The ONGC Divestment Debacle

Imagine a situation where you are about to buy a product, which costs Rs 100, and the seller is desperate to sell it off. However he is selling it at Rs 120, despite the product having several plaguing issues. Would you still buy it, knowing that the seller is so desperate to sell this product that it may well sell it for Rs 80 a few weeks later? 

I wouldn’t.

Something similar happened at the ONGC’s (Oil and Natural Gas Corp Ltd) share auction on Thursday, March 1^st. For the benefit of some readers, let me start with the backdrop. In the last Union Budget, the government had planned to sell a stake in several state-owned companies, aiming to raise Rs 400 billion, but unfavorable market conditions prevented them from doing so. The only stake-sale that went through successfully was an FPO (Follow on Public Offer) of Power Finance Corp., which fetched the government Rs 11.45 Billion. Simply put, the government only managed to achieve 2.9% of its divestment target for the year. Furthermore, the economic slowdown resulted in tax revenues falling short of expectations. But its expenditure bill on the multiple welfare schemes only ballooned. Hence, hard-pressed for funds, and with the fiscal deficit target getting topped already in 10 months ending January, the government made a desperate attempt to sell some stake in ONGC Ltd through a share auction (the Indian Government seems obsessed about auctions) just weeks before this year’s Union Budget.

The government’s frantic attempt to narrow the budget deficit through an untested divestment method was near disastrous. Up for auction were 428 million shares, at a floor price of Rs 290 per share; this equated to a 5% stake in the nation’s biggest energy explorer, valued at Rs 124 billion. The auction started at 9:15 am, but the lukewarm response was causing concerns among officials and merchant bankers alike. Until 3:20 pm, 10 minutes before the bidding closed, only 14.3 million shares were bid for, which is less than 3.4% of the total offer. To add to the theatrics, the websites of the two main exchanges, Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), stopped updating the bidding activity on their respective websites at 3:20 pm.

Then, in typical Bollywood fashion, the last 10 minutes saw bids for 406 million shares, led by other state-owned entities such as State Bank of India (SBI) and Life Insurance Corp (LIC). Seven hours later, at 10:30pm, Government officials confirmed that the final demand from investors was for 420.3 million shares i.e. 98% of the total offer, and the average price received was Rs 303.67 per share, which was a 4.7% premium on the floor price of Rs 290. The total amount raised was Rs 127.67 billion, of which over 110 billion was coughed out by LIC alone, roughly 87% of the total amount. While the reason behind LIC’s last minute endeavor may be open for debate, the 377 million shares it bought increase its total stake in ONGC to 9.48%.

All said and done, the government only has itself to blame for the debacle. It had not put in adequate work to ensure that the auction process went through without any hiccups. Instead, it rushed through it, aiming to raise some quick cash, and hoping to show a lower fiscal deficit number in its Budget session of the Parliament, due in 2 weeks. However, now that the Divestment Department has established that the auction results were satisfying, and that an auction would be the method of choice for further divestments hence forth, the government can take away some valuable lessons from this episode.

The Price – Setting the floor price for the auction at Rs 290 per share was the government’s first mistake. Usually, when a firm tries to sell a stake to public, be it in the form of an IPO or an FPO (or an auction as in this case), they issue the shares at a discount. This is attractive, especially for the retail investors as it leaves some money on the table for them by giving them an opportunity to sell the stock in the secondary markets. When the floor price of Rs 290 was formally announced on Feb 29^th, it was at a 1.1% discount from the previous day’s closing price of 293.2.

ONGC Shares, up 14% in 2012 - A misleading benchmark perhaps?

However, what the government (or their advisors) failed to factor in was the wave of liquidity around the world in the last 2 months, which saw foreign investors pour in $7.2 billion (Rs 360 billion) in Indian equity markets, and another $4.8 billion (Rs 240 billion) in the debt markets. Such large inflows caused the ONGC stock to climb 14%. Hence, a more appropriate price would have been somewhere between Rs 260 - 270, the average price in the last few months, thereby offering an attractive discount from the previous trading day’s closing price. Just for the record, the share price as I write this piece is Rs 283 i.e. Rs 7 lost on every share from the auction’s floor price overnight. I wonder how LIC feels about its loss.

