A disciple; a visionary... - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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14 FEBRUARY 2008

Part I: the disciple.

To be a disciple, or a follower - you need to have a leader, a guru.

Most investors are followers, they are disciples.
And that is good.

The problem, though, is that they are disciples of greed.

Greed is not a good leader, a good guru.
Ask Adam - he reached out for the apple.

And because of that one action from Adam, we are where we are.
Britney has re-defined motherhood.
Ben has re-defined central banking.
Bush has re-defined "belief".

And investment bankers have re-defined logic.

So there is Reliance Power with a book value of Rs 9 per share (based on the 2,260 million shares in issue after the IPO shares are counted, but before the IPO money is counted). This jumps to a book value per share of Rs 60 (after you add in the money proceeds from the IPO price of Rs 430 to 450 per share).
So investors paid Rs 430 for a share whose book value was Rs 9 per share.
After the IPO, these investors are now owners of a share with a book value of Rs 60 per share.
Think of the logic there: you paid Rs 430 to own something that is now worth Rs 60: it was your Rs 430 that took the book value from Rs 9 to Rs 60.

And the market price is hovering at the Rs 350 levels.

And that grey market premium of 100%, which reflected a price of Rs 900 per share, has disappeared.

What remains is a company with many projects on paper, a market cap of some USD 20 billion, cash in the bank of some USD 3 billion from the IPO; and some execution skills and challenges.
Rs 60 plus dreams plus expectations for the future.
And you paid Rs 430 for it last week.

I can see why the investment bankers are celebrating.
They just performed a miracle.
They just became gods.

Disciples who follow such gods should enjoy the fruits of their worship.

Atleast the apple that Adam plucked was red and, presumably, tasty.
Hopefully, these disciples of greed will also get to taste something sweet.

By the way, in case you know any investors who need to change their guru, see what www.equitymaster.com had to say about the mother of all IPO's. About investing. About following a discipline.

We are not gurus, we are disciples. Just like you.
Learning new things every day. And sharing our thoughts and views with you.

We try to figure out what truths exist and which gods to follow.
Like you, we wish to be good disciples.
And we try not to reach out for the bad apples.

Part II: The True Visionary.

When the historians of the future will write the economic history of India Incredible, India Arriving, or India Rejuvenating, they will credit much of where India is today to a combination of luck, government policy, and "the tireless efforts of the many Indian industrialists who led India to its present rejuvenated form".

And when they list the many industrialists who made their tireless efforts they will name the established business houses led by Dhirubhai Ambani, Aditya Birla, and Ratan Tata. Financiers like Vaghul and Kamath of ICICI, H. T. Parekh and Deepak Parekh of HDFC will also make that list. The newer generation of entrepreneurs like Narayan Murthy and Nandan Nilekani of Infosys and Subhash Chandra of Zee will be praised for creating new, globally competitive industries.

While many in this list will truly deserve the credit for prying India open from its secluded shell, the historians will most likely leave out one visionary. A person who, from a position of power, tried to create an environment that would give the beneficiaries of the industrial raj - including him - less power.

The late Ashok Birla was the visionary that future historians will not write about.

He was noteworthy because he was a member of the Birla family. Grandson of Rameshwar Das Birla, grand nephew of Ghanshyam Das Birla, and cousin of the more successful Aditya Birla. The press liked to write about Ashok Birla because he did not wear suits, he sported a moustache, he smoked, he drank, he had his social fun - and he was open about it. His private life was not lived behind some high-tariff, industrial barrier that sheltered the "us" from the "them".

The press referred to him as "the black sheep" of the Birla family. Ashok Birla thought of himself as a normal guy. Being a Birla, he figured, did not mean he had to always be clean shaven, come to office in a suit, or not drink alcohol or smoke cigarettes. He was a rebel, but one with a cause.

I recall the first day that I met him. I had returned in 1984 from the US after my MBA and wanted to do "something" in finance. Through sheer luck and a series of events that began with my reading an old issue of "Business India" while waiting for my dentist (remember dentists in India are a lot cheaper than dentists in USA), I ended up with an interview at the Birla office arranged by Ashok Advani the publisher of "Business India".

