Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

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Mon, 02 Feb 2009

Open offer price: CNBC Interview

I was interviewed by CNBC today morning on whether the open offer pricing norms need to be changed to account for the steep fall in Satyam share price after the exposure of the fraud. The CNBC web site has the transcript and the video. The key passage from the interview is the following:

We need to make changes in the open offer which are not specific to Satyam but general enough to cover all cases. When we are talking about a company which is very liquid ... one should assume that what is happening in the market is a fair reflection of its fair value and simply allow people to buy at a price which is dictated by the market.

The whole idea of 26-week average ... essentially reflects a distrust of market prices – a belief that market prices can be manipulated. I think that belief is inapplicable when we are talking about a very liquid stock. So, I think the way we should move forward is to say ... 26 weeks average is not required when we are talking about a stock which is reasonably liquid.

We might say top 100 stocks, top 500 stocks or we might go by impact cost or we might say that anything on which the derivatives are allowed to trade where there is a reasonable degree of openness and resilience about the market price there is no need to average anything. The latest price is the measure of what the share is worth.

Posted at 17:16 on Mon, 02 Feb 2009     5 comments     permanent link


Venkatesh Chari wrote on Mon, 02 Feb 2009 21:13

Re: Open offer price: CNBC Interview

Sir, actually, I think on days like this, not more than 30-40 stocks are actually reasonably liquid. Also, from my personal experience of trading in Indian equities I can say that presence of derivatives are not sufficient condition for "reasonable liquidity". In fact , presence of a cash settled stock futures + an illiquid stock makes a lethal manipulation cocktail. Positions can be accumulated over a few days in the futures and a quick last 3 minute ramp up on the expiry day will give rather good results. This happens rather frequently. While 26 week average is rather a longtime period, I would not trust the market prices in Indian markets. Much happens behind the scenes.

Naveen wrote on Mon, 02 Feb 2009 21:19

Re: Open offer price: CNBC Interview

Prof. varma, Could you please explain why you are always quoting the US example ( in detailed quarterly statement etc) as though it is a benchmark when it is shown beyond all limits that the US financial system is a failed one . Please refer to the Putin speech in WEF 2009. Why are we still obsessed with USA. Is it still the post-colonial mindset.

Naveen wrote on Wed, 04 Feb 2009 11:20

Re: Open offer price: CNBC Interview

Prof. Varma, I really appreciate your efforts in referring to your past posts in answering my ‘ insinuation’ that you always quote US examples and thus legitimize benchmark status for US financial system. I accept I wrongly used the word ‘ always’ as I had not done a analysis of all your previous posts to reach such a conclusion. I apologize for that. I really went overboard in bringing in post-colonial mindset and all. In fact I have started following your blog only recently. I was making that comment just based on the observations you made in the TV interview.

You made the observation that we need to amend relevant rules to have a system like that in USA where companies would make detailed quarterly financial statements. My question here was why is it that an Indian Finance professor can’t put forth suggestions regarding disclosure norms for companies for better transparency and accountability without quoting already existing disclosure norms in some western nation. It is a different case altogether that the country in question (USA) has seen more corporate frauds, more bankruptcy and more bailouts in recent times. If confronted with a problem in the disclosure norms in the corporate sector it is not pertinent that one has to follow an existing system, however legitimized it is. In the case of our country which is acknowledged as quite different from the western nations, does it not ask for original thinking as to how corporate disclosures must be structured. In the larger context, people like Prof. Vaidyanathan of IIMB, Sucheta dalal etc has already started questioning usage of these western models like independent director in board as a regulatory measure for corporate governance. Has the detailed quarterly statements by firms in USA prevented the stock market from crashing like a pack of cards. In the Indian scene, When Satyam has showed that when any fraud is possible behind the cosmetic curtains of corporate governance norms, detailed annual financial statements etc, how have you quickly reached conclusion regarding the efficacy of detailed quarterly statements. I can go on and on with examples of many past cases where such regulations have failed.

You have also cited the US law regarding responsibility of board to all stakeholders and not just shareholders in the context of choice between strategic takeover or simple auction. Tell me, given the nature of boards ( remember GTB, Satyam, Educomp etc), do you think such simpleton acceptance of the judgement of board be acceptable. Don’t you think that we need lot of original thinking in this regard. One theoretical (or methodological) question I have is regarding the logic of empiricism you are using in reaching such conclusions. Won’t it be more appropriate to follow the deductive route in settling the problem. The problem here being how to improve transparency of corporate organizations in the Indian context. Before you accuse me of being a subjectivist, look how you have argued for moving away from the 26 week average for pricing in case of takeover. In some sense you are also saying that this case is different and hence need different standards.

Even if one reaches a conclusion to have detailed quarterly financial statement , why an Indian Professor has to legitimize his/her argument by saying it is the current US system as though it is working fine there. Does existence in a western nation itself an argument? I beg to differ and has some alternate in mind to the existing ‘norm’. Any argument should be structured in logical manner as to why something must be done in some particular fashion. Refering to an example must be just a matter of verifying one instance of its practice. In other words, Just because USA has institutinalised some practice is not a case for or against the practice. The advocacy for a practice must be entirely based on reason and logic regarding appropriateness and efiicacy in the context.

I was not making a veiled critique of you as a person. Rather my grouse is against what I call as intellectual slavery of Indians in general. The rot education system has ingrained in us a mind which is uncritical and thus a passive and dull . You may object to this proposition of mine. I have only Keynes to quote here though I consider his economies as pseudo-economics, something which will fall flat with a small enquiry. I quote below from his The General Theory of Employment, Interest, and Money ( pp 383) “…the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”