other words, for Rs 1 of black money, he should have Gross Revenue of Rs 100 or 100 times the black money. If we are to believe that $500 billions have been stashed outside (Net Income) and they are all black money, then the gross business revenue would have been 100 x $500 billion or $50,000 billions or $50 trillion!

The size of entire Indian economy is not even $1.5 trillions including black and white money, then in that case, how black money alone could have been 50 times GDP of entire Indian nation? Based on above, we can only conclude that most black money are not hoarded abroad. Over 95 % black money generated in India are being held locally (and not overseas) in various forms of assets as under:

1. In Real estate where every transaction entail 60:40 (white:black) ratio. Do you want to assess how much black money is generated by “Real Estate” sector per year? consider the following. Almost every real estate transaction, be it residential, commercial or industrial property, generates (source) and applies (application or utilization) black money depending on whether one is a seller or buyer. In Metropolitan cities like Delhi, Mumbai, Chennai, Bangalore, Surat and Ahmedabad, the deal ratio is 60:40 (White: Black money).

The population of Delhi is say, 2.8 crore. Presuming average family size of 4, there may be about 70 lakh families residing in Delhi. They need 70 lakh homes. Most of lower income group (LIG) or middle income group (MIG) live in chawls or small tenements rented for years. They do not generate lot of black money, as transactions are few and far between for such homes. Only those 10 to 20 years old are recently owned. Presuming that at least 40% are owned out of 70 lakhs homes, the total newly owned homes may be about 28 lakhs.

Let us presume that annual real estate transactions rate is 10% of such homes or say about 2.8 lakhs. One may use exact numbers from the Registrar of Property. Average size of each property transacted may be Rs 80 lakhs. The black money element is 40% or say, Rs 32 lakhs per apartment or home. If there are 600,000 transactions in Delhi and Mumbai together in 2014, the amount of black money being generated (source) or applied (utilized) is 600,000 x Rs 32 lakhs (0.32 crore) = Rs 192,000 crores. (Rs 1.92 lakh crores).

In other centers, the black money generated would be Rs 50,000 crores (Ahmedabad), Rs 1 lakh crore each in Bangalore, Chennai and Surat – a city of diamond which business thrives only on black money. Even some of the names released by HSBC list are those of diamond merchants from Surat, Gujarat. A majority of diamond merchants in India are Gujaratis. These are only guesstimate. We have not considered Commercial and Industrial properties where the size of the deal is from few crores to thousands of crores.

Even chief of Sahara group is trying to sell his real estate for Rs 1,200 crores in Mumbai to get out of jail.

In other words, to arrive at reasonably correct numbers, we have to use registered value of property all over India x 2/3. Reason: If the gross value is Rs 1 crore and registered value Rs 60 lakhs, the black money portion is Rs 40 lakhs. Therefore, if we use registered value of the property as base, which is official number, the black money element is 40/60 or 2/3rd of registered value. If the Government works out the Registered value of all property on national level (including Homes, Offices and Industrial properties), it can arrive at the generation level of black money during the relevant period. (Say, 2014)

If Government extends this exercise for last 15 years at least, it will arrive at the extent of black money cumulatively generated and tied up in the real estate sector with 60 to 70% accuracy. I am 100% sure that the amount so arrived at will be several times the black money suspected in overseas bank accounts. By my rough guess, the extent of black money tied up in real estate sector over last 15 years will be not less than Rs 40 lakh crores.

Please note that the property value has risen only during last 7 years. In first 8 of last 15 years, the property value was hardly around 30% of current value. The extent of generation of black money in first 8 years may not be as much as they were in rest of 7 years.

2. In Agriculture land which is being transacted at “Ready Reckoner” value. It is just at 10% of real transaction value. The black money so generated goes into the hand of a farmer who is never investigated. The sale of agriculture land does not attract capital gain tax if the land is situated more than 8 km from the urban center or local City municipalities. Even sale of land is treated as agriculture income which is not subject to income tax. In other words, the black money is white washed once those lands are sold.

Supposing one has Rs 1 crore black money in cash. He buys agriculture land, say 10 acres, @ Rs 10 lakhs per acre. The official agreement value as per Ready Reckoner” will be just Rs 10 lakhs. Thus, his black money of Rs 90 lakhs is effectively employed. When he sells the said agriculture land for official value of Rs 50 lakhs (his cost Rs 10 lakhs), the surplus income of Rs 40 lakhs would not be taxable.

