No one to bribe, therefore no investment

9 JULY 2011

For the past few months there has been some data that is worrying a lot of people. The respected CMIE notes that the decline in capital expenditures by India, Inc is disturbing. After all, future GDP growth depends on investments made today. ----------------------------- A Good Time To Sell Bad Stocks -----------------------------

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Mr. Deepak Parekh, the respected business leader who has been "known to call a spade a spade" (source: Times of India) says that "I have been told by several large industrial houses that they are now looking at investing abroad as it's much easier. Their aim or strategy is to now have 50% of their turnover from abroad. Take the top five to seven group - the Tatas, Birlas, Ambanis, Ruias...Some have already achieved their target...These are industrialists who have established their reputation, capacity and stature in India. "

Mr. Parekh went on to rightly question the rationale of investing abroad when there is demand in India. But I have a few issues with this statement and some of the examples of the business houses quoted.

Is the "reputation" they have established good or bad?

Is the stature being referred to classified as "good" by some ranking of the richest industrial families or are we referring to their stature in terms of people who have helped build a more fair and transparent India?

The end may be more important than the means to some - but the means may be equally important to many others.

Business is free to go where it wishes to - and we should not stop it from investing there where it wishes to establish its reputation, capacity, and stature. Countries who wish to host them are welcome to do so.

Goldman Sachs, Merrill Lynch, Morgan Stanley, Citibank, J P Morgan - and many other Wall Street firms and banks - have established their reputation, capacity, and stature in the USA. Their business plan is simple: they mug an investor, whack his wallet then end up paying fines in a settlement (if they are caught) with their host regulators. On July 7th, J. P. Morgan agree to pay a fine of USD 228 million in settlement of accusations that it was rigging the US municipality bond market. The fine, the article noted, "will have no material impact on the firm's earnings". Nor will this have an impact on most parents' desire to have their children work with J. P. Morgan.

Every time I meet a proud parent of an NRI living in the USA they happily proclaim how proud they are that their son or daughter is working with one of these infamous firms. Maybe they, too, one day will see the movie "The Inside Job" and realise that most of these businesses are basically built on questionable practices. Maybe, after watching "The Inside Job", these proud parents will ask their children to quit their jobs and petition the regulators to protect their own citizens from the fee-generation business plans of these financial geniuses. Or, like many of us who get blinded by some wealth ranking statistic, they will hold the industrial equivalents of the financial firms in high esteem and continue to highlight the "reputation" and "stature" of these firms.

But, while statements of "stature" and "reputation" are subjective the data from CMIE is a dose of hard, cold facts.

Capex and corruption

In an article carried in the Financial Express on May 3, 2011 Mahesh Vyas - the MD and CEO of CMIE and a person I respect a lot - pointed out a "deceleration in the pace of announcements of new investments". As Table 1 shows, India Inc and all its high stature business leaders seemed to be frightened about announcing new investments.

Table 1: A sharp decline in announcements of new investments.
Quarter ended31-Mar-1131-Dec-1030-Sep-10Average of the 3 quarters (Sept 30, 2010 to March 31, 2011)Average of the 3 quarters (Dec 31, 2009 to June 30, 2010)
Capital investments announced (in Rs trillion)2.632.923.5735.8
Source: CMIE, Financial Express

The second disturbing sign that Mr Vyas highlights is the decline in the completion of projects (see Table 2). Also, if the completion of projects stays at Rs 2.63 trillion range, this would be the first time since 2004 when there is an actual decline in the year-on-year investment by India Inc.

Table 2: India Inc completes fewer projects than it announces
Projects announced (Rs trillion)8NA
Project completion expected by CMIE (Rs trillion)6.5NA
Actual completion (Rs trillion)2.633.84
Source: CMIE, Financial Express

The third point brought out by CMIE is "the sudden rise in projects abandoned in the March 2011 quarter". As Table 3 indicates, at Rs 516 billion, the projects abandoned were over 2x the normal rate of projects cancelled. Mr. Vyas does note that most of these cancellations are in the real estate and SEZ areas.

Table 3: India Inc gives up on projects at an alarming rate.
Year-ending31-Mar-11Average for most quarters
Projects abandoned (Rs billion)516250
Source: CMIE, Financial Express

So, is it time to bail out of the long-term India story? If there is no capex, there will be no job creation, and if there is no job creation, the 120 million young people looking for jobs by the year 2025 will not be a happy lot. Chances are they will happily sign up for Baba Ramdev's army or be willing - and natural - volunteers in any fast unto death programme!

Was past capex driven by corruption?

CMIE does not feel that things are that bad. They note that revenues are growing by 20% in general and that net profit margins are a healthy 8%. Good enough incentive to get corporate India to move ahead with its investment programme.

Obviously, the industrial houses - based on the comments by Mr. Parekh - have a different take. They have no incentive to invest in India. There is uncertainty. There is no clarity. They are people of stature and reputation and can take their money anywhere.

