(This article appears in the latest issue of Moneylife- 'What me worry about corruption")
SCANDAL A DAY KEEPS NO ONE AWAKE
Another scam, another scandal. The sun again rises on nothing new, in India.
The one good thing the bribe exposure did was to show how shallow our stock markets are. It also shows the risks in the markets. Under normal circumstances, if one were to believe all the corporate governance speeches and talks that the foreign investors make, they should have totally ditched Indian markets. The fact that they choose to remain, shows that money and respect for ethics are two different things. Being unethical is no bar to making money. Tolerance is everything.
The breaking of the scandal perhaps gave the markets a good excuse to correct. Stocks of companies that had risen for no apparent reason fell with a thud. One hardly saw a good quality stock price take a big tumble. Yes, our markets need continuous doses of ‘grease’ to keep going. Most promoters and money managers fall in to the honey trap and create an environment which creates a make believe world of ‘all is well’. I am reasonably sure that this scandal will blow over. In fact the first two to three days have seen an enormous number of market participants appearing in the media and making light of the scandal. Corruption is accepted as a way of life. Getting caught does create some hiccups. Look back at 1991. So many got away scot-free, some got divine retribution and a few got punished. History will repeat itself.
Yes, we can question that the actual impact of the scandal on a LIC Housing or a Bank of India does not appear to be damaging. Most analysts came back saying that either the amounts are small or that the loan book is still healthy, so ‘what me worry’? This will be the sales pitch to ensure that these stock prices will recover sooner rather than later.
To me, the bigger issue is the management culture in the PSU’s. It is common knowledge that graft and grease take various forms and shapes in the public sector undertakings. I am not, for a moment, saying that only the public sector is greasy. Private sector is often more greasy. Unfortunately, the public sector also has the ownership in hands of a government which should not be in commerce. It uses the public sector as a part of its ‘currying favours’ kit. The private sector promoters, on the other hand, treat the companies as their personal properties and use the money first for self, then for family and residual is for all ‘other’ shareholders. In the private sector, personal ambition often creates a lot of incidental value for the other shareholders. On the other hand, the PSU bosses are not unduly worried about share prices. For them, wealth is what can be taken away from the company. In the private sector, the promoter is happy when the share prices rise. This is the big difference.
What keeps people invested in public sector companies? Is it a hope that someday, the government will exit the board room like they did in IPCL or BALCO or Modern Bakeries? Or is it a blind evaluation of published figures? Perhaps it is a combination of both. One fund manager friend mentioned that he prefers public sectors simply because the government will always stand by it. Look at the banks, he said. Some of the new gen private banks have vanished. But the dull public sector banks are still around, after having got several doses of oxygen.
Somewhere, there is also the fact that if we take the recent scandal, the private sector intermediary company share price is far less likely to recover than LIC Housing’s share price. Investors will not care unless it turns out that the company is filled with dud assets. The scandal will be taken as a small dent in the share price and in fact I know of some investors who have bought in to these shares when it fell sharply. So, the world of investors really gives a damn about corporate governance or honesty.
The real estate sector has also taken a hit. Here again, the take is that perhaps for a small time, the companies will find it tough to get loans. This will pass. They will find new intermediaries. This sector has never been known for its transparency, but still attracted the cream of foreign investors. It hardly matters whether they are straight or fit in to the shadow of a corkscrew. So long as they have land, can sell houses and offices, investors will flock to it.
So, don’t worry. Grease and graft changes nothing. It may change a few equations here and there, but the investment universe feeds on it.