»Straight from the hip by Jawahir Mulraj

Can a country prosper without protecting investors?
11 JANUARY 2014

Countries like Hong Kong, Singapore and others once had corrupt regimes but are, today, leading nations in terms of per capita income and quality of life. This happened after, and because of, their success in cleansing the corrupt systems. India will continue to remain an emerging market with lots of potential until the polity is cleansed of this cancer. One hopes, and prays, that this happens, through whatever route the country adopts, and that those who have amassed ill gotten wealth are forced, through investigation and due process, to disgorge it.

As things stand today, sadly, the system strives hard to protect the culprits (perhaps because the stolen money is used for payoffs, whereas the victims, whose money has been stolen, are unable to pay) and mock the victims. Finance Minister P Chidambaram had the temerity to opine that the victims were to blame, since the NSEL exchange was illegal, to begin with. Why, if he knew it was illegal, did he allow it to operate? Does he condone illegality and wishes to punish the defrauded investors? And does he believe that investors would roll over and play dead?

What is happening, instead, is that the number of equity investors is shrinking, falling below the 3 crores mark. That number, too, is pathetic, representing just 2.5% of the population. The Bombay Stock Exchange is over 130 years old, so the equity cult in India has a long history. After this period, the fact that less than 3% of the population invest in equity, an asset class that outperforms others, and through which savers can participate in a country's growth, is the direct result of their feeling their interests are not protected.

And they aren't.

Mr Arvind Datar, eminent lawyer, in a recent talk arranged by Moneylife Foundation, stated that the only prosecution for prospectus fraud was in 1938, when two persons, Srinivas and Chary, were convicted (they raised some Rs 1.5 lacs from the public). Zilch, thereafter. Some states, including Maharashtra, have created special cells within their police for economic offences, but, so far, there have been no convictions. The EOW in Maharashtra has been investigating the NSEL scandal, and has recently filed a charge sheet, though it does not include the main promoter, Jignesh Shah.

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The Satyam case drags on, strangely, although the founder of the company, Ramalinga Raju had, in Jan 2007, himself admitted to fraud. He is now out on bail but, together with family members, has been sentenced to 1 to 3 years in jail. As per this news item secret offshore bank accounts exist in the British Virgin Islands (BVI), a tax haven, in the name of Teja Raju Byyraju, the son of Ramalinga Raju, although he disputes the accuracy of the documents.

Details of other bank accounts in the BVI are available on this and other websites, if any Government is serious in its attempts to weed out unaccounted money. The fact that it is not, indicates that its intentions are unclean.

The unclean intentions of the Government, and the apathy of a laguburious judicial system that works too slow, thus delivering judgements instead of justice, can be seen in the speed of investigations and convictions. In the US, investigations into Rajat Gupta's insider trading began in Oct 2011, the trial commenced in Oct 2012 and he was convicted and imprisoned shortly thereafter. The trial of Jeff Skilling, of Enron, started in Jan 2006 and he was convicted in May 2006. In US, 54% of the people invest in equity.

Two Sahara companies wanting to raise Rs 40,000 crores through issue of Optionally Fully Convertible Debentures (OFCD) were estopped by SEBI from doing so, without issuing a prospectus. They obtained a stay from the Allahabad High Court on the SEBI order, and proceeded to issue the OFCD anyways. SEBI has now ordered the company to refund some Rs 27,000 crores, to over 3 crore investors. Why is it that persons can take advantage of different legal fora to proceed with an illegality which then bloats to become a major problem? Why is it that it still takes years for investigative agencies and courts of law to combine efforts and work with the purpose of protecting investors and punishing fraudsters? Why do they, instead, punish investors and protect fraudsters?

Contrast this with the actions of US regulators and law enforcers. The US SEC (equivalent to SEBI) has compelled JP Morgan to pay $ 1.7 b. to settle a case. SEC had charged JPM with ignoring warning signals in the case of Bernie Madhoff's ponzi scheme.

The NSEL was also a ponzi scheme, and, by the same token, SEBI and FMC ought to be charging promoter Jignesh Shah, the parent company, FTIL as well as brokers, with neglect in ignoring warning signals. The EOW has recently started investigating the role of brokers. Let us see if the EOW will be permitted to take events to their logical conclusion, or whether the ostrich like behaviour of corrupted politicians, burying their heads in the ground to make believe that the problem, if unseen, has vanished, will influence them.

Instead of compelling Shah and FTIL to pay for the fraud committed by their own, fully owned, subsidiary, the Government and the courts are still debating whether or not to allow him to retain a fit and proper status to run an exchange. The exchange has defaulted in all its payments, in itself adequate evidence of unfit and improper behaviour.

It seems that politics, and political interest, come before protection of investors.

Investors, whether in bank deposits, or in equities, or in commodities, or any other assets, would surely voice their angst in the general elections.

In global news, the FT of Jan 10 says that new jobs created in the US in Dec were only 74,000, far fewer than the 197,000 forecast by economists. What is happening globally is that machines are replacing a lot of human jobs. On the plus side, this has led to, and is going to lead to, a lot of gains in productivity. On the minus side is that with no jobs, there will be reduced consumption, and slower economic growth. Not to mention the social issues. In countries like Spain and Greece, the jobless rate amongst youth under 25 is higher than 50%, a scary phenomenon.

People not in the labour force in the US is a worryingly high 91.8 b. which is over a third of its population.

Last week the BSE-Sensex lost 29 points, to close at 20,758 and the NSE-Nifty dropped 20 to close at 6,171.

What next?

In January, the US Fed, under new Chairman Yellen, is expected to start the taper. She will follow an accommodative interest rate policy. Though US GDP is growing satisfactorily, it is productivity led, jobless growth. Although she plans to follow a low interest rate policy, she may be forced to start raising rates if inflation starts to rise or the US $ to fall. If rates rise a bit, the real estate bubble will start to pop.

The concern in India is of rising NPA (non performing assets). The loan refinancing needs of the top 100 companies over the next 12-15 months will be Rs 2.1 lac crores. 20 of these companies are already in distress and they represent 24% of the amount to be refinanced. Another 26% is represented by the next 20 companies who have a weak credit matrix. So half the amount to be refinanced will be in jeopardy of inability to find lenders. Which would translate to higher NPA provisions being made by banks.

The Government is belatedly waking up to the effects on the economy of its somnolence. Its said that the powers that be mistook the term 'laissez faire' for 'lazy fare' and went on to block all project proposals!

It has granted environmental clearance to South Korean's POSCO's investment in a steel plant in Orissa, ahead of the visit of their president, Park Geun-Hye. That would be a new twist to pay and park.

But its too little and too late. The manufacturing sector has too many stumbling blocks and far too many clearances, all of which are withheld for (not too difficult to guess) other purposes. Investors do not feel safe and are denied protection. Instead of protecting them, senior government functionaries delight in mocking them.

The investment community is betting on a change in Government to help in clearing the backlog of clearances and thus kick start economic growth cycle. It is also betting that the speed of the taper is benign. A lot, thus, rests on optimistic assumptions.

Query for investors: do you agree that a country can truly prosper only if corruption issues are seriously tackled? Are you hopeful that such a tackling will happen in India? Share your views at the Equitymaster Club.

J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.

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 authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same.
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