The state of the Republic - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
The state of the Republic A  A  A
30 JANUARY 2013

In his address to the people of India, on the eve of the 64th Republic Day, the President of India noted:

India has changed more in last six decades than in six previous centuries. This is neither accidental nor providential; history shifts its pace when touched by vision. The great dream of raising a new India from the ashes of colonialism reached a historic denouement in 1947; more important, independence became a turning point for an equally dramatic narrative, nation-building. The foundations were laid through our Constitution, adopted on 26 January 1950, which we celebrate each year as Republic Day. Its driving principle was a compact between state and citizen, a powerful public-private partnership nourished by justice, liberty and equality. India did not win freedom from the British in order to deny freedom to Indians. The Constitution represented a second liberation, this time from the stranglehold of traditional inequity in gender, caste, community, along with other fetters that had chained us for too long.

While the state of the nation and our "second liberation" is known to us all from what we experience in our daily lives, the state of the "compact" between minority shareholders and the founding families we invest in is not that openly discussed. The creation of the joint-stock company was, in many ways, a replacement of the feudal system. The growth of activity in India's stock markets - and the liberalisation of the economy since 1982 - was about businesses being driven by market forces and shareholders being equally rewarded for the risks taken, in proportion to the number of shares they held.

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What you will not read in the financial press

One could argue that the financial media, in general, has a vested interest in keeping quiet about the treatment of minority shareholders. Much of the media is owned by large business groups (a global phenomenon) and much of the focus of the media is on the size of the wealth, not on how the business houses made that money. Money talks, the poor walk.

So now that the media has done their annual rankings of the movers and shakers - and we have been carpet-bombed with stories about their ability to spin wealth - it is time to take stock of what investors seem to think about these grand symbols of the Republic.

A previous Honest Truth (Is it the car - or the driver?) had a table listing a sample of 15 of Indians business groups / families where many of you gave your feedback on:

  1. How fair was the group: do they share the rewards of the risks taken with all the shareholders or do they play dirty and keep some extra money for themselves? A score of zero indicated they played dirty and a score of 100 indicated they played fair;
  2. Has the business been built on connections with the government (zero) or on the ability of the management to thrive on market dynamics where the consumer decides the winners and the losers (100)?
With a total of 200 points being the perfect score, the highest score went to HDFC (187) and DLF (43) got the lowest score (Table 1). Interestingly, the best and the worst both deal in real estate: HDFC makes most of its money giving loans to individuals who wish to buy homes; DLF builds the homes people buy.

Table 1: How you rated the various business groups
Rank Group/Founder Score Pass/Fail
1 HDFC 187 93.50%
2 INFOSYS 185 92.50%
3 TATA 172 86.00%
4 WIPRO 169 84.50%
5 MAHINDRA 147 73.50%
6 BIRLA 130 65.00%
7 BHARTI 111 55.50%
8 PANTALOON 83 41.50%
9 STERLITE 73 36.50%
10 AMBANI, Mukesh 71 35.50%
11 ESSAR 59 29.50%
12 AMBANI, Anil 57 28.50%
13 ADANI 51 25.50%
14 MALLYA 50 25.00%
15 DLF 43 21.50%
Source: responses from 37 readers

No admission?

If these business houses were applying for a seat in a college, many would not be given admission. If 80% was the cut-off mark to qualify for accessing your savings and for you to feel comfortable with investing in such companies, only 4 entities (HDFC, Infosys, Tata, and Wipro) would make the grade.

If a 50% pass score was acceptable, an additional 3 entities (Mahindra, Birla, and Bharti) would qualify.

There is a very powerful statement in this table: most of the business houses are not trusted by investors. Not only do they seem to have used their connection with governments to win favours but, even when they make it rich (by means fair or foul as perceived by you), they are not seen to be sharing the spoils of war.