In other words, his black money to the extent of Rs 40 lakhs (out of Rs 90 lakhs originally) gets white washed officially. Call it a tax avoidance or tax planning. Most buyers of agriculture lands of large value are Doctors, Lawyers and local businessmen who receive most of their incomes without bills and pay little taxes by way of excise duty, sales tax, income tax and service tax.

Farmers too hold agriculture land, but they are “holy cow” and would not be touched even with 100 feet long pole by any government. Whereas farmers are a ”vote bank”, the black money holders are the “note bank” of any aspiring political party to fight election.

If Modi government goes all out to punish businessmen who are large black money holders, none of such businessmen would ever come forward to donate political contributions to BJP in forthcoming election in 2019. In other words, the present Modi or BJP government would lose that election hands down, and 2014-19 could prove to be last 5 years of its rule.

3. In Gold bullion, where most transactions in non urban sector (villages and towns) are in cash or mostly in black money. In large ABCD Metro cities (A = Ahmedabad, B= Bangalore and Bombay (now Mumbai), C= Chennai and D = Delhi) most gold being bought officially are in female names. A woman’s wealth is considered “untouchable” even from the powers of courts and income tax department because it is categorized as “stree dhan” or “married woman’s wealth”

India’s Net import of gold (Gross import – Gross Exports, the value added items like gold ornaments) is about $8 billion per year (Rs 48,000 crores). Gold is the destination of most businessmen’s tax avoidance money. The black money generated out of real estate or business operation gets invested largely into gold. If other sectors are “source” of black money, gold is the “application” of such money. If male folks make too much money, the very first hint goes to the lady of the house. And the very first item she wants to buy is gold. Thus, while husband generates black money, wife applies them skillfully in gold assets. After all, gold is a major gift away to loving daughter – millions of daughters marry every year.

The storage of Rs 1 crore cash needs at least two large suit cases whereas equivalent gold of 3.3 kg would take up only a small locker in a bank. This is why bank lockers are not so easily available to the public.

4. In Diamond, Whereas common men’s destination is gold, diamond is the preferred storage place or application of black money of very rich people. A diamond necklace may cost Rs 1 crore but needs very tiny place to hold it in a bank locker or safe at home. The entire diamond industry located in Zaveri Bazaar in Mumbai and Surat is run and financed by black money. The diamond merchants are the largest hawala players dealing with the black money.

While diamond may be colored white, underlying money is black money.

5. In Mining, the mining sector is one of the largest creator and applicator of black money. Coal mines (biggest scam was in this sector recently), granite, marble or stone mines, (in Rajasthan, Karnataka and Andhra), mineral mines (like dolomite, alumina in Central India) , metal ore mines (aluminum, copper and iron) are the kind of industries run mainly by illiterate owners (called “angutha chhap” or thumb impressionists). Most miners are Marwaris (Rajasthan) and Gujaratis (Gujarat and Kutch) in the west; Chettiyars and Reddys in the south; Agarwals, Mehtas, Sarafs and Shroffs in the north, central and east India.

There is a light hearted joke which I heard when I was in my early college days. A growing child asked his Rajasthani mother – Maa, what is “paap“(sin) ? The mother said, ask your baap (father), he knows it too well. The son then went to his Rajasthani father and asked him same question – pitaji (father), what is sin, did you ever see it? The father adjusted his glasses, held the currency notes in his hands and replied – Kar bharna paap hai (Paying taxes is an act of “sin”). This is why the tax payments of any kind (excise, sales or income taxes) from the said mining sector and respective states is the lowest in India. This is a joke, so do not take offence.

6. Corruption, in the hands of Ministers in Central and State governments, municipalities, courts, government employees, tax collectors, public utilities, education especially in medical and engineering faculties, police and other law enforcing authorities. Since most activities are centered at State administration level, the corruption is widely prevalent and rampant in the states where federal (central) government may not have much control.

The common denominator is “power” . Where lies the power, there thrives the corruption. They are all small thieves but the sheer numbers of government and semi government employees make them one of the largest source of corruption and creator of black money. These persons ride the power and sell the “favors” for cash. (Black money)

These employees are fearless – they feel that once they are caught, their unions will fight for them and they may be transferred at the most . They never fear loss of job. Until their “job security” is threatened by decisive force, we can not stop this major source. Once these corrupt employees and ministers are caught, they should be dismissed (not suspended), their assets confiscated and all retirement benefits withdrawn. They should be booked and ruled within 3 months of concerned corruption incident.

