Can companies get stronger than countries?

Jan 31, 2012

In this issue:
» Fidelity contemplates exiting India AMC business
» Healthcare spending a threat to G-20 ratings
» IMF prods Asian economies to ease monetary policies
» IPO accountability to go beyond i-bankers
» ...and more!

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Job creation, improvement in standard of living and socio economic benefits are responsibilities associated with governments. But when the governments stand on the brink of bankruptcy or fall short of their duties, powerful private sector companies at times become the commanding power when it comes to policymaking. The fact that some companies are becoming stronger than countries has become evident in the recently concluded World Economic Forum at Davos, according to an article in Time magazine. No points for guessing that the critique is directed towards smart phone giant Apple Inc.

We had discussed earlier how the US government does not enjoy the financial status that Apple does. The government has been stripped of its AAA rating while the company continues to enjoy it. Further, Apple Inc. has more cash on its books than what is in the US government coffers. Apple's latest earnings show that it has a cash balance of US$ 76 bn, while the US government's operating balance comes more than US$ 2 bn short. Hence even though US President Obama may like companies to create jobs in the US, the likes of Apple may get away with their own business plans. As one of the company's executives put it, "We don't have an obligation to solve America's problems." Thus the signs that some companies are wielding more power than the government of the countries seem apparent.

The logic that outsourcing jobs makes sense to ensure sustainable profits and better talent sourcing certainly makes sense. However, what strikes us most is that in a nation as powerful as the US, nobody seems to mind the privatization of profits and nationalization of losses. If companies can claim to be indifferent to the economy's problems, why should the government participate in corporate bailouts? We are glad that the Indian government has at least so far not paid any heed to the ridiculous bailout requests by a private sector airline company. In fact the government owned carrier has also been left to fend for itself.

The distinction between politics and economics may have become blurred. However, that social welfare for the masses and ensuring healthy business profits for a set of shareholders cannot go hand in hand is well accepted. We do not oppose the right of powerful companies to have an opinion on policymaking. But neither the government nor the companies should pay the price for each other's wrong doing.

Do you think there are powerful companies in India that arm twist the government in policymaking? Let us know your comments or post them on our Facebook page / Google+ page.

 Chart of the day
Judging by the growth in banks' loan book during the first nine months of FY12, it is not difficult to ascertain that companies have clearly shied away from approaching them to fund capex. As per data from the RBI, loan sanctions from banks for capital expansions are set to be at a 4-year low in FY12. Given the steep rise in lending costs over the past 12 to 15 months, the reason is not hard to find. However, with the RBI now hinting at softening of interest rates, Indian companies may look at getting back to their capex plans, albeit with some delay.

Data source: RBI Macroeconomic Review

In a somewhat surprising turn of events, Fidelity, the money management firm of international repute, is believed to be heading for the exit doors in India. An announcement to this effect has not been made by the firm itself. However, it did accept that it is reviewing its mutual fund operations in India. The reason behind the move appears to be the tight regulatory environment present in India currently. An idea can be had from the fact that India is perhaps the only market in the world where there is no entry load. Besides, even management fees are higher in other countries.

These issues are thus taking a toll on the successful running of Fidelity's Indian operations and keeping its bottomline consistently in the red. Viewed from another angle, the decision can also be called as slightly hasty. This because the firm is not only close to touching the Rs 100 bn asset under management mark, supposedly a breakeven point in India, but it would also lose out on the long term India growth story. Only time will tell whether Fidelity has made the right choice or not.

As if the current problem of deteriorating finances is not enough, developed countries are expected to see some more pressure on their fiscal balances. And the major culprit in this regard is expected to be healthcare expenditure. With a vast chunk of the population included in the social security net coupled with the fact that the proportion of aged people is increasing, healthcare spending in the developed economies such as the US, Europe and Japan is set to soar.

That is why ratings agency S&P has warned that it may downgrade 'a number of highly rated' Group of 20 countries by 2015 if their governments fail to enact reforms to curb rising health-care spending and other costs related to aging populations. Unfavourable demographics is not the only factor that is piling on the pressure. More expensive new technologies and broader treatment coverage may account for as much as two-thirds of the projected increase in health-care spending. So reforms to curb healthcare expenditure are badly needed. But with so many problems already keeping governments on their toes, are they aware of the seriousness of this issue? And if so, are they ready to tackle the same? It does not look like the case if one were to go by the evidence at hand.

The RBI didn't go into a monetary easing overdrive in its latest policy review despite slowing growth. However an infusion of liquidity was more than welcome. The Reserve Bank Of India (RBI) recently cut the Cash Reserve Ratio (CRR) by 0.5%. The CRR refers to the share of deposits banks must hold with the central bank. This move is expected to release around Rs 320 bn into the system. But that's not all. The RBI is open to more debt buybacks through open market operations (OMO) in order to address the strain on liquidity. Since late 2011, the central bank has already bought back about Rs 719 bn of government bonds from the secondary market. This was in order to reduce pressure on yields and ease a cash crunch after the government hiked its borrowing plan for FY12. Thus even though policy rates were not cut, increased liquidity is expected to push rates downward. This is definitely good news for growth.