To apply the speech of the President to the relationship between the shareholder and the large business groups - and based on the feedback received from you - it would seem that:
  1. "Colonialism" - seen as a "bad and unfair master" - has given rise to a new, and equally unfair, master in the stock markets;

  2. "Nation-building" is in short supply; the building of private fortunes by means fair or foul is plentiful;

  3. The "compact" between shareholder and founding family is not based on "justice, liberty, and equality". Rather it is based on a one-sided relationship of the powerful throwing crumbs to their minority shareholders, as they see fit.
If the Ministry of Finance wishes to see the imports of gold decline and if SEBI wishes to see more activity in the capital markets, the solution does not lie in raising the import duty of gold or in finding ways to energise the distributors of financial products.

The solution lies in making the stock markets a safer place for investors to place their long-term savings.

But that would mean the school masters have to punish the naughty children caught with their hands in the till - and not be the Chief Guests at the award ceremonies hosted by the financial media where the naughty children end up winning accolade and prizes.

Is that likely to happen?

That, then, is the state of the Republic.

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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.

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7 Responses to "The state of the Republic"


Feb 6, 2013

Indeed an eye opener for us. Unfortunately, I am not aware (if at all it exists) of a quantitative 'transarency' index of companies that I can use for my investment research.


randhir singh, commodore (retd)

Feb 2, 2013

Kudos for bringing out the plain truth. Sadly, as u brought out there is less of nation building and more of lining personal coffers.
2. Democracy is being wasted on undeserving politicians. Communism is more "people oriented." We are far behind China. Discipline and honesty is the need of the hour.


neeraj varshney

Jan 31, 2013

I guess we are just an overgrown "banana republic". There is a politician-criminal nexus, there is a politician-mafia nexus, there is a politician-builder nexus, there is a politician-industrialist nexus, there is a politician-insurgent axis, there is a politician-media nexus. Where does it leave a common Indian?
We have a "feudal democracy" which creates its own dynasties and favours its own set of cronies.
I have become a cynic and despondent person. I can foresee 5 years down the line youth lynching politicians, if they do not change. Why? They need jobs. 80% protestors in Nirbhaya case were the young people below 30 yrs of age. This nation is fed up with the governance. High time a revolution takes place int he general elections of 2014 or else we will have an Indian Spring like Egypt.

Like (2)


Jan 31, 2013

Rightly said but you shy away from naming the TOI group of publications.

Like (2)


Jan 31, 2013

India became politically independent but is yet to discard the feudal mindset and the slavish approach thereto. The recent and absolutely unnecessary uproar over Asish Nandy's comments is an indicator. Till now the inheritors, the politicians, the babus, the lalas have been hogging the benefits of the republic with a degree of elan and a finesse bred out of practice and experience in tweaking the system. Now a different grade of carrion eaters under the garb of religion, caste etc have joined the fray and most disturbingly due to the compulsion of vote bank politics they have become the holy cows. Meritocracy has gone for a toss. Some would have to score 105% out of 100% while some others would reap the same benefits by scoring only 5% and their promotion is also assured. No wonder that the meritorious join the private sector leaving the public jobs to the inferiors. But these inferiors hold the key to administration to the detriment of the country. They are mostly incompetent, dishonest,-- what a shame!

Like (2)


Jan 31, 2013

The depraved, unabashed and disgusting sight of mutual back-patting, gushing and prattling displayed in the event organised by Times of India is solely for their individual business interests, rather than as experts of the Indian economy. I guess, except for socially grasping people, not many are fooled.
The many recent articles and events on real estate industry organised by Economic Times and Times of India group highlighting positive and investment up-sides of Indian real estate is a hand-in-glove arrangement with Credai and major real estate players to dump over-price real estate stock on unsuspecting desperate buyers.

Like (1)

Nagesh Kini, CA

Jan 30, 2013

The Honest Truth come out with elightening thoughts. They need to be channelized into concrete grass root implementation. The primary concern presently that needs to addressed is one of bringing about good - and not excellent - corporate governance. This has to brought about by like-minded professional non-partisan coming together under one umbrella to spread the cause of Financial Literacy that is so woefully lacking in our professionals and surging middle class retail investors. Over to you Ajit!

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