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Shareholders let down

By Rakesh Rai     March 22, 2007

Think. Aren’t you a shareholder in this giant company called India Ltd? You are more. You are one of its promoters! Consider for a moment that as citizens of India Ltd, we are the promoters of this company and that after many years of agonising underperformance, we seem to have finally got it right and (s)elected a management (or government) that showed some signs of working in our interest.

Even as investors from the rest of the world noticed the traction in our company (or country) and began to invest in India Ltd (thus providing even more resources for our business to grow), our CFO seems to have messed it up.

The CFO of its economy (its finance minister) has delivered a budget that has left businesses and citizens bewildered and hurt. Sure P. Chidambaram has done a somewhat decent job in managing government finances. But many of his tax proposals seek to re-establish babu and minister raj rather than liberalise the economy.

Consider the following:

  • An additional education cess of 1% is a solution worse than the problem. What ails education is not resources but poor implementation
  • A progressive tax system should recognise the inherent double tax flaw in dividend tax. Instead, dividend distribution tax has been increased from 12.5% to 15%.
  • Tax benefits have been offered for building hotels and convention centres of a certain type in the national capital region in preparation of the Commonwealth Games. This smacks of ad hocism in policy
  • Among specific sectors the worst hit are, ironically, the cement and construction sectors. These are supposed to lead the country's infrastructure resurgence. Cement has been hit with a hike in excise duty of Rs 10-30 per bag (on MRP of over Rs 190 a bag). After all the crowing about high cement prices (and the resulting inflation) this sounds like an effort that cuts off the nose to spite the face.
  • Imposing service tax on commercial rentals will undermine the viability of all new age businesses such as retailing and call centres. The widespread imposition of service tax must be accompanied by commensurate set-off benefits, else cascading effects aggravate inflation.

Not all the budget proposals are negative. Reduction of many customs and excise duties, increase in allocations for crucial sectors such as defence, railways, fertilisers, irrigation, power and roads were all expected and did materialise.

But not even one of these indicated that India was shining, or poised, or was on the verge of doing the great things it had been promising to do for a long time.

At first glance, it might sound naive to compare the governance of a country with the process of managing a large company. But the similarities are remarkable.

Both challenges involve the securing of sustainable (and increasing) economic benefits to the stakeholders. Both involve democratic selection of the executive team at regular intervals under a well-defined, legally enforceable process. And yes, both are susceptible to vested interests that work against the stakeholders.

What distinguishes a good management from an incompetent one is what great governance (national or corporate) is all about.

Now that India’s CFO is showing signs of poor financial sense, what tactical measures do we take as stakeholders in this company? For one, real estate is definitely in for a short- to medium-term cooling off. So if you are planning to buy or book a house, just hold on for a few months. There’s a lot of supply coming in, especially in the metros and suburbs. Costlier home loans will add to the slowing down on appetite here, so postponing this large purchase decision seems sensible now.

Further, I’ll stick my head out and say that interest rates are close to peaking out, so be a contrarian like me and buy lots of debt with your savings. Getting into income funds looks safe. Obviously, there is PPF that comes with tax breaks and should get preference. This is definitely not a time to borrow, which is another reason why taking a home loan with a fixed interest rate sounds like a silly decision.

Finally, if you think there’s too much turmoil right now in the global markets, you may find solace in exchange-traded gold funds or in physical gold. Bullion charts have definitely been in breakout mode.

And yes, don’t neglect the simple ways to trade out risk from your day to day life. Buy big dollops of health and life insurance in sync with your age profile and lifestyle. Take the trouble and spend on the little things that really matter in your life. Buy your mum that shawl she adores, or take your spouse out for a candlelit dinner. Hang out with the kids at the local multiplex, buy them ice cream and popcorn. Don’t forget to give some money to charities that you admire.

You’ll get back that feel good factor you’re missing in the budget.

(Dipen Sheth is head of research, Wealth Management Advisory Services. He can be reached at


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