There I was sitting in this pristine, white waiting room at Industry House with the portraits of the legendary R. D. Birla and G. D. Birla looking at my pinstriped suit with approval. A man came out of one of the passageways, walking briskly past me, and went into another passageway.
I ignored him - he was not wearing a suit, so must be really unimportant.
I turned my attention to the Birla family members, filled with life on the dead canvas.

A few minutes later, that same man strode through the wafting room again, tucking his shirt in his trousers, trying to zip up his beige coloured pants. "Gosh", I thought to myself in Americanese, "how do they let such people work here?" And while I was running that thought in my head, I gave the man a really dirty look converting my thought to an unmistakable message: "Hey, shape up, this is the Birla office, they control 3% of India's GDP!"

Ten minutes later, a peon dressed in crisp white clothes and a shiny white hat to match came by and said, "Babu ne bualaya". About time, I thought to myself, glad that I had finally been called by the boss man himself. I mean, how could they keep an MBA waiting? With all the case studies I had solved in business school, I had been trained to think we were the gifted and God's Chosen on mortal earth. The peon swung open the door.

There, behind a very large, official looking desk, was the man who had trouble zipping his pants.

Before I went for the interview, I had seen a few pictures of Mr. Birla, but that was all with suits. I had no idea then that he was the "rebel" Birla so I had expected him to be in suit. Just like his grandfather RD and his grand uncle GD were in their canvas homes.

He got up and shook my hand, "Ashok Birla", he said.

I shook his hand and mumbled my name.

"So, why did you come back to India?" he asked.

I did something which most MBAs would never do in a job interview: I spoke the truth in a plain and honest way. I came back, I said, because I wanted to help change India. I wanted to see this whole license raj disappear and all this corruption and black money be a thing of the past.

Here I was, talking to a member of an industrial group that was one of the biggest beneficiaries of the license raj. And I was telling him that I wanted to see all his wealth at risk.

I got the job.

I worked with Mr. Birla for seven years. And much of what I am today is due to what he taught me or allowed me to teach myself - at his expense, while on his salaried payroll.

Working with Ashok Birla was everything I dreamt of and nothing I expected. It was about launching the first mutual fund in India and competing with UTI. It was about meeting Mr. V. P. Singh when he was Finance Minister and trying to understand why we were not getting a "license". It was about meeting Mr. P. Chidambaram when he was something called Human Resource Minister in the Rajiv Gandhi government and I went to see him to complain that his bureaucracy was sleeping.

It was about dealing with the London-based foreign collaborators, S. G. Warburg (then later called Mercury Asset Management, finally sold to Merrill Lynch). It was about telling foreign investors why they should invest in India. It was about meeting with DSP and J M Financial and Cifco and creating a marketing strategy for the launch of the Birla Warburg funds.

And there were the joint ventures and project reports for Birla-Yamaha for making portable generator sets; the joint venture with 3M for making some of their 3,000 products in India; the joint-venture with Kennametal for making industrial tool tips. Helping and co-ordinating the IPO's of all these 3 companies.

And there were the esoteric things: buying out ice cream chain Swensen - worldwide; making a bid for the ITC shares held by British American Tobacco when BAT did not wish to subscribe to the rights of a boring company like ITC in a boring economy like India. There was the discussion with Coke about doing a jv in India.

And there was the policy-note writing. Mr. Birla had a lot of ideas.

Strange as it may sound today, prior to 1991, one had to apply to the Reserve Bank of India for any foreign trip one made, and the RBI would grant the use of USD 150 per day spent outside India. Needless to say most people spent more than that so there was a lot of demand for US dollars in the black market. Mr. Birla was keen to know why the RBI could not make a profit from their rule - and also control the black market. He made me a write a note on a dual foreign exchange policy sometime in 1984.

