Investment Advisory Service

Sunday, 15 April 2018

Lata Bajoria- Queen of Hearts

Jute business was big in Kolkata many years back and one man who ran the show with more than 25% of market share was Mr Arun Bajoria. There are other pieces about his takeover attempt on Bombay Dyeing and Ballarpur Industries. You can find more about him on the net.

This post is more about his wife : Mrs Lata Bajoria. There's a nice speech she delivered and you can watch it here.
I am sure her simple and witty speech will leave you motivated. If Mr Bajoria was "King of Jute", I would say Mrs Bajoria would be "Queen of Hearts".

Monday, 26 February 2018

2 Thought Leaders

In Ernest Hemingway’s novel “The Sun Also Rises”, there is a dialogue “How did you go bankrupt?”
The response is “gradually and then suddenly”.

It is so apt.
While reading about NPAs and the resolution process, I read a column written by Dr M S Sahoo- Chairperson of the “Insolvency and Bankruptcy Board of India (IBBI)” where he quoted Hemingway.
I was immediately drawn towards Dr Sahoo’s writings and found them here. You can find them under the resources tab.

Dr Sahoo delivered Dr R H Patil Memorial Lecture where he talked about important concepts of -

1.     Institutional Environment
2.     Institutional Arrangement

Using an example of stock exchange and anonymous screen-based trading system-he explains the above concepts in a lucid manner.

Another important concept he touches upon is that of Economic Liberty with an example of how 4 persons received show cause notices from the competition authority.

“Different conducts can invite the same outcome under economic laws and the same conduct may yield different outcomes in different contexts. So, it is not so much the conduct, as the context- who, why, when, what, where and how- of the conduct that matters. Rule of reason to guide economic liberty.”

This helps me to further understand the case of Intellect Design Arena which I wrote about in my last post. It is not the conduct alone but “context and conduct” meshed together which matters.

Dr Sahoo spoke very highly of Dr R H Patil – the “Father of National Stock Exchange” and how his thinking got shaped by Dr Patil.
I read up on Dr Patil and came across this beautiful interview in Moneylife magazine.

Some excerpts:

“After the Harshad Mehta scam in 1992, the government was groping in the dark about what to do…G.V. Ramakrishna was the SEBI chairman. The finance ministry had called a meeting and I only got to know what was to be discussed on reaching there. Montek (Ahluwalia, then finance secretary), Dr P.J. Nayak (then jt. secretary and now chairman, Axis Bank), Mr Ramakrishna, Mr Nadkarni (IDBI chairman) and I were present. The concept of NSE was born at that meeting. We wanted to do things differently. We discussed setting up a professional organisation with screen-based trading, a weekly settlement system, etc.”

I then said, “I want to move over to NSE.” The company had already been formed and I was a director on its board. He was shocked. He said, “People aspire for power and you are saying that you want to go to an entity which nobody is sure if it will succeed or not. Aren’t you taking too much of a risk?” I said, “Sometimes one should take the risk.” He said, “Are you sure you want to take a risk at this age?” I said, “It is only at this age that I can take the risk. Both of us -- my wife and I -- have been earning; we both lead very modest lives. We have decent savings. If we continue to live modestly, I can take that risk.” In fact, many people said that I was a fool. But my own feeling was that, once you retire from IDBI, who remembers you? So, I decided that it does not matter whether or not I succeed in setting up NSE. My grandfather used to say, if you make a whistle out of a carrot, it is good if it plays; and if does not, you can always eat it.”

“As someone who creates new markets, where do you invest your money?

In RBI bonds and in mutual funds - there too I invest in FMPs - so no risks. You need a different mindset to take risks. I prefer to devote my limited energies to do things that are more productive, especially from a social point of view. I have tried to create a world to protect others’ risks -- (laughs a lot) - that too through systems and design. Remember, systems and design only. After all, what are margins? They are walls so that the speculators don’t jump into the sea.”

Amazing clarity about building institutions, risks and priorities in life.

I am sure the readers will feel motivated- as I felt- after reading about the above thought leaders. They help us build layers of understanding and shape our own personalities.

Friday, 19 January 2018

 Hey Siri! Is the management ethical?

There are many questions that Siri cannot answer. This is just one of them. 
Whether the management is ethical and works as a trustee for shareholders can be answered by the shareholders themselves - and only them. Nobody else.

I read up on the business of Intellect Design Arena. I also studied the management of the company, or more specifically the man behind Intellect Design Arena: Arun Jain. While reading about him on some discussion forums- I read that there are doubts about his integrity and him not clearing the Buffett’s newspaper test. 

I decided to look into the concerns. The first concern and the strongest one which I came across was about Arun Jain being banned by SEBI for 2 years on insider trading charges. This has been a serious concern amongst a lot of people. Let’s see what SEBI has written in its order. The order can be found here.

