14 May 2017
Changing Times, eh?
I had written this one sometime in early 2015 and like many other pieces, it was lying unfinished on my laptop. As I went back to write something else, I realised that nothing much has changed over the last 2 years. Bharat Sarkar is still making the pretension of trying to extradite Mr. Mallya from the UK, Mr. Adani's business is only growing in spite of occasional rumbling in the media, the Supreme Court hasn't given the go-ahead to investigate the Sahara Papers. And so it continues in 2017. I hardly had to edit the piece, not even the title. Indeed, the more things change the more they remain same.
One of the favourite peeves – with significant justification, of course – of this country’s leftists – who also happen to be one of the most trenchant critics of the country’s middle classes – is that while they (the middle classes) get all riled up at the political or bureaucratic corruption, they hardly ever talk about corporate corruption – in both private and public sectors. The reason is not very difficult to fathom simply because the service classes are primarily employed in these sectors and often complicit, either actively or passively, in the same acts of omission and commission which they lambast the politicians for.
Talking to my friends in the financial industry – from rating agencies to banks – is often an education in itself in how murky things are in this industry in India and how murkier they are getting with time, how regulatory checks and balances (mostly week to start with) have failed us again and again and how entrenched and strong the vested interests are.
A friend who works with a leading rating agency put it pithily when he said, “You know, Roy, I can clearly see in front of my eyes how a bubble builds.” From pressures to rate a company higher than what an honest analysis of their financial statements should point towards to blatant conflicts of interest in the organization, he has a story to narrate everywhere. When he contemplated whistleblowing on one particular instance of conflict of interest recently, he realized how the odds are stacked against him and how powerful the entrenched interests are. At the end of the day, most of us have families to support and EMIs to pay, which makes us hold our noses while we enter our offices in the morning, do our work as honourably as possible and collect our paychecks at the end of the month. It reminds me of what another friend once said in a different context, at a time when all of us had less reasons to be cynical – we all have sold our souls. Some have sold it cheaper and some dearer.
In this context, when magazines like The Caravan do investigative stories in the long form on this sort of corporate hanky panky, to put it mildly, I can’t help but say that more power to their elbows and not everything is lost even in this age and time when companies like Reliance control huge chunks of the country’s supposedly independent media. From stories on how public sector top guns like ONGC have been steadily milked and undermined including probably leaking of crucial gas finds in KG basin to how steel, infrastructure companies (the Essars, the Jindals, the GMRs, the GVKs) have built their ‘too-big-to-fail’ businesses by taking on impossible amounts of debts, it all makes for depressing reading. Even though you knew or suspected most of it, it is difficult to fathom the extent of the rot, how spectacularly our systems have failed us and even more difficult to imagine the cost to paid when all these are taken to account and most importantly, who will pay that cost. I am sure all of us secretly hope that the day of reckoning comes after we are dead because in the long run we all are as Keynes had famously said.
People can be forgiven to think that the tricks which Harshad Mehta pulled together – which eventually led to the setting up of that ineffective and often willfully blind regulator called the SEBI – in the pre-demat era of stock trading will be impossible in this age because few people understand how the rules of the game in high finance has changed over last 2 decades. What Harshad Mehta did in early 90s and what Jignesh Shah did with commodities market in 2000s differ only in their modus operandi. If Satyam scam was the first major one which came after the Ketan Parikh’s in late 90s, it was probably an indication that auditing fraud is more widespread than most of us would like to believe. I hear that Institute of Chartered Accountants (ICAI) have got stricter now and they cancel the membership of any CA found doing auditing hanky-panky. Good for them.
While growing up in a Bengali, middle class family in the 80s and 90s, we were made to understand that nationalized banks and post offices and the myriad savings instruments they offered, were the best place to park your savings even if they grew at the proverbial Hindu rate of growth. The thing is during those days, they probably were, if you didn’t understand too much of the stock market or didn’t have the risk appetite or simply didn’t trust your broker (there were too many stories of brokers underreporting a trade in the era of paper share certificates).