Charge the person who wants more USD a higher price. If the black market rate was 30%, by introducing a pipeline of USD at, say, a 10% higher rate, the RBI was effectively taking on the role of the black marketer and giving people more USD at a higher price. It could, by its action of having a dual fx rate, set a pricing guideline for the black marketer. Eventually, this dual-rate policy could lead to a one-rate fx policy. I presented the idea to Mr. L. K. Jha, then a senior economic advisor to Prime Minister Indira Gandhi. He probably thought we were mad but he heard me out patiently, spoke some encouraging words and that was it.
The RBI did follow this dual fx rate for a while in 1991.

Then there were the notes on why foreign capital should be welcome in India.
And why the Birlas should set up overseas mutual funds to source this capital
UTI did not like that, nor did LIC and GIC. These financial powerhouses wanted to be the first and final call of any industrial group that wanted funds.

The industrial groups did not like this foreign capital either.
The Swaraj Paul - Escorts takeover bid had made the industrial groups realise that one US dollar could buy twelve Indian rupees and these NRIs and foreigners had a lot of USD and fx notes.
The industrialists wanted their cosy relationship to continue: the industrialists would own 30% of their company, LIC, GIC, and UTI would own 30% and the public could own the balance 40%.
And because the industrial families knew all the ministers in New Delhi and the Chairmen of LIC, GIC, and UTI the industrialists' control over their fiefdoms was never threatened.
Forget it, said Mr. Birla, let capital flow in a more efficient manner and let no one be secure in their cosy clubs.
India has received over USD 50 billion of foreign portfolio capital since 1991.
And Indian industrialists queue up to meet FII's.
They don't really want to meet UTI, LIC, and GIC any more.

And there was FERA and the restrictions on foreign ownership of Indian companies. Why, asked Mr. Birla, should a foreign company be forced to give me shares? Only because I am Indian? Only because by being Indian they know that I have some influence and control over governments and government policy. Let foreign ownership laws disappear.

All this, dear reader, in an environment where every industrial family was using their "closeness" to the government as the key factor for winning joint ventures.

Mr. Birla was the least qualified in many ways to be chosen as the local partner for US multinational, 3M. Yet, he was selected as the local partner. Mr. Birla told 3M that the day the government allowed foreign companies like 3M to increase their ownership in the Indian company, he would sell them his shares.

Mr. Birla was an industrialist, for sure, but he was very much an individual. Mr. Birla was human. He cared for the people around him. And his friends. He never acted like a "Birla" up there on some cloud. He was approachable. He did not wish to make money for the sake of making money, he wanted to have fun. Hence his desire to look more at the services sector and new businesses: hotels, financial services, restaurants.

Mr. Birla always looked to see what the world outside was doing and why India could not follow suit. On one occasion, the Chairman of a large food company in UK told him; "My crystal ball does not show any future in India".

Mr. Birla leaned forward and told him: "May I, sir, tell you what my crystal ball has to say? I see USA as a great innovator and a leader. I see Asia as a manufacturing hub. And I see London as a place we go to on holiday".

That was in 1989.

Mr. Birla's crystal ball was right.
But he never got to see it turn out that way.

Mr. Birla died in a plane crash in 1990.
On February 14, 1990.
A year before India began to open up.
The way he had visualised it.

He was on his way to cut the ribbon for the inauguration of the Birla-3M factory.
The Airbus A-320 plane never made the smooth landing at Bangalore airport.

Ironically, of all his companies, the 3M joint venture did the best.

Ashok Birla will be regarded in economic history as a failed industrialist: no project or company has made it to any M-Cap ranking.

Yet, what we have seen in India since 1991 was his dream, in many ways.
His vision.

Most of the industrialists had no vision - they ran licensed businesses.
They sought favours from the government.
They did not have the desire to let success or failure be a function of market forces.
Their focus was on what they could get approved and passed in the next budget.
Their riches for the next one year were a function of that budget.

But, many times, the truth will die with those who know it.

"The visionary", said Friedrich Nietzsche, "lies to himself, the liar only to others".

Ashok Birla was a visionary and may his truth always be known.


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