Stymied mergers and govt obstruction

Along with the global markets, the Bombay Stock Exchange rallied smartly last week on hopes that Ben Bernanke, the US Federal Reserve chairman, may either not raise interest rates, or raise it by perhaps just another quarter next week, as fears of inflationary pressures have subsided. The BSE Sensex did a cha-cha-cha with the 11,000 mark, ending the week at 10,866, for a weekly gain of 186 points (1.7 %).

Investors must be aware of the obstructive powers that can stall sensible economic action. Examples abound. The demerger of Great Eastern by spinning off its offshore division has run aground (if that is the correct terminology for a shipping company). The offshore business commands a higher valuation (witness that of Aban Lloyd) than the shipping business. So the spinoff would have added value to shareholders. It had earlier been stalled on objections from ONGC, now removed, but has run into fresh problems.

Just the opposite is happening in BPL and Hutchison Essar. The planned merger of BPL with the latter has been (ostensibly) obstructed by non-receipt of permission from the department of telecommunications (DoT). Both BPL and Hutch being in the same business, a merger would have been economically rational.

Another proposed marriage, that of Jet Airways and Sahara, also stalled, thanks, it is stated, to the obstructive power of the official ‘no’ to Naresh Goyal’s directorship in the merged entity. Others opine it is because of a belated recognition of the folly of the deal. Be that as it may, Jet may have to write off some Rs 180 crore (not reflected in the June quarter accounts) and has been downgraded by several brokerage houses.

The government used the power of obstruction with public sector banks, asking them to get prior permission from their boards before hiking interest rates!

This is nonsense! It is micromanaging an economy. Fifteen years into market reforms and one still has doubts about the government’s belief in the ability of the market to deliver better results than a command economy! This would directly affect the performance of State Bank of India, Punjab National Bank and Oriental Bank of Commerce, among others; indirectly, even those, like HDFC, who are not micromanaged could be affected if banks offer loans below economic costs.

Members of Parliament want to clear any plan to revive sick public sector units with private help!! Presumably they have plenty of time to manage them.

Public issues are routinely stalled by last minute objections, often instigated by vested interests. Sebi ought to consider putting a time limit for objections, much as a priest exhorts those who may have an objection to a couple getting married, to raise them now or forever remain silenced!

Sebi must also look into pre-IPO information dissemination or lack of it.  At pre-IPO analyst meetings, companies sometimes refuse to answer questions that are not mentioned in the Red Herring prospectus. Some of these are very relevant for investors to take an investment decision.

The corporate sector continues to perform well in the quarter ended June, 2006. Hindustan Lever has managed to bounce back well, with a 35% rise in net profits the April-June quarter (its second quarter) to Rs 370 crore on a 9% increase in topline, a far better performance than its parent, Unilever, whose results were below expectations. Grasim, Balrampur Chini, Suzlon (profits more than trebled), Videocon International, Financial Technologies, Bharat Forge and J&K Bank also had good profit growth during the quarter.

The only red ink was from BPCL, which had a loss of Rs 670 crore in the quarter, thanks, again, to the power of obstruction as the government controls the prices of petroleum products. Indian Oil, a Fortune 500 company, would also have made a loss had it not been saved by a Rs 3,220 crore gain on the sale of shares of ONGC; it showed a profit after tax of Rs 1,780 crore.

The market has climbed, along with global markets, on expectations of a benign monetary stance by the US. On the flip side, Japan, the second largest economy, is coming out of an extended deflation and will keep raising its interest rates for a long time. There are several other areas of concern. The situation in Lebanon is very worrying for it could easily go out of hand in the senseless cycle of recriminative counter-attacks.

That, in turn, would spike oil prices, bringing with it inflationary fears to the fore once again. Better to be safe than sorry and lighten up in the ongoing rally, though it has some more steam left in it during the current week. Maybe one could get lighter a few hundred points later.