The Risks – Another reason why it would have been more prudent on the government’s part to auction at a discount is the operational risk underlying ONGC. In any economy, the nation’s largest energy explorer would be the darling of the investors. However, the case is slightly different in India; on one hand, over 80% of its oil is imported, but on the other hand, the government subsidizes the price of fuel. The problem (not to mention the current account deficit) for investors is that ONGC, being a state-run company, is forced to share a portion of the government’s subsidy burden. In fact recently, the government increased ONGC’s share of burden, and with oil prices edging higher (already above $125 per barrel), chances are that this ratio will increase much further.

 

In addition to the impact on costs and earnings, investors have also been worried about the ad hoc nature of the subsidy sharing arrangement. According to the Economic Times, the company’s subsidy burden for the first 2 quarters of FY12 was close to 30% of the oil marketing companies’ under-recoveries. However, in the third quarter (ending December 2011), the methodology was changed and the burden was calculated to be $56 per barrel, rising from 33% to 38% for the entire 9-month period, April - December. As a result, there was a steep rise of 47% in burden in a single quarter, and no assurances that the methodology wouldn’t change again in the future. Hence, with such uncertainty over issues that have a direct bearing on its profitability, a floor price of Rs 290 was totally unjustified vis-à-vis the underlying risk.

The Timing – The government has been teasing the markets with the idea of an ONGC FPO since December 2010. While the offering was postponed several times, a mere discussion about it stagnated the share price as investors were anticipating a discounted offering. So much so that the stock did not even react to developments such as a bonus issue and a stock split (both of which would otherwise cause a significant rally) in February 2011.

However, when the time finally did come, the government rushed through the process, in order to fill its coffers before the financial year ended. They neither gave themselves and their bankers enough time to market the auction, nor did they give the markets enough time to arrange liquidity to participate. The auction was held barely 48 hours after an official announcement. For a market where the average IPO size ranges between Rs 30 billion to Rs 50 billion, a much greater effort was required by brokers and investment bankers to sell an auction worth Rs 124 billion. Therefore, the government should have been more diligent and given themselves and the market about 8-10 days to prepare for the auction. Alternatively, they could have carried it out in multiple steps, for example, 4 auctions of Rs 30 billion each. This would have calmed some jittery nerves among investors, who fundamentally remain very bearish and indecisive due to several domestic and international overhangs (European Crisis, Slowing GDP, etc.)

All in all, I can see why the government tried to rush through the auction. I can also see why they set the floor price at Rs 290. In the grand scheme of things, ONGC is still undervalued at Rs 290; therefore longer-term investors wouldn’t mind the price too much. However, it is important that the lessons are learnt from this experience. I am convinced that we are living in a world where sentiments control stock prices (at least in the short term), and government interventions drive the economy. Hence the single most critical factor one should evaluate is the underlying risk – risk of a bad investment; risk of mismanaging a stake sale; risk of making a wrong decision. Come to think about it, it’s a life lesson isn’t it?

Update: According to news reports, the decline in ONGC’s share price over the last 2 days (post auction) has cost LIC Rs 9 billion.

Ouch !

The Hullabaloo over 2G Licenses

Last year, Time Magazine listed the Indian Telecom Scam 2^nd (after the Watergate Scandal) in the “Top 10 Abuses of Power” list. Considering that it has been making headlines since 2010, I suppose most of you know the details of the scandal. However, for those just tuning in, I thought I’d do a post featuring the 2G Licenses and Spectrum Scandal.

What happened?

In 2008, A. Raja, the erstwhile Minister for Communication and IT, decided to allocate 2G licenses and spectrum to several telecom companies, some of whom did not meet the basic requirements to be granted a license. Furthermore, he sold the licenses and spectrum at apparently throwaway prices, causing the exchequer to suffer from revenue losses, estimated up to Rs. 1.76 Trillion ($ 35.2 Billion) according to the Comptroller and Auditor General of India. Interestingly, Kapil Sibal, the incumbent minister of Communication and IT, dismissed the estimates calling them meaningless “notional” figures. Either way, this led to several new players entering the market, and the increased competition (read: price wars) meant lower tariffs for users, and squeezed the profitability of the incumbent players. 