Maybe Corporate India ko gussa aata hey because they no longer know who to bribe.

And they are not sure if the person they bribe will be in power to follow through on the deal.

The timing of the slowdown is interesting. Over the past year we have had the Adarsh housing scam. The CWG sports event. The Nadia tapes. The 2-G scam. Just to name a few.

There are now investigations and queries into the hydrocarbon ministry. There was the incident of 16 bubble-gums hanging around the Finance Minister's office - supposedly places to plant bugs to listen into conversations. We have 2 Ministers sitting in jail. Many more bureaucrats, industrialists, and CEOs are also being denied bail.

In addition to Jairam Ramesh trying hard to protect the national resources and the tribal assets, the Supreme Court is ordering land stolen by governments and passed on to real estate developers to be returned to the villagers. And the Supreme Court wants a definitive trail on the black money issue.

In such an environment, which of our industrialists who have "established their reputation, capacity, and stature in India" would have the guts to announce or implement capacity? Their skill set of bribing their way through the system is in danger of being extinct. Most of our industrialists have surely added to capacity - but they have also helped to make our society and our system more corrupt. Let them take those skill sets to other countries, if they don't have the determination to work in a cleaner environment.

As Mr. Vyas notes in his concluding paragraph: "It is better that India Inc battles issues related to proper land acquisition, environmental clearances and graft rather than worry about a liquidity crunch."

Indeed, stop whining Mr Corporate India. Stop complaining about the RBI raising interest rates because that is not the real cause of the slowdown. Just admit that while you may be individually happy to light a candle for Anna Hazare's cause, if corruption was to decline, you would stand exposed for what you have become. And it will not be a pretty sight.

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Quantum Long Term Equity Fund Quantum Gold Fund
Quantum Liquid Fund
Why you
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An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years

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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.

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund, Quantum Equity Fund of Funds, Quantum ESG India Fund Quantum Gold Fund
Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% in total in both; Maybe 15% in QLTEF and 75% in QEFOF and 10% in Q ESG 20% Keep aside money to meet your expenses for 12 months to 3 years
Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

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16 Responses to "No one to bribe, therefore no investment"


Jul 19, 2011

I tend to disagree with the author if he is chooses to question the "stature" and "reputation" of business houses that are now heading abroad rather than invest in India.
In many industries, investments, capex and new projects are dependent upon government clearances such as environmental, construction approvals, power connections, water, etc.
In the recent past we have seen a number of powerful politicians land in jail, along with powerful high profile businessmen and bureaucrats - all are accused and supposed to be in connivance (these accusations are to be proven before we can call them criminals).
As a direct result of these, what I feel we are seeing now is an unwillingness of bureaucrats and politicians to take decisions. Even the honest guys are now scared of sticking their neck out.
As a result, businesses are not getting approvals, and firms of "stature" and "reputation" are thinking of foreign plans, so that their growth continues.
Notice that I have assumed that above businesses are clean.
The 'not so clean' businesses are - I presume - running scared and have frozen up. They dont matter to me. If the clean guy is in trouble, we are all in trouble.


Prem Khamesra

Jul 12, 2011

Mr. Dayal,
Brilliant article. Brilliant skepticism. One would like to agree and to disagree. As a business person one is exposed to different kinds of corruption: Extorive, Collaborative, Cronyism, Preferential. In extorive corruption the businesses are at receiving end. In collaborative corruption, businesses loot public resources alongwith those in power. In cronyism and preferential corruption one business is a beneficiary over other through a monetary or a non- monetary favour. It is only collaborative corruption where businesses as a collective stand to benefit because of corruption because they are joint looters of public resources. In extortive corruption they are unwilling forced partners to corruption and are actually losers. In cronyism or preferential corruption one business gets an advantage over other but as a collective businesses do not gain anything, in fact as a collective they lose to the extent they pay to buy the preference.
Therefore to brand business houses the way you have done is not a fair assessment of businesses.



Jul 11, 2011

I agree totally.. right on and write on.
Terrific writing
May god bless you with this "correct kind of sanity" for many more years to come.