Such corrupt government officers force the honest citizens to become corrupt as well. Say, in medical education, one needs to bribe Rs 12 to 20 lakhs to get the admission for his son or daughter. He does so by corrupting himself taking bribes in his employment or by avoiding payment of income taxes. Why should I pay the tax if the government can not assure me a clean and corruption free administration? He would argue.

We have tons of good laws to govern any kind of economic or social activity – but the efficacy lies only in honest implementation. We do not need new laws, but effective implementation of existing ones..

Are “Black Money holders” traitors? Not all of them. Only corrupt Ministers and government employees could be categorized as “traitors”. In fact, traitor is a very strong word and should be used with utmost discretion. Almost all Indians are patriots. They should not be abused as “traitors” for some innocent economic aberrations.

Most black money is generated by businessmen. They are the driving force of the economy. It is they who create employment. And in addition to their own tax payments, their engaged employees pay even more salary taxes than they do. Banish those businessmen, face multiple closure of businesses and consequent unemployment on massive scale.

We live in democracy where the majority has a right to rule. The businessmen are the largest contributors of taxes to the system. They deserve to be respected for their contributions in creating employment. However, we tend to tenderize them, abuse them, cry them wolf and make them “shaitan’ out of normal human being. We glorify the non tax payers like farmers, poor people, dalits etc. but vilify, abuse and hate tax payers who at times may be dodging some taxes. These businessmen are like “ chickens in the backyard who lay the golden eggs every morning”.

We should never kill such golden chickens. It is their money that goes into the subsidy or helping out poor, farmers, dalits etc. who never paid a paisa to the national exchequer in last 67 years of post independence. We have to understand why do they avoid taxes, and then only take bold steps to address deficiencies in the system so that they come back to tax payment mode by persuasion and not by force.

Tax avoidance is a human instinct and a natural phenomenon. It is as innocent as the stealing of pencil or rubber by a child from other student in his class. Even taking home of stapler, paper or gem clips from office also amount to “stealing” but everyone does that unconsciously. We can perhaps scold the child or an employee, but do not banish them from the society by labeling them as “chor” or “traitor”. Even Lord Krishna stole “makhhan or butter.” Don’t we worship him even then? We pardon his acts of aberration as “natkhat” only because such stealing is innocent and not accompanied by vicious mind.

Once we understand this notion, we can think of taking proper actions by not only unearthing the black money but also avoid its creation in future by installing suitable system. The taxation system has to be fair, equitable and honorable to the tax payers. How many times in last 67 years of independence did we honor, award and reward the largest tax payers in the country with titles like Padma Bhushan or Padma Vibhushan for doing exemplary service?.…. Never. We decorate dead people but forget the living legends.

Finance Minister Arun Jaitley is in a state of futile exercise. He can not get back enough money from overseas. The cost of recovery will far exceed the Income Tax collected, besides creating hatred and ill will amongst local businesses against BJP government. It will be a political suicide.

Most black money are lying within India right under our nose, which can be seen with naked eyes. One does not need binoculars to look thousands of miles away at Switzerland or elsewhere. We can not wield stick to get back black money. We need voluntary participation of such tax payers and infuse confidence in them that future tax system will be fair, rational, equitable, easy, vendetta less and meet the needs of large income earners.

Black Money and Black EconomyUnderstating India’s real  GDP by 30% to 40%
The belief that most black money are inactive and hoarded as cash, gold or other passive assets is terribly wrong. Black money is hyper active in Indian economy. The growth generated by such black money is not reflected in the official numbers for obvious reasons. India’s November 2014 annualized growth rate of about 5.5% is understated by at least 2.5%. India’s real growth could be anywhere between 7% to 8%.

What is Money?
The term “money” is not just the physical quantum or volume. The real money is = money (Volume) x Velocity (speed at which the volume circulates). The black money circulates faster than official or white money. For Instance, a businessman may give trade credit of 3 months for white money trades. In such cases, his Rs. 1 crore of trade credit may generate turnover of 4 crores in a year. He may also charge interest at annual rate of @ 12% to 15% depending on the creditworthiness of the buyer. The production or sales recorded in this turnover does get reflected in the official GDP numbers.