The matter was mute for a couple years of until 2010, when during the 3G license and spectrum auctions, the government realized the amount it had lost in 2008. This incident of poor governance was termed as another scam by our particularly hardworking media. After much political ruckus, the Supreme Court of India declared the allotment as “unconstitutional and arbitrary” and cancelled all the 122 licenses issued by A. Raja. According to the Apex court’s judgment, A. Raja “wanted to favor some companies at the cost of the public exchequer" and "virtually gifted away important national asset" It is worth noting that the Telecom Policy does not have any specific provision for the licenses or spectrum to be auctioned off, and it was only in 2010 that an auction process was deemed to be the most appropriate method of allocating national resources.

Cancelled Licenses and Affected Parties

 

These firms, especially the foreign players, have complained that the Supreme Court ruling disregards the interests of the business community. Furthermore, it is unfair as it makes businesses suffer for what is in essence the Government’s gaffe.  They also said that such moves would make foreign investors hesitant and cautious against investing in India, and this would hurt the nation in the long term.

So what are the implications?

The cancellation of the 122 licenses will affect close to 45 million people around the country (roughly 5% of the total active user base) who will see their services go off. However, the court has given the companies 4 months, so the users will have some time to switch to a different service provider. As for the companies, they are left with 3 options. First, they can go to court and appeal against the verdict (a very lengthy and expensive undertaking). Alternatively, they could bid for the licenses and spectrum (whenever the auctions happen). Or finally, they could exit the Indian telecom market altogether. As for the incumbent players such as Vodafone and AirTel, it is an opportunity to increase their subscriber base, and also a chance to bid for more spectrum. The sector overall will hence see some much needed consolidation, and with competitive pressure reduced now, the unsustainable price-wars can end and the profitability of the firms would increase too.

Personal Take

At just point, I would like to highlight a couple of points, and let you assess the event at your own terms.

Firstly, If 2G spectrum was to be auctioned (like 3G was, and 4G seemingly will be), the government would get more revenues (only to give out more subsidies in my opinion). But would the tariffs be as low as they are? Would your milkman, driver, domestic helper, fruit vendor, etc. all be able to afford it? Would your life be more convenient or less if that was the case?

Secondly, since the spectrum was allocated on a “First Come First Serve” basis instead of an auction, many new players were granted license and spectrum. As a result, incumbent players such as Vodafone and Airtel who have a larger subscriber base were left with too little spectrum to work with while the newer players who were unable to build a sizable subscriber base were sitting idle on precious resource. So this not only prevents the players from achieving economies of scale, but it also translates to poor quality of network coverage for the 800 million mobile phone users across the country.

Thirdly, the scam has further tainted the image of the Government. However, one should really take a step back, and think if this was really as scandalous a misdemeanor as it seems? After all, it did make mobile usage more affordable to the masses. Would 3G (which was auctioned to service providers for Rs. 670 billion or $ 13.4 Billion) be able to achieve the same reach in India’s price elastic telecom market?

Finally, considering as telecommunication and connectivity as a vital infrastructure of the nation, it was an industry that grew at an exponential pace for some time, but that growth has now halted. Little room to expand due to over-competition has led to unsustainable business models. Hence, some consolidation could do wonders for both, consumers as well as the businesses.

The 2G licenses of 2008 were issued at 2001 prices, on a first come first serve basis rather than an auction.  

So, at this point, would you call it a scam or a blunder ?

Corruption or mere Inefficiency ?


I will let you decide for yourself . . .

FDI in Indian Retail II

In my previous post on FDI in Retail, I kept the focus limited to numbers & stats, mostly formulated by consultancy firms. The people behind those projections happen to be some of the best brains in our country (handpicked by their employers at IIMs or Ivy League universities). So their analysis in my opinion carries more reliability than most government officials, who are either uneducated (I did not use the word illiterate because the definition of a ‘literate’ in this country is laughable) or too ignorant, or have vested interests (the most probable case). If questioned about their stance on FDI, or asked to explain that stance, they get agitated but fail to provide even one plausible implication of their stance. Sad but true!

So far, the critics of FDI have given reasons along the lines of the following:

• Kirana shops will close. International sourcing will destroy Indian MSMEs too. This will cause unemployment.
• Farmers will get exploited.
• International firms (with deep pockets) will form monopolies and manipulate prices. Hence, the consumers will also be exploited.
• The Gandhi family wants to bring in FDI to benefit their “foreign cronies”
• The manner of the policy announcement was “inappropriate” since the Congress did not do adequate “consultations” with the allies and opposition parties. 

