Why it's time to rescue capitalism from Indian capitalists
I continued reading on incredulously the inane interview in Hello! magazine. "I like to pop over to Dubai or London for a shopping spree when I need a pick-me-up”, or something like that. Incredulous not for the louche banality of this glossy rag, which unfortunately is the nature of that beast. I was incredulous as this was the daughter of a man who’s company was virtually bankrupt, except for the fact that there isn’t a real bankruptcy law in India. The mere word, "bankrupt" doesn’t give a sense of the sheer size of the indebtedness - this man’s company owes thousands of crores (hundreds of millions to billions of dollars) to bankers, both in the primary company - a construction and power transmission line firm, as well as subsidiaries setup to develop and own infrastructure assets like ports and roads.
An entire article dedicated to an interview of the lifestyle of this young woman whose father has defaulted on interest payments to several banks, hasn’t paid employees and not paid vendors their dues for works honestly done for them (I know since a company I’ve setup and run is one of them, albeit for a relatively smaller amount - “Yes we owe you the money - we just don’t have it").
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| The fortunes made in the crooked manner do not help society in any way. Photo credit: Reuters |
I read another article about yet another heiress who was going to take part in a debutante ball in Paris chaperoned by her father who owes the banks three thousand crores (four hundred and fifty million dollars) setting up a lemon of a warehousing and railcar company. The gentleman in question hails from a well off background, but even so was suddenly flush with big funds as he set up this ill-fated company, and as it sank into insolvency, the public advertisement of his opulent lifestyle started getting splashed all over the media, including a botched real estate deal to buy one of Mumbai’s priciest homes. Where was the money coming from?
Indian bankers continue to feel the extreme pressure of dressing up their books to hide the fact that not only are a large quantum of loans issued to corporate borrowers not being serviced, the loans most probably don’t have assets underlying that are worth even pennies to the dollar of the value of the loans. The “promoters" (Indian business colloquial for sponsors or majority owners) of these businesses on the other hand, are living absolutely stress free, as their now primary pools of income are seemingly unaffected by the plummeted fortunes of their companies.
The above mentioned sponsors are just two of the smaller examples of this growing breed of out of work businessmen. There are the robber-baron Mumbai brothers who have set up a large metals and energy conglomerate which hasn’t seen a profit ever; the robber-baron Mumbai brothers who have setup massive shipyards that don’t make ships and ports that never work; the various Hyderabadi businessmen who appeared on the scene from nowhere to setup roads, power plants, airports which can never service the capital used to set them up, the Capital Region real estate "tycoons" who haven’t delivered homes for which advances were taken from buyers, on top of bank loans. And too many more.
What has been happening here?
The tempting conclusion would be that the businesses and projects were set up by these entrepreneurs with all good intentions, but once they were hit with an unfortunate dose of ill fortune or because of the buffeting of a shrinking economy, the projections did not play out as expected, and eventually the businesses needed to be wound down. The entrepreneurs paid themselves salaries (which is very much legal) during the time the businesses did attempt to operate and because of that they are reasonably wealthy individuals.
The reality is starkly different, and disturbingly so. The majority of these businesses don’t make fundamental sense - and they didn’t make fundamental sense even when they were being imagined, conceived, financed and constructed. The sole intention of spending millions to billions of dollars on these businesses was just that, to spend millions to billions of dollars. Both, banks and private equity funds were for the longest time - probably a decade, in a frantic delusional race to grow, and at any cost, lending to or investing in any kind of assets that the "India growth story" had to offer. Business sponsors were only to happy to lap up the money provided by these suckers.
Today, not more than 200 such businessmen have literally effected the largest transfer of wealth in Independent India. Banks are mere custodians of wealth - beyond the equity capital, it is not their money - they are authorised, licensed dealers of the Reserve Bank of India. The funds that they manage and lend are therefore a good proxy for money that belongs to the people of the country and all the legal entities they own, back-stopped, implicitly by the state of India. These 200 individuals have in effect transferred vast sums of money from the rest of the 1.2 billion Indians and blown it up on overpriced assets. Assets that were so fabulously overpriced, that these individuals have in cases siphoned off upto half of what they have spent. Most often the funds have been received at exotic off-shore havens, making the money tax-free without it ever being in the ambit of the Indian tax authorities.
What were the bankers thinking? I remember at the time of the setting up of the above mentioned warehousing company, bankers were in thrall of the sponsor - they cooed that he was the first entrepreneur in the space who truly had vision. After the spectacular crash of the stock of the company, once it was discovered that they hadn’t the cashflows to pay salaries, forget interest payments, the bankers only changed their praise slightly - they said he was a visionary who was just ahead of his time.
The bankers did not want to look at the simple math staring them in the face - the cost of warehouses he had setup were multiple times the cost of what they should have been - either before or after the crash of the company. Was it wilful negligence? Hell, yes. A combination of unreal growth expectations, a mediocre financial services talent pool and the non-existence of a simple and effective bankruptcy law was a deadly mix that has made the banks effectively defecate in the very beds that they sleep in. Add to that what the motivations of some bankers really were.