The issues which SEBI has raised are:

1.  Price sensitive information (unpublished) was known to the Promoter Group
2. On the basis of that information, the promoter group sold 15,080 shares of the company and pocketed gains of INR 27.26 lakh
The replies which the Promoter Group (Arun Jain & Others) gave were:

1.   Out of 15,000,000 shares held by the promoter group, only 15,080 shares were sold
2.   Money was required to buy a plot of land in Gurgaon
3. Promoters have already paid INR 700,000 to settle case under the consent mechanism of SEBI. SEBI has however re-opened the case.
Consent mechanism is a legal process to settle cases without admission or denial of the alleged irregularity. The intent is to put an end to the litigation and move on in life.

The questions I would ask myself as an investor are:

1.  If the promoters really wanted to benefit from price sensitive information, would they sell only 15,080 shares? Why not more? (Magnitude)

15,080 shares are just 0.1% of the total quantity of 15,000,000 held by the promoters. The charge of dealing in 15,080 shares - to my mind is like a speeding ticket. The speed limit at a highway may be 60 miles/hour and you just happen to accidentally drive at 65 miles/hour. Surely, it’s a mistake. But it’s unlike driving at 100 miles/hour and that too drunk.
So, I consider the magnitude to be quite important in the overall scheme of things. Magnitude helps us to be sure about the intent. If Mr. Jain had a bad intent, he would have sold many more shares that the promoter group held.

2.  Assume for a moment that Arun Jain is not trustworthy. Did I find any other instance where he showed the tendency to behave unethically? (Repeat Behaviour)

Usually- unethical people find it difficult to control their temptation (like everybody else). They do it more than once.
So, if Arun Jain is unethical – is there any other instance of him playing close to the line? I did not find any instance. Hence, my answer is No.
Instead I found quite a few instances which speak highly of him.

3.  What has been the track record of investigations done and orders passed by SEBI? (Credibility of the Source)

Please find here a research paper written by Ms Dharmistha Raval, Ex- ED of SEBI and Ex- Professor (Indira Gandhi Institute of Developmental Research). She did an analysis of the regulatory processes at SEBI. Kindly see page 20 and 21.

A total of 1309 orders pronounced by SEBI and later heard by SAT during 1998-2009 were analysed for the study. Out of 1309 orders, 237 fell under the “Others” category which means that those cases were not heard on the basis of merit. Leaving them out, leaves us with 1072 cases. Out of these, a total of 427 appeals were lost by SEBI. That is in ~40% cases, SEBI lost the appeal when its order was challenged in SAT.

I respect SEBI but it will be incorrect to base my thesis on something which stands scrutiny only 60% of the time.

4.   Opinions of others? (Wisdom of the Crowd)

About others' opinions, I think it is a matter of perception. It’s more like the 'Red Indians- collecting-wood' story. Since, everybody thinks Arun Jain is doubtful, everybody else also, thinks he is doubtful. This is a circular argument and lacks stamina.

Combining the above 4 reasons, in my view the allegations of insider trading against Arun Jain do not hold water.

The second concern was about Arun Jain getting arrested in Indonesia in 2001. Reading about the case- it is found that Polaris Software was executing a project for a client- Bank Artha Graha. There was some commercial dispute and Arun Jain travelled to Indonesia to meet the client and resolve the issue. Dispute could not be resolved and the client ordered the police to arrest him. It is said that Bank Artha Graha was owned by the Indonesian Army Foundation and the generals decided to take matter in their hands- literally.
I don’t think there is much to read in that. It was a commercial dispute and should have been solved in the appropriate way. It was just bad luck for Arun Jain. He happened to be in the wrong place at the wrong time.

I will now put across circumstantial evidence why I think the promoter of Intellect Design Arena is clean.

1.  Arun Jain was earlier the MD of Polaris Software (sold to Virtusa). He did not draw any salary from Polaris Software since August 2010. Now, he does not draw any salary from Intellect Design Arena. In one of the interviews, he mentioned that since he is a promoter shareholder of the company, he doesn’t need any salary. He will create wealth alongside other shareholders.

Excerpts from the respective annual reports :

(Source: Polaris Software Lab. Annual Report 2010-11)

(Source: Intellect Design Arena Limited. Annual Report 2016-17)

His last drawn full year’s salary from Polaris Software during FY 2009-10 was around 1.5 cr.
It’s difficult to accept that somebody will forego 1.5 cr every year (without counting any increase in salary) which rightfully belongs to him and play around with insider trading rules for a meagre gain of 27 lakh.

2.  Intellect has won marquee deals from RBI, LIC and Govt e Marketplace. Given that RBI has stringent checks and balances in place, I would assign high weight to the quality of management which is selected by RBI to implements its core banking system.

Overall, I feel that Arun Jain is clean and quite ethical. I would love to read your views even if they are contradictory to what I have stated. But please substantiate it with data because :

It’s a capital mistake to theorize without data ~ Sherlock Holmes.

This is not a stock recommendation. This post is for discussion purposes only. My clients and me may be holding position in the stock.