However, if anything, these claims have been nothing but populist in nature and their ruckus so far has gained them hefty support from the poorly educated vote-bank, which is not expected to know any better. Some political parties and their supporters seem to be too preoccupied with the Luddite Fallacy, which simply put, is a belief that labor-saving technologies will cause unemployment. As you can tell, the problem with this is that nobody (neither individual nor nation) can progress, let alone innovate, holding such a premise as core value. So it comes as little surprise that when the Prime Minister made an executive decision, the opposition created a pandemonium, both in parliament and on the streets, and forced the government to suspend the proposal in the name of democracy.

Now then, I doubt I need to remind you of how Protectionism hurts the economy of the country that imposes it. Not only does it disincentivize competitiveness and specialization, thereby deterring potential exports, but it also supports incompetent businesses. One does not need to look too far to validate this as our own history offers enough pointers. Businesses that were protected from foreign competition eventually got complacent and did not bother to innovate to stay competitive. Such complacency sets in to all businesses that are protected as they do not feel threatened by competition and hence they become exploitative in nature themselves. I’m sure you can think of a few such businesses yourself. Personally, I am an advocate of the notion that competition brings out the best of any business, and those that get wiped out were obviously not competent enough. Organized retail – though currently only 6% of the total retail market – is here to stay and is expected to rise to 21% over the coming years. This means that the Kirana shops will not be facing competition for the 1^st time.

In fact, judging by the VAT collections of the kirana stores between 2000 and 2010, which increased from Rs 3300 Cr to Rs 8300 Cr, one can only say that they have done well to hold their place despite the emergence of organized retailers (See graph). If anything, this would be another opportunity for them to cement their place in their neighborhoods. How? Consider this example of this shopkeeper in Delhi :

In 2009:

• 500 sq feet store with typical kirana layout and design, open 16 hours daily
• Had 4 employees (2 sons and 2 hired), and total of 448 employee hours every week (4 employees x 16 hours x 7 days)

In 2010, it was time to innovate (& renovate) :

• Repainted walls, added 3 shelf racks, 2 fridges, and 1 air-conditioner
• From Kirana format, it migrated to the self-service format
• Renovation Cost = Rs 90,000 & Time = 45 days

In 2011, post renovation results:

• 80% growth in sales
• Employee hours reduced by 25% to 336 hours per week (2 employees could now work part-time 8 hour shifts)

This is a true story of a kirana shop embracing change, modernizing, and as a result, enjoying higher sales and lower costs, which translated to better profit margins. An average kirana shopkeeper (working in meager conditions) does not take home more than Rs 10,000 – 12,000 per month. So when his sales nearly doubled (for the sake of simplicity, let’s assume that the decline in wage-bill was equal to the rise in his electricity bill), his improved profits (and work environment) could go a long way in improving his livelihood. He could potentially scale up his purchases and hence improve his bargaining power; perhaps he could eliminate an intermediary, thereby further lowering his costs. What he actually does with that extra income could be anybody’s guess, but the key takeaway here is that competition brought the best out of him. Had there been no pressure from bigger and fancier stores opening around Delhi, he might never have bothered doing what he did.

Next, I want to draw your attention to the graph. It is a comparison of the rise in CPI (Consumer Price Index) in 6 cities between 2000 and 2010. As you can see, cities with more organized retail – Mumbai, Hyderabad and Delhi – had faced less inflation (measured by change in CPI) compared to other cities – Amritsar, Kanpur and Nagpur – where retail is relatively less organized. This is essentially because organized retailers have bargaining power that individual small shops don’t. And while the scale of our domestic organized retailers is not very large, it still managed to keep inflation significantly low. Now, if, or when, the government’s better sense prevails and FDI is finally permitted, the inflation will be even lower.

In my last post, I already highlighted how organized retail (with FDI) would bring superior scalability, eliminate unnecessary intermediaries, and establish a high quality back-end infrastructure of international benchmarks. One thing I would like to add to that list is that it would lower Shrinkage Cost, which is the cost of slippages such as employee thefts, vendor faults, administrative errors, shoplifting, etc. This, in case of India is as high as 4% of total sales (read: losses) compared to a benchmark of only 1.5% globally. Furthermore, According to Technopak, while Indian retailers currently hold their inventory for an average of 128 days, their foreign counterparts hold their inventory only for 38 days because of their ability to source directly from the producers. That statistic alone shows that their efficiency in inventory management is 300% higher. Statistics aside, foreign retailers will also instill professionalism in their dealings (paying the suppliers on time, no worker exploitation), and inculcate a strong work culture benchmarking best practices.