As per the International Monetary Fund (IMF), Asian economies have been relatively resilient to the Eurozone sovereign debt crisis and the overall slowdown in the global economy. But what if the crisis in Europe gets worse? It would easily shave off two percentage of growth from the global economy. In such a scenario, IMF opines that Asian economies have enough room to initiate growth-boosting policy measures. In other words, the governments of respective Asian economies could either relax interest rates and money supply, or loosen up tax rates, or do both to offset the negative impact of the external shocks. Unlike what many economists and analysts believe, the IMF does not expect any 'hard-landing' in China.

The IMF could be either right or wrong. But that is beside the point. What worries us is the way institutions are obsessed with economic growth and the role of the government to maneuver the same. We believe that alike most things in nature, cyclicality is an essential characteristic of business. Economies should be allowed to correct on their own with as minimal interference as possible. The crisis in the developed economies is a clear testimonial of what happens when a government interferes excessively in an economy. So there is no denying that by easing money supply and taxes, an economy could be propped up in the event of a slowdown in the short to medium term. But such an approach not only postpones but also worsens the eventual crisis. And when that eventual crisis occurs, it is just too big and too difficult to handle.

Incidences such as violation of Initial public offering (IPO) rules by promoters or investment bankers and misuse or diversion of IPO proceeds are nothing new in the Indian capital market. The market regulator Security And Exchange Board Of Indian (SEBI) is relooking at the entire IPO process. It is planning to put extra liability of overseeing the utilization of the issue proceeds on investment bankers besides the existing responsibility of verifying the information published in an IPO offer document. Agencies such as auditors and legal advisors also play crucial roles in the IPO process. The problem is no one wants to take the responsibility of any wrongdoing. Several auditors do not want to share crucial documents related to tax benefits, end-use of IPO proceeds, project funding etc. And this makes the due-diligence task of investment banker tougher as they cannot vet each and every detail themselves. This is practically not possible in the kind of fee they get. Also, there lies a clear conflict of interest among issuer companies, auditors and investment bankers.

The solution lies in streamlining the standard disclosures of financial information in the offer document. In addition to that, not only merchant bankers but other involved professionals such as statutory auditors should also be made more accountable for the listing procedures.

On the back of few enthusing set of results from India Inc Indian stock markets continued with the buoyant mood today aided by gains in banking, commodity and realty stocks. At the time of writing, the BSE Sensex was trading 210 points (1.3%) higher. Indices across other key Asian markets also closed higher while those in Europe have started on a positive note.

 Today's Investing Mantra
"In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you. You think about it; it's true. If you hire somebody without the first, you really want them to be dumb and lazy" - Warren Buffett

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9 Responses to "Can companies get stronger than countries?"

k d desai

Feb 1, 2012

The strong companies in India may not dare to openly arm twist government on policies, but they will act more smart while preferring to operate back doors to meet their selfish motives may be at the cost of masses.



Feb 1, 2012

Your last statment is correct. If our govt bail out indian airlines, they are asking me to pay for MP's pending payments(Nearly 430 Crs). Whay should I pay even in remote chance of concern? Who is supposed to pay whos mistakes?
Will the same Govt pay me one month un employment benifit If I loose my job?



Jan 31, 2012

They work together and deceive the public and make money at the cost of Public



Jan 31, 2012

It should be. If the companies can twist the existing law of land there is prevailing improvement in few areas. if you stop this, find out other rules/ norms first. kings are always doing this. anybody who is made king will have weakness & that people encash. You can not stop this even in your own close family having wife anf few children..


Amit Sengupta

Jan 31, 2012

Yes - there are companies, I think. And in India, you don't even need very powerful companies at state level or at panchayat level, who today get significant part of tax payer's money. Look at this tribe called promoters of real estate - its a mystry how they qualify to handle such latge sum of money, operating in small pockets. It defies logic unless of course they are only the front face of someone behind.


Anupam Garg

Jan 31, 2012

With respect to rating agencies downgrading ratings...the word reform seems so ironical in this case...what kinda social reform would snatching away of medical expenses bring?

a society built on principles of social reforms shldn't require economic ones...economy should flourish automatically...if not, then cutting back on social reform can't really reform the economy...ah, bless philosophy



Jan 31, 2012

You are too hasty in lauding the Indian Government for its supposed refusal to bail out the troubled private sector airlines. The real reason for this stance is that the airline industry is seen as elitist that affects only the minuscule non voting middle class. Yet, Air India keeps bleeding the tax payer continuously. "Advances" to the tune of Rs.3000 crore have been given by the Government and at least Rs.7000 crore loaned by nationalized banks with little hope of recovery.

In the 90s the Unit Trust of India was run to the ground by the cronies of the central Government. As millions of ordinary people had invested in UTI, the central Government had no alternative but to set up a "special" vehicle to isolate the poisoned funds and bail them out. The bottom line is whether lots of jobs are at stake or whether letting the troubled company die could have political repercussions. This political calculation is the same the world over.


M T Chiddarwar

Jan 31, 2012

Yes in India the Reliance family has been doing it all along. But for the strong public outcry, M M Sing would have nationalised the private losses of the Mallya's Kingfisher.


anil kumar mehta

Jan 31, 2012

There are powerful companies in India who can get policies favourable to them implemented and there are number of instances of such things. However this is not really arm twisting. Its like hands in gloves- Companies use policy makers- politicians and bureaucrats to their advantage and pay the cost- in terms of money or money's equivalent. This practice is far reaching in India then any of the developed countries.

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