Now, when we hear a SBI lending a couple of thousand crores to Vijay Mallya’s by-then-already-doomed airlines with a collateral which probably didn’t amount to much more than a couple of phones calls from the Ministry of Finance, Indian Bank lending to Essar Steel whom the private lenders are not willing to touch with a bargepole, or read about the CMD of Syndicate Bank being arrested for the ‘bribe-for-loans’ scandal, one wonders about the savings of millions of small and medium investors like us who trust these wolves with their monies. Are we the so-called educated lot any different from the gullible poor who park their money with Ponzi schemes and chit funds like the Sharada? OK, the government will probably bail these banks out if things come to a crunch but who bears that cost? These public sector bankers may not be as glamorous as the wolves of the Wall Street, whom at least everyone knows as wolves. They have been pretty much like sheeps till like a decade and half back – happy with their salaried government jobs which they managed to bag in post-bank nationalization era of early 70s – when they realized that their public sector salaries are probably not sufficient to take care of their and their families aspirational lifestyles and simultaneously discovered that their positions, while probably not as powerful as that of civil servants and politicians who call shots at the level of policy-making, offer them nice and cozy means of gaining personal gratification and favours on the side. The gratifications are of course not always monetary or in form of holiday gifts. The friend mentioned earlier was recently talking about a public sector banker who after sleeping with a couple of small time models (quite a normal practice, my friend assures me), paid for by the client, was still not willing to sanction the loan. On further follow ups by the intermediary of the loan applicant/promoter, the banker finally asked to sleep with the promoter – a lady setting up a private hospital – herself and thus, putting the intermediary in a fix. Honestly speaking, I found it a bit hard to believe but given the money and sleaze involved in the whole financial system of this country, there is enough fodder for Madhur Bhandarkar to make a movie with all the usual elements of his potboilers. Who knows, it may even clock the now-usual 100-200 crores given the multiplex audiences fascination for glamour and sleaze.
Underreporting of earnings to evade taxes is an old trick in the book. Indian promoters have traditionally depended more on debt than on equity to expand their businesses, with typical debt-equity ratios often in range of 8.5:1.5 or even 9:1. Companies with large capex (capital expenditure) outlays often ask suppliers of capital equipment to over-invoice to get the banks fund their equity portion as well and thus, putting minimum of their own money. So, it is effectively the public (bank depositors) who are funding their businesses which have zero accountability to the public whose money are being deployed. Taking out a public issue to raise money from the public at least mandates the promoters to make some disclosures. In these kinds of borrow-and-bust businesses, the downside is all of the banks because of the old banking adage – if you take a 100 rupees loan from the bank, it is your problem, if you take a 100 crore rupees loan from the bank, then it is the bank’s problem. Another friend recently commented that while we have our CIBIL scores and entire credit history being vetted for a 25-30 lakh rupees home loan, Mr. Mallya doesn’t even have to keep his yacht as collateral for availing a couple of thousands crores.
The funny thing is that the gullible public neither understands this nor wants to understand. The popular perception is that finance is a highly specialized, heavily quantitative field meant only for very smart people and those who have an aptitude for numbers. The insiders – from the currency traders to the petty bank officer in your neighbourhood SBI – of course, want to keep the public at their ignorant best while crouching many simple concepts in financial mumbo jumbos. It serves their own interests.
Also, most people think that the world of finance is full of glamour and highly remunerative, which is definitely true during the years of bull runs. They will keep on exhorting their kids to do MBA Finance and preen in front of their friends and relatives and how their son/daughter is now a hotshot professional employed in one of the streets with six figure dollar salaries or eight figure rupee salaries. In some cases, they also take a perverse pride in the fact that how they routinely work 80 hours a week and are burning themselves out. The surprising thing is that even the 2008 crisis and its aftermaths and large scale discrediting of the buccaneers of all streets hasn’t really disturbed the rosy pictures of the world of finance in the minds of the man of the street.
When I come across people in their early 20s dreaming of a red hot career in Finance, after possibly an MBA from one of the IIMs, I think of my friends and their colleagues with similar academic pedigree who entered this murky and fascinating world almost a decade back and already want to quit it for good, simply because they had enough of their fill. They think about all these years spent busting their asses competing with the CAs who often had a 5 to 8 years of head start over us engineers, mastering arcane theories of risk management, which are often just that – theories, learning to read P&L, cash flow statements and balance sheets, the way one learnt basic math back in school and wonder was it all worth it.
Finally, we Indians are an inherently dishonest lot. That coupled with last two and half decades of unbridled capitalism – some will say crony capitalism – has only made people worship big money. With any residual pangs of guilt, a hangover from Nehruvian socialism, fast vanishing, flaunting your wealth is not frowned upon anymore even in face of one of the most dehumanizing poverty and wretchedness on the planet. Income inequality, climate change, social unrest nothing matters anymore even in forming public opinion against capitalism or corporate corruption in this case.