According to the DIPP, India produces about 180 million tons of fruits and vegetables, but has a cold storage capacity of only 23.6 million tons (5,386 standalone units). That is a deficit of about 87%, and according to CRICIL causes losses worth a whopping Rs 10,000 Cr annually. What’s worse is that more than 80% of that cold storage capacity is wasted on potatoes alone. Sadly, the fact of the matter is that currently, India is relying on infrastructure that is outdated by decades. It does not have a proper logistics network, but just a number of warehouses and transport offices scattered across the country. As the country (and its citizens) develops, it is going to need adequate infrastructure in place to facilitate its growth ambitions. The Planning Commission of India estimates that India needs an investment of Rs 60,000 Cr (about $13 billion) in its agricultural infrastructure alone. Only way that this is possible is if the government puts its politics aside and allows FDI in multi-brand retail.

Let me give a scenario where the Indian retail industry is protected and FDI is not permitted. The outcomes of this would be actually very undesirable. Lets take a look:

• No Foreign Capital Inflow – With no inflow of foreign capital, the Rupee will remain weak for the foreseeable future and our expensive imports will continue to exert inflationary pressures.
• No Technological Breakthrough – This, in my opinion, is more important that inflows of capital. I already spoke about these so I will not repeat myself, but I will remind you that the value that the likes of Wal-Mart and Tesco will bring in technological knowhow would be priceless. While we tout about our software exports, it is crucial to realize that we lag far behind the world in actually adopting some of those technologies.
• Slower Job Creation – Since there will be no FDI, the growth in organized retail will come from our incumbent companies. But with business confidence so low, corporate balance so leveraged and the cost of credit (interest rates) so high, the growth is going to be much slower. This means that fewer jobs will be created than otherwise.
• No Infrastructure Development – I think it’s about time we smell the coffee and admit that the Government lacks the ability (and perhaps political will too) to eliminate infrastructure bottlenecks that cost us over 2% of our GDP every year. For those who think I’m being over-cynical in this regard, just compare the quality of roads that have been built in the last decade (try to focus on the damage) with the quality of infrastructure built over 60 years ago and is now probably declared heritage property (compare the damage). The potholes, the railway accidents, the filthy streets, and the overall neglect speak for themselves.

By now, I’m sure you get the picture. However, before I conclude, I would like to make one suggestion on this policy. That is to increase the 30% local MSMEs sourcing requirement to 50%. This is because giant organized retailers source about 30-40 percent locally anyway in order to achieve cost-efficiency. Furthermore, it makes little business sense in trying to sell grainy Chinese rice to an Indian basmati-loving consumer base. Hence, by imposing a local sourcing target of only 30%, the government is not doing any favors for Indian MSMEs. Secondly, I hope the Indian government doubles the definition of MSMEs from an asset base of Rs 5cr ($1million) to Rs 10Cr as overtime, in order to be able to meet the large demands of the retailers, the MSMEs will need to increase capacity and will then no longer remain in that MSME category since their asset base might exceed Rs 5 Cr. Moreover, opening up the multi-brand retail markets to foreign firms will also require India to rethink about the legal infrastructure – something else that India needs desperately since our legal system is very outdated. Issues such as taxation, labor laws, procurement laws, and food and safety standards will all have to be revisited. A nation with an economy developing at such rate needs a legal system progressive enough to match it strides.

Finally, the Indian economy grew at an aggregate of 105% between 2005 and 2011. Today, rural income is rising, and consequentially rural spending (demand) is rising. The rural demands in the same period (2005-11) grew by 35% for milk, 70% for vegetables, and another 70% for packaged and processed food items. This further shows that not only are kirana shops going to stay, but also that removal of intermediaries will give the farmers and other rural communities more disposable income will then improve the standard of living, and hence the social fabric of those communities (a positive externality). This however has one more implication. As these rural incomes rise, and the villages and rural areas are developed, new towns will be formed. Furthermore, there is already intense migrating from villages to big cities already. This will then make the procurement and logistics of food across the country a very complex process. Hence, in order to avoid chaos, adequate investments and careful planning needs to be put in place before it gets too late. FDI will bring in both the resources needed (capital and expertise) to do just that, and should therefore be seen as a boon to our supply chain, and hence, to our infrastructure thus the entire economy.

