Two weeks back, on 4 May 2018, capital markets regulator Securities and Exchange Board of India (Sebi) uploaded a five-page document that I thought should have made more news. Titled Consultation Paper on Review of SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2009, it is a call for public comments on a big rehaul of the Indian capital issue regulations. The document links to three annexures that read over 369 pages with details of regulations that were changed or deleted and the reason for it, the draft regulations and the schedules. Post public comments, the draft regulations will go to the Sebi board soon.
The $16 billion Walmart-Flipkart deal came closer home to many Flipkart employees when a letter sent to them listed out the process and price of the employee stock buyback. For those who are current employees with already vested options (see this story to know more about this: bit.ly/2wDOsfC), the money will come in three tranches—half on the date the transaction closes in about 60-90 days, a quarter a year later and the rest at the end of two years from the first liquidation. The letter puts the value per share that the firm will buy back from the vested stock options between $125 and $129. At the current conversion rate, a person holding 10,000 shares will make approximately a pre-tax Rs8 crore.
I am reading a really cool book. When: The Scientific Secrets of Perfect Timing by Daniel H. Pink is a book about timing. Pink wants to turn timing from art to science and introduce a new genre in book titles, from ‘how to’ to ‘when to’. Pink says it matters when in the day we do things because his research shows that the human race has energy rhythms that are consistent across the world. Most people work better in the morning, hit an energy trough by about 2 pm and then recover by about 3 or 3:30 and then hit much higher levels by evening and 9 pm. What’s so great about that you may be asking? Well, for one, his work finds that scheduling a doctor’s appointment in the morning than in the afternoon may give you better care. Having your parole hearing in the morning carries a higher chance of being set free than in the afternoon. His advice: figure out your energy rhythms and then focus on your most productive and meaningful work in the time you know you are most effective. Leave routine tasks like admin work for the office day energy slump time.
Rahul Dravid filed a police complaint recently accusing an investment firm of cheating him. He invested Rs20 crore in a firm promising a 40% return. He recovered Rs16 crore but is yet to get back the remaining Rs4 crore. Instead of trusting a sharp shooter for higher returns, had Rahul Dravid invested his Rs20 crore in mutual funds, what would his portfolio look like today? The average large-cap 3-year return is 7.31% and the average 5-year return is 14.47%. His Rs20 crore invested 3 years ago would today be worth Rs25 crore and had he invested 5 years ago, he would be sitting on a corpus of Rs39 crore. That is if he got just average returns and not top quartile returns. But he is looking to just recover his principal from the sharp shooter who promised him super returns. Dravid would have been better off in funds than with a ponzi scheme that he trusted in search of more.
Mutual funds have done well and have been in the news for mostly good reasons in the past few years. The number of retail investors is growing, the systematic investment plan (SIP) book is now at Rs6,500 crore a month and long-term investors have seen stability in their money growth. When seen in the context of large banking scams or the loot of investor money due to misselling of life insurance products, or the periodic ponzi schemes that loot not just the rich and the famous, the fund industry looks good.
Every time people who have defined benefit retirement plans make rules for the market, their lack of understanding comes across clearly. Take people in the Ministry of Finance for instance, and then look at what subsequent Budgets have put in place. Not only is there arbitrage between asset classes on the definition of long term, there is arbitrage within an asset class too on the basis of which product you choose to buy. If tax policy is used to nudge behaviour, there is some serious malfunction in the Indian policy that is nudging in all the wrong directions and all the wrong products.
In India we answer the question, ‘How many years does it take for an asset to become long-term?’ in different ways depending on the asset. You have to hold equity for 1 year, real estate for 2 years and debt for 3 years for the profit made to become ‘long term’. This classification of assets is against Finance 101, since both equity and real estate are asset classes that cook slowly over time. They give their best performance over a long period of time. How long is long? Data analysis done by my colleague Kayezad E. Adajania (read it here) shows that it takes about a 7-year holding period to iron out volatility in equity. The thumb rule for real estate puts the cycle at about 10 years. Market-linked debt (as opposed to relatively fixed-return debt products such as bank deposits) as an asset class for retail investors is mostly used for short-term purposes for emergency funds, for near-term cash needs and for income generation. It would be more logical to make debt go long term at 1 year and keep a 5-year threshold for long term for both equity and real estate. At the very least, policymakers need to equalize the definition of long term across asset classes.
Are Indian stocks in bubble territory? An interview given by Uday Kotak to The Indian Express (you can read it here) asks this question. Kotak is making valid points when he says that there is a wall of money coming at the market which does not have enough stocks to absorb the cash. A strong institutional flow is bringing Indian household money to the stock market through mutual funds, unit-linked insurance plans (Ulips), National Pension System (NPS) and the Employees’ Provident Fund Organisation (EPFO). This money is going into a few hundred stocks because the Indian market lacks depth. The market cap of the top stock is Rs6 trillion and that of the 100th stock is just Rs32,000 crore. The market looks overvalued on metrics of the current price-to-earnings (PE) ratio, which is much higher than the 10-year average. Valuations can go back down in two ways—markets can crash, bringing prices down or the earnings can grow; both bring the PE down. The wait for earnings has kept the market buoyant in the past few years and the wait is still on. Which will come first, the market crash or the earnings bump? As retail investors, we have no option but to give our money an equity exposure; see Table 1. But we will never have the relevant insight to time the market. We also know that markets go up and down, get overvalued, crash and then recover. See Table 2. So, is there a way in which we can ride out the bubble, if indeed there is one?
Regulations in the financial sector need to keep evolving as the market grows in depth, breadth and complexity. Think of this as the need for road rules and a traffic management system in a large metro—what worked 30 years ago cannot work today. It was possible to travel 5 km in Delhi without running into traffic lights or traffic cops 30 years ago as road traffic was thin. A malfunctioning traffic light today causes hours of traffic jams. As the traffic volume rises, cities resort to one-way traffic rules, higher parking fees and other measures to curb traffic in the city centre. Financial markets are similar; regulations need to keep moving to keep pace with the changing face of the market. Has the market changed? Yes, the size of the assets under management by the three large parts of the retail financial market—mutual funds (only retail), life insurance and the National Pension System (NPS)—crossed Rs34 trillion in FY 2017, up from Rs22 trillion just 3 years ago. Both the volume of money and the number of people on-boarding these products has risen sharply over the past few years. The share of household savings in financial products has been rising and now more than one-third of household savings find their way into financial products. In addition to the urban users of these products, a new category of investors are getting added through the Jan Dhan accounts. These are people who will be first-time users of many financial products as they move from cash, gold and real estate.