Saturday 31 August 2013

Currency crisis in the Emerging Markets


The year 2013 has seen a global sell off resulting in the fall of currency in most emerging markets including Brazil, India, South Africa, Indonesia and Turkey. The charts below show the currency movement of the emerging nations versus the US Dollar in the last 5 years. (Source: http://www.xe.com/currencycharts )




Brazilian Real has fallen more than 14%  against the USD.










Indian Rupee has fallen about 20% against the dollar in 2013 and hit a lifetime low 68.85 per USD.










South African Rand hit the R10/$-mark for the first time since 2009, the lowest value in four years as poor economic data and labor market tensions weighed on sentiment.








Indonesian Rupiah has slid nearly 12% in 2013.















The Turkish Lira has fallen to a record low of 2 to the US Dollar, the lowest level record since 1981.














The under performance of these currencies can be attributed to the widening of the current account deficit in these countries including Brazil, India, South Africa, Indonesia and Turkey, with the CAD/ GDP ratio exceeding the levels set by the respective governments. The anticipation of the reduction in the US Federal Reserves’s stimulus program from September 2013, is causing outflow of foreign money from the emerging markets  into the United States, resulting in a further weakening these currencies.



In contrast, Chinese Yuan Renminbi has seen an appreciation in the corresponding period. Economists attribute it to high foreign exchange reserves and lower dependency on hot money inflows. 









The fallout of the depreciation can be felt in the rising costs of imports, increasing prices of petroleum products, fertilizers, commodities and loss of purchasing power due to inflation. The borrowers in these countries with dollar-denominated loans may not be able to pay back the loans, thereby increasing the default rates.

While the government and central bankers are taking measures to arrest the depreciation of their currencies by raising interest rates, curbing imports and tightening monetary policy and regulators are taking steps to reduce arbitrage opportunities and speculations in the currency markets, the overall remittances to some of these countries, particularly India has seen a jump, with Non-Resident Indians (NRIs) remitting more money to India, taking advantage of the depreciating rupee.  







Friday 9 August 2013

Companies Bill 2012– Giving Voice to Minority Investors in India

The passing of The Companies Bill 2012 by Rajya Sabha on 8th August,2013,  is a step forward towards transformation in the corporate governance practices of the country. The new bill that requires President’s assent for it to become law, replaces the Companies Act of 1956. The bill, when enacted will bring in reforms to enhance corporate governance by giving voice to the minority investors in India, strengthening the role of independent directors and expanding the responsibility on auditors. 

A key objective of corporate governance in India has been to strike a balance between the rule of majority shareholders and the protection of the rights of minority shareholders. The protection of minority shareholders rights is particularly critical given the often concentrated ownership of Indian companies.

Unlike in the developed countries such as US & UK, where ownership of a company is widely dispersed and is generally separate from the management of the company, In India listed companies are usually parts of a large business group, characterized by a promoter or a controlling shareholder. This pattern of ownership gives rise to potential conflict of interest between the dominant shareholders and the minority investors, since the controlling shareholders have the power and incentive to monitor corporate activities closely and influence or control the corporate decisions in a manner that could be detrimental to the interests of the minority shareholders.

Traditionally the outside (non-promoter) shareholder participation in the corporate decision in India making has been low. The regulatory framework in India was till recently by & large tilted towards redressal of oppression by management and did not encourage proactive engagement of shareholders on corporate decisions. The new Companies Bill 2012 seeks to provide investors with effective means to voice their opinion in corporate matters that may have potential conflict with the interests of the company and the investors at large.  

The bill as passed by Lok Sabha on 18th December, 2012, has the following key amendments to increase shareholder participation in corporate decision-making:


Related Party Transactions


Companies Bill 2012 includes the provisions for approval by the Board of Directors for Related Party Transactions with transaction amounts exceeding prescribed limits or transactions which are not on conducted on market terms. Exemptions apply to transactions that are on ‘market terms’ and are conducted in the ordinary course of the business. The Bill also requires Independent directors to ensure that adequate deliberations are held before approving related party transactions and authorize every contract/ arrangement entered into with a related party, while providing with a justification for it. The Bill also says that no member of the company shall vote on such resolutions to approve any contract or arrangement if such member is a related part.


Exit Offer


Another key provision in the new Companies Bill is that if the minority shareholders feel that the funds raised from them are utilized by a company for a purpose other than those stated by the company in its objects, then they shall be given an exit offer by promoters or controlling shareholders. It will allow the minority shareholders to exit at such exit price, and in such manner and conditions as may be specified by the Securities and Exchange Board of India.


Class Action


The biggest boost for the small investors comes in the form of the provision in the Companies Bill for class-action lawsuits, which will allow a group of investors with common interest in a matter to sue the management of a firm, its auditors or a section of shareholders in case of suspected wrongdoing. A class action suit is a form of a lawsuit where a large group of people collectively bring a claim to court through a representative. The provision for class action in the Companies Bill 2012, will give shareholders an edge in defend their rights, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members.

These measures are in line with the international practices adopted for empowerment of shareholders and will pave the way for enhancement of corporate governance system in the country.