JSW brand promotion a.k.a How to transfer shareholder wealth to your family

Satyam was not the first case of its kind in India, but it was THE high-profile burst that destroyed investor confidence. It was outright fraudulent, as admitted by its own founder. (Which SEBI corroborated quite recently, despite Ramalinga Raju's written confession years ago. Nicely done, SEBI!)

Compared to outright fraud, corporate governance practices may seem a bit grey, if you add a dose of business jargon. What's worrying is the fact that it is becoming way too frequent. Cairn India did it recently when it announced that it was transferring $1.25 billion to a subsidiary. The audacity was shocking - they had already disbursed around 2/3rds of the sum before making the news public. Now, you would wonder why? This is a publicly traded corporation. In other words, baap ka paisa nahin hain - the shareholders have a right to that cash.  The management excuse: The interest rate from the loan to the affiliate is more than what it receives from its fixed deposits in the US currency. We do not invest in companies so that they can park their surplus funds in FDs and crib, do we? Reinvest for better returns or pay out dividends, duh. Not hand it over to related parties. 

Well, that was somewhat tolerable if I was Christ. What took the wind out of me was another article that I read today. For simplicity sake, assume that I started a company in 1982 and listed it later. I had named it XYZ Steel. 

Fast forward to 2014. It is a $10 billion plus conglomerate now. I announce that the brand name "XYZ" belongs to another private company named XYZ Investments Private Limited incorporated in 2005 (31/03/2005). Incidentally,  my wife holds 99.99% of equity in XYZ Investments. In the interest of brand promotion, I plan to transfer funds from XYZ Steel and other group companies to my wife's company, for using the XYZ brand name. This year's payout to my wife from XYZ Steel: 125 crore Rupees. 

Funny, right? That's what JSW Steel, a publicly traded corporation, is doing. 

But I wondered how the management would explain this to people who own their stock. Beats me. Well, this is how JSW Steel  responded to a query from Business Standard. Full report here.  "To ensure consistency in brand usage, uniformity in performance standards among various companies using the brand, appropriate framework has to be in place through governance structure, code of conduct and a business-excellence model. The brand owner has to be vigilant and needs to monitor that the brand name is not misused and the value of the brand is not diluted. Accordingly, JSW Investment Ltd, the brand owner since inception, has carried out a study to adopt best practices in managing the brand architecture, benchmarking with both Indian and international conglomerates. To sustain and improve the brand value and to bestow the tangible and intangible benefits in the longer term, a sustainable corporate-branding campaign involving substantial expenditure has to be done on a consistent basis - to disseminate the idea, knowledge, information and core values of the brand through a systematic campaign."

What the hell was that again? I don't know. I'm not that smart. But I have one ability - to smell bear-shit. And this one is. Stay away from JSW, folks. And if you own it, sell it, unless you want to hand over your rights to the promoter's wife.

Btw, the markets are funny, coz the stock did not plummet today as I expected.  That said, poor corporate governance does not pay in the long run. Satyam!

Beginners Guide to Financial Neologisms

Neologism is the name for a newly coined term, word, or phrase, that may be in the process of entering common use, but has not yet been accepted into mainstream language. - Wiki 

BRIC: Unless you have been hiding beneath one, you have heard of BRIC. For financial neologists, BRIC was the first major hit, a grouping of the major emerging economies of Brazil, Russia, India, and China. Four markets that are radically different in terms of size, potential, key drivers, and even market structures. It required someone with Goldman Sachs standing to pour them into a bucket and call them the collective driver of the global economy in the 21^st century.

13 years after the term was coined all the four economies are charting different growth trajectories with challenges that are unique and immense – from China’s potential bubbles, and India’s twin deficits/poor governance to Russia’s Putinarchy that managed to convert a commodity-driven healthy surplus to a widening deficit, and then there’s Brazil.

BRICS: = BRIC + South Africa. Hey, we never thought of South Africa (we never thought of Africa to be precise), when we coined the acronym. Want more representation? BRICS, it is.

PIGS: Now, that’s a smart one, even though animal rights activists might have a problem with it. It refers to the financially mismanaged grouping of Portugal, Italy, Greece, and Spain – countries with tottering economies even while they were ambulanced into the EU. These are the same babies that almost pushed the euro zone into a near-collapse and the painful bail-outs.