Concluding this post, I would only say that FDI in retail is something that India needs (almost desperately) and hence should embraced with both arms instead of resisting. It could add about 4-5% to our GDP every year. Take a look at the chart above. It shows the breakdown of the costs a consumer pays for tomatoes. The farmer gets only 30% of the final price, the retailer takes 21%, and the remaining 49% is distributed among other intermediaries. Considering that organized retailers could source directly from the farmers, how much value do you now think the intermediaries add?

A study by ICRIER (Indian Council for Research on International Economic Relations) came up with some interesting insight.

• The average distance from a consumer is 1.1km for a kirana store, but 2.6km for an organized retailer. In fact, 64% of the smaller kirana stores well less than 500 meters away.
• 35% of the kirana stores recognize their regular customers and give them credit. In fact, credit sales are makeup 22% of their total sales. These kiranas also know their customers’ tastes and can follow the changing tastes.  

Take a look at the graph below. It shows what FDI Liberation in the Retail Sector did for China. Why China? Because of the similar population size, and traditional agricultural economic roots. But the similarities end there. Anyways, the India-China comparison can be left for another day. For now, I've only brought this up to raise a simple question. Can liberating FDI do the same for Indian Retail sector? 

Let me give you an example. You realize that you are out of bread or eggs one morning. How would you make that purchase? Would you go to the big retailer in your city, or just downstairs to the nearest kirana store? What if you realized you did not have change? Or were crunched on time? In case you didn’t realize where I am going with this, I’m only trying to remind you that your neighborhood kiranas have a place of their own in the Indian retail landscape and the likes of Wal-Mart, Tesco, Carrrefour SA, etc. cannot take their place. If anything, it is 7-eleven that we should be worried about!

Real Life Lessons that Economics Can Teach Us All

I often find people dismissing Economics as being "impractical", 'unscientific" or "idealistic", and when I try to debate otherwise, I get some heated arguments, most of them being along the lines of its inability to 'truly reflect the reality'. Considering that economic theories are formulated with a peculiar assumption of Ceteris Paribus, a Latin phrase that translates to 'holding all other factors constant', I do not blame the skeptics. Regardless, I believe that Economics is still a science, which emerged from the notion of scarcity, and I think it teaches some important lessons on life. Let me mention some of them. 

1. Expectations: Expectations about the future causes businesses and households (participants of the economy) to adjust their consumption, saving, investment and expenditure patterns accordingly, and these subsequently influence economic variables.

Let’s look at an example, within the Indian context to see how this works. In an inflationary environment, expectations of future inflation could become a self-fulfilling prophecy. For instance, if workers expect future inflation, they are more likely to demand higher wages to compensate for the increased costs of living. If their management gives in to their demands, the higher wages would increase the cost of the product / service that the firm sells. Moreover, the firm, in anticipation of higher inflation will increase the costs further to maintain adequate profit margins. Essentially, the higher costs will be passed on to the consumers causing what is known as Cost-Push Inflation. On the other hand, the workers who now have more disposable income will demand for more (or higher quality) goods and services. If the supply remains at the same, the prices will go up thereby causing inflation of a different kind – Demand-Pull Inflation.

Key Lesson: Expectations influence Actions, and hence Outcomes. If you believe you will succeed / fail at any endeavor, chances are, you're making another self-fulfilling prophecy. Thus, as the spiritual gurus say, stay positive !

2. Externalities: Externalities are spillover consequences (often non-monetary) of a transaction, experienced by unrelated 3^rd parties. These could be positive (read: social benefits) or negative (read: social costs), and could potentially lead to market failure if the social costs are not compensated for. On the other hand, social benefits tend to add to the business' goodwill. 

For example, schools, universities and research institutes emit positive externalities as education generates social benefits in addition to the profits for the institute selling the service (of education). Therefore, it’s a common feature in advanced economies for governments to either subsidize education or give incentives to education providers for the social benefit they bring about. On the other hand, large investment banks have been heavily criticized for taking on unsustainable amounts of debt leading to the Global Financial Crisis of 2007-08, and also amplifying the systemic risk in the overall banking system. These actions of investment banks (due to poor regulation) had brought about severe negative externalities that have now triggered in widespread social unrest (read: Occupy Wall Street).

