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Indian 'TBTF' entities beware...
Wed, 9 Mar Pre-Open

The last time large entities showed signs of bankruptcy, we Indians relished the fact that we were far from the mess. A prudent regulator in the form of the RBI had helped save the financial institutions here from risking their existence.

But as risks envelope a larger scope of operations in developing economies, the need for better regulation cannot be sidelined. Acknowledging this the Indian policymakers have already proposed some steps to avert systemic risks. An entity to oversee stability of large entities is on the cards. Banks and financial institutions most certainly will be under the purview of this supervision. But at the same time, non financial companies having a large market share will also not be spared of the regulatory scan.

Not just the RBI or the SEBI but several other regulators will be involved in the role of risk management. Their oversight is expected to help large entities in conducting their businesses on a global scale. But without exposing themselves to undue risks that hurt the interests of their stakeholders.

Given the kind of weightage that large entities have on the overall financial system, this proposal seems justified. Reckon this. The 30 stocks comprising the BSE-Sensex account for nearly one fifth of the market capitalization of the BSE that has 4,700 odd listed entities. Some of them have in the past, however, eroded investor wealth by exposing themselves to undue risks like derivatives. Others have also been accused of indulging in practices that hurts the interest of minority shareholders.

Banks and financial institutions have already tasted the RBI's strict oversight in terms of providing for possible risk on their books. But it is time that every deemed 'Too Big To Fail' entity wakes up to this realization. Whether it is taking excessive debt or betting on derivatives, their actions will be taken to task.

If the plan is executed well, the old proverb "If you owe the bank a few thousands, then you have a problem. If you owe the bank several millions, then the bank has a problem" would probably not play out for entities here.

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Feb 21, 2018 (Close)