Like the BRIC, this neologism is also open to manipulation on a long-enough time-scale. Ireland came into the picture by (a) replacing Italy or (b) as an extra I a la PIIGS.  This even became PIIGGS, by adding Great Britain to the trash can. Portugal's Economy Minister Manuel Pinho was deeply offended that anyone would label his country with this term – as in, how can you call a spade a sty? 

PIGSHIT: Potential combination for the original PIGS + Hungary, Ireland, and Turkey. This is not used, as of today, but someone will think of it someday.

CIVETS: Another grouping of emerging markets, this one refers to Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. Why the term? Apparently, the Civet is a nocturnal mammal that has this unique penchant for eating coffee cherries and then crapping them out as transformed coffee beans (after digesting the flesh), which are then used to make the much-acclaimed “fox-dung coffee”. And no, I did not brew that one up. But, I am yet to get the comparison that Michael Geoghegan had in mind when he referred to these diverse economies as civets. 

MINT: Mexico, Indonesia, Nigeria, and Turkey. Fidelity came up with this one. These 4 countries are also on the list of the Next Eleven countries (more on that interesting species in a while). “All have very favorable demographics for at least the next 20 years, and their economic prospects are interesting”, according to the guy who propagated this term.  

MIKT: Miffed with MINT? Check out MIKT. Take out Nigeria from MINT and then add South Korea, the output is called MIKT. Nigerians went so livid when they were left out of this one. My concern was mostly with the use of K in South Korea for the acronym. I would have batted for MIST, by using the logical S in South Korea. And then add Oman to the list to make it MOIST! (The crowd would have gone wet!) 

Oman is a very important country for neologisms, as I will demonstrate later on. The rule of thumb for neologism is to make the acronym attractive – which country you chose does not matter – you can add or delete, when the timing is just right. 

E7: No, it’s not a listing of Euro zone countries. E is for Emerging.
The E7 includes BRIC + Mexico, Indonesia, and Turkey. Nigeria still continues to be pissed, and this time they have the South Koreans and South Africans for company. You cannot blame smarting South Africans for thinking they were at the forefront of emerging markets after they were attached to the big one - BRIC with a capital S?

The Next Eleven (N-11):  Bangladesh (29), Egypt (34), Indonesia (77), Iran (37), Mexico (97), Nigeria (16), Pakistan (13), the Philippines (60), Turkey (86), South Korea (157), and Vietnam (98). Goldman Sachs (same guys who came up with BRIC) came up with this one too in  2005. BEIIMNPPTKV would have been tough to pull off, so they stuck to N-11.

Wiki says “The criteria that Goldman Sachs used were macroeconomic stability, political maturity, openness of trade and investment policies, and the quality of education.” Really? Btw, the numbers in parentheses are the 2013 rankings according to the Failed States Index maintained by the United States think-tank, Fund for Peace. Out of 178 countries, the N-11 has four of them in the worst category (Alert), six in the next to worse category (Warning), and one in the stable category. The Failed State ranking is based on social, economic, and political indicators. Tell me what were the N-11 formulators smoking?

The lists go on: Four Asian Tigers, Tiger Cub Economies, Gx, and so on and so forth. Let’s just wind up with an interesting play that might take the ticker headlines away from emerging markets, unless they have done so already. Ladies and Gentlemen, please welcome the……. 

Frontier Markets: A fad, way below the standing of grandiose emerging markets, these are countries which could potentially witness the inflow of hot funds in the next few years. Includes countries such as Trinidad and Tobago, Cyprus (yes!), Mongolia (micro-base effect), Malta, Côte d'Ivoire, Macedonia, Botswana etc.. Exotic stuff, like Elbonia! 

I use Scott Adams' work without permission. I don't think he would care.

As a parting note, try the latest neologism:

ARSEHOLE: It includes Afghanistan, Rwanda, Somalia*, Egypt, Haiti, Oman^, Libya, and Eritrea. This one was coined on February 9, 2014. These are economies that (a) have been so oversold that there’s no downside left (as in shit has already hit the floor) or (b) have never been sold/bought because there are no exchanges (so we do not know their intrinsic value).
 
^Oman is an outlier that was added to the list as it is the only country to have a name that starts with the alphabet O – a very useful alphabet for neologisms.

*Sudan, Syria, and South Sudan were strong contenders, but there is only one S possible in the acronym, unless of course, you make it plural. Get it? You neologist financial engineering a*******s?