Key Lesson: Your actions always have unintended consequences. Well-intended actions can sometimes have unintended ill side-effects too, and vice-versa. You can never be cautious enough. 

3. Dead-weight Loss: Dead-weight loss (DWL) refers to the monetary/welfare costs to society that are caused by market inefficiency, mostly arising due to poor policies or misallocation of resources. When a market is in equilibrium (i.e. demand = supply), there is no DWL. However, when price controls (minimum wage, subsidy, etc) are introduced, the demand & supply dynamics change and the new equilibrium point create a dead-weight loss. 

For example, imposing taxes on any particular product / service would not only reduce the seller's profits, but also cause some customers to shy away from making that purchase due to a higher price, thereby further reducing the profitability of the seller. In another scenario, imposing price controls (such as minimum wage & price ceilings) tends to restrict the businesses from functioning optimally, and creating DWL in the process. This loss of efficiency is then passed on to the consumer in the form of higher prices. In both cases, there is deadweight loss arising in terms of the monetary loss of profit for the seller, and in terms of the loss of utility derived from that particular product to the customer. 

Key Lesson: Let nature take its course, and only intervene when those forces are on a collision course, and external action is a must. Natural forces have a way of finding their own equilibrium.

4. Opportunity Cost: Opportunity cost is the cost of the action that has to be forgone, when opting for an alternative action, thereby highlighting the relationship between 'scarcity' and 'choices'. It is important to understand that the underlying assumption is that resources (time/money/labor) are limited and therefore there is always a trade-off on how to deploy those resources at any given point in time. One must note that the opportunity cost of an action may not necessarily be monetary in nature.

For example, instead of reading this post, you could have been baking a cake, washing your car, shopping, working, etc. Here, your opportunity cost is in terms of time (scarce resource), which could have been used for many possible activities (choice), and in the trade-off, you chose to read this post (excellent choice). In another instance, an investor decides that investments to make based on his capital and the available opportunities (both being scarce resources), and his decision (trade-off) is based on the pay-offs of each investment opportunity (returns, risk levels, etc). At the end of the day, one can use a $ 1 million to deploy at the stock markets, a new house, at a new business venture, or be used up for buying flashy goods, or be given to charity, etc.

Key Lesson: Our lives are determined by the choices we make, and while our options may seem limited, we must compare their Opportunity Costs to make the right decisions. 

5. Diminishing Marginal Utility: The Law of Diminishing Marginal Utility, in simple words, says that as an individual consumes more and more units of a product/service, the utility (read: satisfaction) derived from each consecutive unit, after a certain number of units, tends to decline. This concept applies to a production setting to, and a manufacturer may find his marginal utility diminishing by producing more units.

For example, Toyota currently manufactures 1000 cares a day. But to manufacture more cars per day, it will need to hire more workers, which will require more space to work, and also more wages to pay out. This may no longer be efficient because it may raise the average cost of producing one car. Hence producing more than the 1001^st car (and every car after that) will have diminishing marginal utility.  Similarly, consider a situation where you are very thirsty, and you drink water. Your 1^st glass will be very satisfying, but your second glass, though much needed, will not offer the same satisfaction as the 1^st one, and hence, will have lower marginal utility.

Key Lesson: More isn’t always better. Excessive quantity more often than not tends to defeat the purpose and backfire. This also applies to things such as hard work and happiness, where excess can lead to health problems and therefore, a natural decline in efficiency.

6. Fiat Money: It is currency that has been declared by the government to serve as legal tender, but is not backed by any physical commodity such as gold, copper, grains, etc. Therefore, its value is not intrinsic, but based solely on the premise that the counterparty would accept it as means of payment for goods, services and debt (or taxes in case of the Government).

As most of you know (I hope) transactions historically were made using the Barter System. This evolved to using commodities (grains, precious metals) as currency, until the 11^th century China, where the Yuan and Ming dynasties became pioneers of fiat currency. That being said, after the Nikon Oil Shock in 1971, almost all currencies in the world have been flat currencies. The problem with this is that since currencies are legal tenders backed solely by trust, it can become worthless due to hyperinflation if there is a loss of public confidence on owing to incessant printing of paper currency (the most recent victim of this was Zimbabwe).

Key Lesson: Always Have Faith. The moment you lose confidence, even the most prized assets – whether it is a skill, a person, or an object – become worthless.