For black money related transactions, same businessman may give trade credit of 30 days. As such, his turnover in black market may record Rs 12 crores (12 x 1 crore of trade credit). The turnover so generated does not reflect in country’s GDP numbers. Further, the cost of financing is less at about 9% compared to 15% for white money trades. Most Marwaris (Rajasthanis), Gujaratis, Punjabis or Sindhis conduct such trade financing in the name of “Multani hundis” (similar to Promissory notes or Bill of Exchange for 30 days tenure). The amount is rolled over every month, where the borrower returns the money on last day and re borrows on very next day. This comforts the financier that the borrower does have outside resources or market credit to pay back his loan.

Multani Hundis or Discount Houses
Such financiers are known in the market as “Multanis” and therefore the promissory notes or hundis are known as “Multani hundis” . The cost of financing is lower because the turnover is faster, and the borrower is usually introduced by some good referees. In English, such financiers are known as “discount houses’ in South India (Chennai, Bangalore, Hyderabad) and in East India (Calcutta) where English is more prevalent.

Real GDP growth = Official GDP% + Unofficial GDP% (due to black money) In other words, the black money economy does not reflect in official numbers, except in electricity bills where no one can separate the electricity consumption between white or black money transactions. If the current growth rate has come down from high of 8% to 4.5% in terms of GDP, the consumption of electricity for commercial or business users have not come down, in fact it has gone up by nearly 10% nation wide, suggesting there is in fact rise, not slowness, in economic activity. The black economy is flourishing at the cost of official economy.

If one wants to know the real GDP or GDP growth rate, he has to sum up both activities – official economy and unofficial (black) economy. While the official economy numbers may be reliable, those of black economy will be just conjectural. It may be noted that all large expenses connected with the black money trades such as cost of rent, electricity, wages, salaries, transportation etc. get debited to official Profit & Loss account (white money transactions) reducing the taxable income. The income portion on black money is not included in the official accounts. The government loses on two counts – the profit is understated due to charging off expenses relating to black money trades, whereas the income generated on black money deployment is not included in the official accounts.

It raises the question – what is the real growth rate for India? Since the growth rate attributable to black economy is conjectural, the best bet is to use approximate % of official money to add up to overall growth. For instance, if the official growth rate is 5.5%, add to it 33% (1/3rd) being the contribution of black economy on conservative basis. It will give us real indicative growth rate of 5.5% + 33% of 5.5 = 5.5%+1.83% = 7.43% If the Income Taxes being collected from individuals is say Rs. 240,000 crores, the loss of income due to black money will be 33% or 1/3rd of declared taxes paid or Rs 80,000 crores. We can not include corporate sector, where large incomes can not be concealed due to compulsory audit of accounts.

Is it possible to extract black money and put them back to work into the system?
Yes, it is. I do have a comprehensive plan and strategy to extract not only more than 40 lakh crores of black money but also create innovative tax system where the honest tax payers are honored with privileges and lessen the importance of non tax payers who have contributed nothing to the nation for over 67 years.

We can achieve the target successfully in less than 18 months from the implementation of my exhaustive plan mentioned in this report that can place India on top of the world, ahead of even United States. The growth rate will return to 8% in 18 months and later over 11% in 30 months time.

Kalidas (real name,  Anil Selarka)
Aliso Viejo, California, United States dated January 14, 2015

Note:
The exhaustive plan (almost 450 pages document – I have spent months of my time) is a secret exercise which will be disclosed to the Government of India after agreeing to the terms of arrangement. “No Free Service” because my comprehensive plan will bring in additional Income Tax revenue of Rs. 10 lakh crores at marginal cost of just 2% to say the least.

I have sent this article in letter form to Narendra Modi, Prime Minister, Arun Jaitley, Finance Minister, Rajnath Singh, Home Minister and Amit Shah, BJP President on 23/12/2014 with a copy of my book “Sub Prime Resolved”. No reply, acknowledgement  or response has been received until the time of this publication. 

Jun 032011
 

2011-11 of 2011-06-03 (3rd June, 2011)            PDF Download

In financial markets, the people are never afraid of heights, but always worried of lows. Almost all hyper activities are taking place at the height of the market, which is determined by fast and hectic rising of the almost all equities.

In Goonda Raj, the bad news pervade from one gang to another easily. The gang leader knows in matter of days how the other gangster made so much of money in so little time. They adopt same methods to succeed, and they often do.

Greed and Fear are inseparable parts of any market. Money makes everyone corrupt. Almost everyone wants to become a millionaire or billionaire in matter of days. When the bureaucrats and Ministers see the businessmen making money so easily, they come in like “mafias” and start seeking their cuts, fees, haftas (installments) or whatever christen names you may want to assign to such activities.