Thank You Sir . . . . Hope the message reaches to all levels

Amitava Saha



Jul 10, 2011

Respected Mr Dayal,
Went through your article " No Bribe & No investment" a nice cristical clear expression. Your last line " You(those Business families of Repute) will stand exposed of what they are today by what means(ethics-they say something in public but do just the opposite way - Bribe and get their job done). I may be ignorant about the meaning of certain terminology like "Capex", "Mug an Investor" & "Whack his Wallet" but it appears clear that it has bearing somthing related to Unetical practice & Corruption.Let me introduce myself I am a merchant navy Chief Engineer by proffession in service since 1981 and has travelled the world almost 60 countries accross the globe from Capitalist to Communist and Richest to Poorest nation of the world.I made it a point to come accross common people of those country and try and find out as best as possible about their feelings about their views their system in their country and their financial status. 75% of them are having a similar views as we are having in India.Fed up of Corruption. I am working in multi national environment on board from Russia, Ukrain to UK USA,Philipines,Chinese,Malayasian,Indonesian,Burmese,Ghana and many more.Comming back to the point till JRD Tata's time as I read from media report and also in general people of India have a respectable views about TATA's( a company that takes care/respects their staff & people prefer to work with them rather than be a Bihar Govt. employee) which have declined probably because of Birla's,Ambanis and others ( to remain in the Elite list of business groups) In 1982(at the age of 28) I have seen TATA Trucks & Buses plying in Kuwait and I had a feeling of Pride of being Indian But not seen a Single Ambassador car in any part of the world of Hundustan Motor's of Birla's.The Birth of India in 1947( after partition ) and the Ruling yard stick was cleverly passed on to J.L Nehru and his gang was well planned to bring its common people in a state of what we are today(Ranking as 2nd Most Corrupt country in the world) finding Anna Hazare & Ramdev has to take street and Times of India's own views(tough) regarding Lokpal Bill.That's why Netaji Subhash Chandra Bose and all those Krantikari's were branded by British as Terrorist well endorsed by Congress & Communist party because picture would have been the otherway round had Subhash Bose given a support by Congress(knowing jollywell he was with his INA on the Indian soil to liberate India from the British clutch during 2nd World War). No then how will these businesshouse will grow(in the formula taught by British) into such a stature & reputation ( they think on their terms) by squizing the Indian mass by not paying their dues? Can Dhiribhai followed by Mukesh & Anil Ambani can be compared with any of those IIT graduates in their calibre who are just an employee in their company? They are lucky by Birth to be in that position.
Thanks Mr Ajit for your article but question is Does it reaches those XXXX Business tycoons ( by sucking Indian mass they have reached their present Stature) and those XXXX Politicians ( by Bluffing / Cheating Indian massess) and touches their Heart?
Jai Hind , Bande Mataram



Jul 10, 2011





P Thirani

Jul 10, 2011

Dear sir,
Like everyone else you take the easy way out and blame india inc for currution. I firmly disagree. In all my dealings with lower and middle level entrepreners one thing comes out in black and white they pay bribes because they have to not because they want to. They would love to follow rules if only they could. My suggestion try for somthing as simple as having your ration card and see if you can without paying bribe. One of my colleagues wanted a domicile certificate for his daughter. 6 months and 15 visits later he paid 2000 rs and got it. It is easy to saY YOU SHOULD COMPLAIN. But we are business men not activist. And we have seen too many bribe takers go scot free on tecnicalities to take the risk of our livlihood fold up. Am I a coward yes I am I have no hesitation in admitting it. I am just not willing to risk my family and home to fight a war I am not sure of winning. But if baba ramdev or baba amte takes the lead I will be there.


B Vijaya Kumar

Jul 10, 2011

Its true that there is lot of uncertainity in the implementation of projects. However, all political parties have now unanimity of views in supporting big projects and they compete with each other (states)in extending incentives. Thus there is no risk of abandoning the projects. At best there will be time and cost over runs due to corruption (uncertainity about whom to bribe) and relocation of projects from one state to another due to issues related to land acquisition. Still the projects will be viable if they are implemented. Thus the uncertainity in corruption (about whom to bribe) cannot be the reason for abandoning the projects. If corruption is eliminated or even minmised, the projects can be implemented quickly at minimum cost. Thus there is rather inverse relationship between corruption and industrial growth.

The reasons for abadnoning the projects need to be analysed properly and the Government needs to take remedial measures to ensure that the projects are implemented.
CA B Vijaya Kumar



Jul 10, 2011

The situation is really grim.... i work for debt & equity syndication firm and see the slowdown in investments directly...... it is a complete breakdown in trust and every decision maker in the banking circle is scared of taking the decision, fearing that the ED or the CBI or DRI is going to come after them asking questions!! Hell, some of the people are now even scared of talking on the phone or exchanging ,mails!!


Kishan Sharma

Jul 10, 2011

Most times Mr Dayal's analysis is accurate but this time he seems to be putting the cart before the horse.What came first, the demand for bribe or the offer for bribe? I think the demand must have come first, then a deal was negotiated and struck and the amount of bribe was agreed upon.If the offer came first some body in the govt failed to do his duty towards the society.The businessman does not see bribing as an immoral act.For him it is a chargeable expense and an inevitable path that he has to traverse.He will be happier not going there but will not hesitate if he thinks it will help his business.



Jul 10, 2011

Please high light that biggest Black Money is parked here in India in real estate. See that almost 50 to 60% is parked and no government is increasing the registered value matching to that of market prevailing rates.

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