Government-owned banks pay their employees a fraction of what their privately owned counterparts do. Sitting on large balance sheets, these officers are put in the line of being tempted to accept a small slice in the pie to look the other way while sponsors help themselves to sweet deals. On the other hand, the motivations of officers in private banks sometimes can be more insidious - the glamour of being associated with rich businessmen, of being invited to their grand, fortnight long, European wedding extravaganzas, of getting their children enrolled at top private schools in Mumbai, of having a word put in to the admissions desks of Ivy League colleges where these businessmen or their families have granted large donations. A lot of top bankers aim to be top socialites, climbing up precariously the fickle heights of the tall, social ladder of South Mumbai - what is the big deal in giving a helpful prod to a project of a friend through a slightly wavering credit committees?
Does it really matter to these sponsors that companies that at some point were highly covered in the media, or had large market capitalisations, are now effectively finished? No, not at all. They are sitting on pools of capital that solely belongs to them in jurisdictions far away from the prying hands of the Indian Income Tax officer. Pure equity. They are the people buying up the really blue chip Modern Masters works of art at auctions, the Rs 100 crore ($15m) trophy apartments in South Mumbai, the 300 crore ($45m) Lutyens Delhi bungalows.
Do they they buy these from their salaries, despite the no-dividend policies of their loss making companies? What do you think? Does the slight embarrassment of heading a company that has died on their watch bother them at all? No, not a bit. Most of these individuals are obnoxiously loud in the assertions that the Reserve Bank of India is to blame for not having decreased interest rates, that the various arms of the central government are to blame for sticking to the terms at which the concessions their companies own which make their businesses unviable. They blame the overall state of the economy ( even when it is growing at 6 per cent plus) and often drag the government to court on unintended technicalities.
I am truly a capitalist and I am truly appalled at the state of the banking system and what has led us to this. I believe capitalism is the only tool that can lift a nation so mired in poverty, so desperate to meet its developmental goals. Unfortunately, India has wasted decades of opportunity with very ill-thought through socialist experiments that led us nowhere. In 1991, we stumbled upon economic reforms, not out go choice but out of necessity to save us a nation falling off a fiscal. Our embrace of capitalism even if tentative has since been unidirectional. Despite, the myriad setbacks - the stock market scams, the government scandals, the inevitable boom-busts cycles, it has been hugely positive - the absolute numbers of our countrymen being entering the middle classes from abject poverty has been staggering. Until now.
We have started sliding into an abyss where the rules are very fluid, and when they are defined they don’t matter. This isn’t crony capitalism as the financially illiterate main-stream Indian media like to report. This is a dangerous kind of kleptocratic criminal capitalism that through positive re-enforcement at every step of the way, actively encourages unethical and illegal corporate behaviour. It is a complete moral hazard for a society to disproportionately reward someone who has defaulted on loans and has created large, bankruptcies.
It is a complete moral hazard when people are feted in society for having wealth, that has effectively been stolen from the nation, when they have not bothered to pay salaries of their low and mid level workers for months. I met a person at a house-party in Delhi who was a very good friend of the warehousing entrepreneur mentioned earlier in the article - he was aware of the architecture of the scam perpetrated by his friend, and he felt it was absolutely fine, because “he is a fun, good, generous, guy”
I am not a socialist - I am very happy for entrepreneurs, their successes and the wealth that they earn and should enjoy. This is the bedrock of capitalism - the drive that makes people work harder, compete harder, and as a result make things more efficient, cheaper, accessible, faster, better, newer, happier for all of us. Capitalism creates jobs, it catapults us to newer heights as civilisation, it allows us to give patronage to the arts that undeniably makes our lives richer. The method of doing business described above, what is happening at an alarming rate in India is not capitalism - it is theft.
The fortunes made in this manner do not help society in any way - besides the obvious body-blow to the banking system and the fact that honest, hard-working employees are left unpaid, these kind of companies do not actually bring anything in terms of innovation, quality or competition - nothing that contributes to the environment in which true capitalism thrives. Which ultimately plays into the hands of the people in thrall of failed socialist ideas, who with an “I told you so” would love to revert the country back to a inglorious past of stagnation.
As the government of Indian and Reserve Bank of India get about the slow task of digging the banking system out of fast hardening quicksand sludge that it sees itself caught in, are there changes in behavioural practises that we see? Not really. Banks continue to lend with dangerous impunity to ever larger behemoths of conglomerates who have very weak cash-flows and business models, relying on very likely cooked books and multiple rounds of finance restructuring, to further grow and acquire other sick enterprises. Bankers, starved of increments and bonuses for a few years now continue to chase elusive growth while behaving like ostriches in confronting the true girth of their problems. If there have been any real forensic audits done with a motive of digging out criminal culpability of fraud by sponsors, it hasn’t been shared with the public.
On the other hand, privately, bankers very easily admit to suspecting just what has been done with the funds by these business owners - without the slightest hint of shame or irony. When bribery scandals of federal and state politicians and bureaucrats are unearthed by the press, our shrill TV media makes a circus of it for days. The measured quiet surrounding what is a much larger scam in absolute quantities of money siphoned off, that everyone in the know, knows about, is rather sad and telling. The lack of steps taken to actually bring the wrongdoers to justice, and the fact that loans are still being farmed out to entities similar to these, is going to build us up to a much exacerbated situation, which we might ultimately not be able to dig ourselves out of.
It has become fashionable for businessmen at cocktail parties in Mumbai and Delhi to say how it is wrong for capitalists to be treated as criminals. I agree. Except in the instances they are just that - criminals. In India, we will have to save capitalism from the so called capitalists.