When the market has risen from one peak to another in rapid succession, a time comes when it begins to either crash or climb down slowly, surely and steadily. There is no more upside, so the best thing that can happen at the peak is to come down due to its sheer gravity.

So it applies to corruption as well. Scam and Scandals begin to emerge when the market is jumping from one peak to another. The ignominious methods adopted by one minister becomes example to pursue by another minister. When one is caught, the entire range of gang operators come within the net.

Media like vultures pounce on such stories and sell their newspaper or magazines at maximum rate by publishing juicy stories. They call it “investigative journalism”.

No one wants to become Lord Rama, a higher rated moral God with “ek patni vrat” (believer in only one wife). However, everyone wants to become Lord Krishna who was darling of many girlfriends or dasis or sakhis (Companions). Similarly, in financial market everyone wants to become Warren Buffett, but they do not adopt his strategy. They worship Madoff, Stanford, Harshad Mehta, Ketan Parekh etc etc. to become instant billionaire like instant coffee.

Of late lot of money has flowed into South India. Initially, lot of Keralites went to Gulf and became richer. They sent lot of money home in their home state, so the prosperity flowed there. However, they were low level workers who earned by hard physical work. They could not engage themselves into corruption. South Indians in north of Kerala were good mathematicians for a long time. They got hold of Software or computer technology. This was instant hit. So Software exports generated billions of dollars or thousands of crores in South India. Hyderabad, Bangalore and Chennai became the focal point of interest.

Such flow of enormous money attracted crooks and scoundrels in the industry and scams and scandals started erupting like volcano in government circle. While License Raj has ended long time ago, the government officials and ministers started reformed “Spectrum Raj” to capitalize on telecom revolution.

In state of Maharashtra, a new Raj called “TDR” started which means Transfer of Development Rights in real estate business. Here the official or minister allows higher FSI (Floor Space Index) against the rule by permitting the developer to transfer his right in one development to another development obviously for a hidden fee. Like Mafias, the ministers and officials at the top started charging fees to the developers and builders. In short, paper derivatives like operations started in “Spectrum Raj” and “TDR Raj”. Everything was up for sale, including IPL.

The scams and Scandals follow same pattern of stock market. When they come out with increasing frequency, they denote the first sign of “cleansing up” . The scams and scandals have no where to go up now, but only down. It is a self healing process.

A few years or decades back, Bihar, Uttar Pradesh, Haryana and Madhya pradesh were considered the most corrupt places in India. Our famous Lalu Prasad Yadav and his bibi Rabdi Devi became the household name. Their fodder fraud of Rs 700 crores look minuscule by today’s standard. In fact, Lalu compensated the country by turning Indian Railways into highly profitable public enterprise earning thousands of crores in revenue and made it a shining example. Phoolan Devi was forgotten and replaced by Maa Rabdi Devi his wife. They are no longer counted because after many scandals in Bihar and Uttar Pradesh, a correction set in and now they are nearly out.

The slack was taken over by the South India where the prosperity flowed due to rise in software exports that brought in thousands of crores of money.

A honey bee goes where the flower blossoms. The honey bees in this case were corrupt politicians and their bureaucrat secretaries. Flower pots or money were in South India. Hyderabad, Bangalore, and Chennai were the places where the crooks and criminals arrived and mushroomed. Andhra Pradesh fired the first salvo when Rajus and Reddys took over the reins.

Satyam Computer’s Chairman B Ramalinga Raju became the first billion dollar fraudster of India. If Guinne Book of Records recognizes the corruption as outstanding achievment, Raju of Satyam will enter the roster of “Fame of Records”. Once tamed Andhra Pradeshi became famed “fraudsters”. 3R – that is – Rajus, Reddys and Rajas started as roosters. GTB or Global Trust Bank where thousands of crores of frauds took place also originated from Andhra Pradesh and RBI’s Reddy took the reins indirectly behind the curtains.

When the storm or tornado arrives, it changes the directions by turning a few degrees all of a sudden. The corruption started traveling from Andhra Pradesh to Karnataka (Bangalore) and to Chennai where Maharani Jay Lalita ruled over the state with thousands of saris and sandals in her closet.

Now that we know the natural process of creation of scams and scandals and their self destructions, let us see whether they help us in making good investment decisions. The dilemma facing the innocent nationalistic investor is whether he should sell and get out of the market or use the correction as outstanding buying opportunities?

