FE: You have been associated with the Indian markets for years. What, in your opinion, remains to be done to make the markets more efficient?

JB: The progress of dematerialised trading is very gratifying. On other fronts there have been some positive steps, as well as some retrograde ones. For example, the new takeover code deprives investors of the opportunity to sell and get out when any one of the joint venture partner decides to sell his stake to the remaining promoter.

Similarly, the minimum offer for 20 per cent is not right. If a takeover results in a new management taking over control, all shareholders may like to get out of the scrip, at the takeoevr price. This is being denied them under the 20 per cent rule. Ideally, we should have a system where the buyer makes a tender offer to buy from shareholders.

Then there is the lack of fungibility in GDRsand ADRs. This reduces the amount of foreign investments into the Indian stock market. The argument saying that two-way fungibility amounts to capital account convertibility (CAC) is wrong. One can have GDR fungibility for FIIs without introducing CAC. The huge discounts or premiums at which GDRs are traded reflect a fragmented market and indicate a lack of liquidity. A fragmented market significantly reduces transparency.

What are your views on the pace of PSU disinvestment?

The government has so little vision when it comes to adopting privatisation in India. For example only 25 per cent of the Indian outward-bound passengers fly by Air India. Instead of improving the service and attracting passengers, the government tries to artificially carve out a market share by restricting operations of foreign competing airlines.

The problem with the government is that when they think of making AI profitable they will not think of it in terms of making AI competitive in a global air travel system. That'swhy they are thinking of merging Air India with Indian Airlines. That is unfortunate, because by merging the two you limit your options. The only way for the airlines to grow is to ally with the global airline alliances. If you have two national airlines, IA and AI, they could then team up with two different global alliances and compete.

Do you think the cross-holding route initiated by the government is right?

Definitely not. They have this misguided idea that India should have a major company that must become a global giant. None of the Indian oil companies are anywhere near the global oil majors in size or expertise. The only way Indian Oil can survive and compete globally is to enter into alliances with major foreign oil companies, instead of entering into share swaps with other Indian oil companies.

PSU stocks are traded at such low values because investors feel that the government is not serious about relinquishing control. They will enjoy much higher valuation if the government is seriousin its intention of giving up control. Proposals to the private sector or foreign investors will raise valuations and send the right message. Cross-holding works against this. It reduces the chance of privatisation of these companies.

What are your views about the sustainability of the post-budget rally?

I think it is sustainable and the market has been re-rated to a higher plane. The news on UTI's US-64 alone is worth 400 points. Many Indian companies have adapted well to the difficult economic conditions of the last three years. In the private sector, many companies have taken steps to restructure their businesses. The economy may be on the recovery path and we may begin to see the higher valuation now enjoyed by certain sectors extending to capital goods sector by the end of the next fiscal.

What are your views on the IT boom?

Some of the Indian IT companies will become huge. Twentyfive per cent of the US GDP comes from IT, whether it is from IT-related work in the military orhealth-care or elsewhere. Indian software firms service hardly a fraction of that huge market.

To tap this, I would prefer Indian IT companies not move up the value chain. For many it would be foolish to compete with US high technology companies. India's huge advantage lies in its reasonably educated large manpower base.

Most Indian IT companies should, in fact, move down the value chain. If you move up the value chain, you'll end up employing more high-priced professionals and foreigners, resulting in a high-cost structure. To sustain the profit growth, Indian companies should use less educated and cheaper workforce. IT skills are not the key to success, it is the project management skill that matters for most Indian IT companies. India's natural role for the next 50 years is to supply people, because everywhere else, in the US, Europe or China there will be a declining population. India is the only region where population is expected to grow further in the next decades. I don't see any slowdown in thegrowth of IT companies for the next five years.

It is easier for Indian companies to maintain profitability due to higher margins, while it is not as easy for the US companies who operate on narrow margins. So a higher valuation for Indian IT companies is justified.

What are the prospects of FII inflows?

FIIs essentially chase returns. Though there are IT companies worth investing here, these have already become expensive compared to investment opportunities in the rest of the region. If the general economy picks up and the rally reaches out to capital sector stocks, then you will see a lot of FII money coming in.

What are the reasons for Infosys' high valuation on Nasdaq?

The high premium partly reflects the scarcity value of Indian IT stocks, which will be eroded after a few more Indian IT companies get listed there. There is an argument that Infosys compares with the bluest of blue chips in the US market. But I feel the future of Infosys in the US market is going to lie somewhere inbetween the all-American blue chip IT companies and the Indian-promoted US IT companies, such as Mastek and Cambridge, which enjoy much lower valuations.