NOVEMBER 9, 2003
 Cover Story
 BT 500
 Personal Finance
 The Other 500
 Back of the Book

Gates Against Malaria
Bill Gates, who claims
to watch the efficiency
of each dollar he spends, has put down $168 million to
combat malaria.

Age Discrimination
The UAE wants to kick
all expats above 60 out
of their jobs. A fine
start to the IMF/ World Bank meet in Dubai, eh?

More Net Specials
Business Today,  October 26, 2003
Legalise Insider Trading
Because the insider's shenanigans will disclose stock-related information fast, benefiting the small shareholder.

It's rampant. And virtually impossible to pin down. So legalise it, keep tabs on it, and let everybody enjoy the spoils-not just promoters, fund managers and operators, but minority shareholders too.

If this sounds suspiciously like a legalise cannabis/prostitution/prohibition/etc, argument, well it isn't that different: Rather than forcing ''insiders'' to break the law-and thereby equating them with thieves, murderers, and rapists-allowing them to profit from material information not disclosed to the outside world can actually work to the benefit of the external universe of shareholders. Making insider trading a crime, however, doesn't translate into healthier returns for the small investor, although the insider on most occasions laughs his way to the bank. (Quick, can you remember the last time somebody got indicted for insider trading?)

Who Is My Consumer?
The New Aliens

Insider trading, in case you're still wondering, is the practice by which a company insider uses material information not yet disclosed to other shareholders to profit by trading in that stock. This is considered unfair because investors without that information can't benefit. But does that really hold water? Consider the case of Alliance Capital's former star fund manager, Samir Arora, who earned SEBI's wrath for allegedly disposing of Digital shares on the basis of unpublished price-sensitive information he had about the Digital's merger ratio with hp. Now fact is that if Arora did indeed do such a thing, shareholders should actually be garlanding him. Because the moment Arora sold Digital, he would have brought down the share price to reflect more accurately the company's value. Public shareholders may not have had access to the info that triggered that sale, but they would have seen the price fall, which would have been a good-enough-and very quick- alert that something was happening at Digital that could impact future earnings. That's one of the biggest benefits of insider trading: The share price (falling prices in this case) can be the fastest way to disclose information about a particular stock.

Now let's assume that there was some insider trading in Enron a year-or-so before it fell from grace. Unfortunately, there didn't seem to be much of insider activity-for even if a handful of Enron insiders privy to the accounting fraud going on in the company had begun selling stock, that would have been a clear signal for the external shareholders that something wasn't right at the former energy Goliath. And the entire world would have known about the goings-on at Enron much before they eventually came to light.

Anybody for insider trading?

Will we see 200 in 2003? Maybe, just maybe.

When this magazine did a story about how the Sensex could cross 4,000 this year, people scoffed. Now, the market is nudging 5,000 and will probably soon cross the mark. If things hold on, the Sensex, reckon some bulls, could even cross 6,000 sometime in 2004. That's a big if, and contingent on no new stockmarket scams coming to light. Even a whiff of a scam could, in a market where most investors have borne the brunt of such happenings, dampen sentiment. Do we think BT50, India's first free float index can cross 200 this year? Maybe. As far as the Sensex is concerned, another major resistance-zone lies just ahead, between 5,059 and 5,222. Still, given the way in which the markets have moved this time around-a gain, some consolidation, a minor dip, then a gain again- we believe 200 is a possibility by end-2003.

A Season For Change

First, and this was on september 1, Bombay Stock Exchange's (BSE) Sensex became a free float index, much like BT 50, India's first float index. Now comes news of a major reconstitution of the index, this one scheduled for November 10. On that day, five companies will become part of Sensex, replacing a similar number which, the thinking goes, are no longer representative of the market. The companies being inducted are Bharti Televentures, India's largest cellular telephony company, HDFC Bank, ONGC, Tata Power, and Wipro. The ones exiting Sensex are Castrol India, Colgate-Palmolive (India), GlaxoSmithKline Beecham Pharma, HCL Technologies, and Nestle. BSE had kept ONGC and Wipro out of its index out of fears that the high promoter stake in these companies (84 per cent in both cases), would distort the index. Now, thanks to the free float methodology, such companies can be included without any such fear. As for some of the companies exiting the index, they'd long since ceased to represent their industries.

Who Is My Consumer?
HLL looks beyond the SEC.

Indian marketers have known all along that the widely accepted socio-economic classification (sec, for short), based on the education and occupation of a household's chief wage earner, has its limitations. Its very definition makes sec an inferred taxonomy. "There are some limitations with sec and we do make mental adjustments while using it," admits Hoshedar Press, Executive Director, Godrej Consumer Products. "Consumer behaviour is governed by income, exposure to media, population of the town or city," adds Harsh Mariwala, Chairman, Marico. "While we use sec, we also factor in these variables." Trust India's largest fast-moving consumer goods company to do one better.

As part of a Unilever initiative being implemented in Africa, West Asia, East Asia, and China, Hindustan Lever Limited (HLL) is moving to a proprietary classification, the Living Standards Measure (LSM), which segments consumers into 18 clusters on the basis of 25 parameters such as ownership of durables, income, consumption of media, size of household, and shopping habits. "This is a surrogate measure of the consumer's capacity to pay and buy," says B.V. Pradeep, Head (Consumer and Market Insight), HLL. "It is more robust than the two-variable sec." An LSM 1 family, for instance, will live in a one-room tenement and own a cycle, a B&W television set, or a pressure cooker, and boast an income of Rs 3,000 a month, while an LSM 8 one will own a car, a mobile phone, eight other durables, and boast an income of Rs 10,000 a month. Almost 95 per cent of Indian households belong to the first eight LSM categories. The classification can also help marketers match products to consumer segments. For instance, HLL is targeting all Lakme offerings at LSM 8. And it is eyeing a couple of Unilever brands that just might fit into the corresponding LSM categories. Now, that, sec couldn't do.

The New Aliens
India is definitely on the FII radar now.

FII money driving the market is old news. After all, of the Rs 82,160.5 crore foreign institutional investors (FIIs) have pumped into the Indian market since 1992, Rs 23,211.2 crore has come in the first ten months (till October 17) of this year. What isn't is the entry of some big, but equally low-profile, FIIs this year, further evidence of the fact that circa 2003, India is the place to be for investors in equity. At last count (and this article is being written in mid-October), 27 FIIs had entered the Indian market since May 2003, when the current bull run began. Among the entrants is Charles Schwab Investment Management, which manages around $879.5 billion (Rs 39,57,750 crore) worth of assets; it added $ 7 billion (Rs 31,500 crore) of these in the second quarter (April-June) of this year. Indeed, even investors who have been around for some time are finding it difficult to resist the lure of the Indian bourses. Warburg Pincus, which has invested over $700 million through its private equity arm, registered an FII in October. Fidelity Investments, which manages $1,534.5 billion (Rs 69,05,250 crore) of assets, has introduced more India-focussed funds. And a clutch of pension funds-these normally manage more assets than equity funds-have entered the market. Andrew Holland, Vice President (Research), DSP Merrill Lynch, cautions that the FII inflow may slow as valuations increase. Right now, however, there's no sign of that.