Our experience opts for latter – that is – outstanding buying opportunities to buy the tainted yet high growth and potential stocks. The stocks are some of the simplest, finest and efficient financial instruments. They are extremely volatile because very few understand them. The stocks make money when they are bought at lowest and sold at the highest. However, in order to buy high end growth stocks, we need the help from fraudsters, scam artists and scandals at the top. They cause the stock prices to crash to the lowest to afford the intelligent and smart investors extra ordinary opportunities. Otherwise, how could one buy the stock at the cheapest?

Look at the Satyam which was taken over by Mahindra group to rebrand it as “Mahindra Satyam”. In spite of accounting fraud, the company was in one of the best health by all counts. Debt free large balance sheet, huge cash chest of Rs 1600 crores, high end growth, acceptability by high end customers such as Pharma industry leaders, well trained and qualified software engineers, erstwhile good reputation in its real field, sufficient margin and rising too, and competent management.

Almost all the bad things that were to happen to Satyam had happened and the company has written off all past losses of settlement of all law suits. It starts with the clean slate now, and the stock which we recommended strongly at near 60s has risen to Rs 89 today, a gain of 50% in just under 8 months. We have set the target of Rs 160 in less than 10 months or gain of about Rs 100 or 170% .

Political events, as different from financial event, provide the high quality opportunities. A stock makes money for the investors if the underlying company makes profits consistently which is a financial event or cause. The stock price therefore goes up. However, a non financial event such as scams or scandals involving promoters or their blood relations provide the outstanding opportunities to the real gem investors.

Such scams or scandals give them “god send opportunities”. They understand the risk and reward and go for it when the scandal dies down or getting reported on inside pages of financial newspapers instead of on front page.

A case to the point is SUN TV and SPICEJET which is controlled by Kalanidhi Maran. His brother Dayanidhi Maran, a former Telecom minister, is being investigated for his role in showing favors in 2G telecom licensing, a spectrum matter. The stock of SUN TV lost 27% in one day, and Spicejet by 17% which is holding most prospect amongst the listed airline. These companies were in different industries and have no vested interest in telco licenses. Their prices crashed due to poor sentiments generated by the main promoter’s family blood relationship.

A question arises – when to buy such scrips? The answer differs from exchange to exchange. In India, Bombay Stock Exchange sets the circuit limit which varies from 5% to 20%. Some stocks do not have any circuit rule attached. When the stock falls to lower circuit, it means that buyers refrained from buying. It is possible that the stock may go to lower circuit again on next day. It is also possible that the stock may have hangover from the scandal for a few months. However, we follow the following strategy not to miss the lower prices.

  • See the intensity of the bad news and see whether the stock trades near the lowest circuit all through the day on heavy volume.
  • Start buying from third day if the intensity of news is very high
  • If the company or its promoters were not involved in seemingly bad news, ignore the news and start buying on 1-2-3 basis as under:
    1. Buy small to test the water. Say you bought 1000 shares at CMP or Current Market Price
    2. If the publicity of news is very bad, buy on alternate days. That is, after buying 1000 on first day, leave second day and buy more on third day. Say you bought 2000 shares now.
    3. Leave again for one more day and on fifth day from the news, buy small portion, that is, you buy 1000 more if the price is lower than previous purchases.
    4. Then stop. Now allow the stock prices to recover. If you have enough stock, ignore the urge to add more.
    5. If the stock recovers strongly, start selling from last purchase. Say your last purchase was 1000 shares, so begin to sell it.
    6. Sell more (say 2000 shares you bought under Stage 2 above) if the stock continues to surge. Here again sell on alternate days or if the stock trades at upper circuit or up by 15%
    7. Allow one more day to pass, and then sell the last lot under Stage 1 (1000 shares)
    8. Do not worry by selling if the stock goes higher. You made your money. If the stock goes higher, you already have old stock which was averaged down. Sell only later as per your convictions.

Allied Digital Services Ltd was hammered down due to Income Tax Raids alleging tax evasion. Good part of interpretation was that the company was making good money which was the reason to save taxes. However, the news here is bad because the company’s management is directly involved. Not so in SUN TV and Spicejet.

Buying and Selling stocks is a imperfect science. It is at the most an Art. Use your common sense, and listen to only yourself. Do not be guided by media news analysis except to know the bare facts. Trust the company’s news release as provided to NSE or BSE under Corporate announcements. Do not act on impulse and sit in quiet corner to think over whatever happened and what could be the reasonable truth. This is the best way to deal with the stock price crash of any substantive stock.

 

Kalidas (Anil Selarka)

June 3, 2011