Bastion of Free Speech

A national newspaper had recently provoked a debate through an edit page article on whether Indians do too much breast beating about poverty, and as a corollary tend to be suspicious of “wealth creators” in the country.

The signed article had lamented that the intellectual class was blind to certain seminal changes in the middle class’ attitude towards wealth. Making money and spending it lavishly is not seen as bad at all now. Austerity is passe, argued the author.

The article further asserted that instead of being suspicious of wealth creators we need more Dhirubhai Ambanis who will compete with each other in creating more wealth.

The example of Ambanis was interesting because sometime ago Dhirubhai had chosen to publicly assert that our society had no future if it ridiculed its wealth creators.

Dhirubhai's lament was not lost on anyone, especially the Finance Minister who was present on the occasion, because the government and its investigative agencies had reopened several old cases against Reliance, including the one regarding its private placement of shares worth Rs.10.73billion with the Unit Trust of India.

Government agencies are inquiring into another case in regard to Reliance Petroleum’s alleged misuse of shareholders’ funds. There are other issues, too, relating to violation of corporate governance norms that Reliance is faced with. Of course, there are a large number of other corporate groups too facing investigation on various counts, especially in the wake of the stock market crash.

So the sub text of this whole debate was partly whether "wealth creators" should be harassed by state agencies.

Earlier, Prime Minister Atal Behari Vajpayee told leading industrialists that they must clean up their corporate governance act and ensure that the small shareholders’ faith in stock market does not get shaken time and again on account of manipulative practices. Vajpayee broadened his formulation by saying that lack of corporate governance actually negates the middle class' support for economic reforms in general.

The Managing Director of Reliance Petroleum, Mukesh Ambani, who was part of a high power industry delegation that met the Prime Minister, later emphatically suggested that the corporate sector would address these issues once and for all provided there was no “witch hunt” by the government.

The sequence of events, as mentioned above, does suggest that some of the big "wealth creators” in the country are repentant about their past actions and want to take remedial action. This is a positive sign, if there is conviction in what is being said.

Be that as it may, the current crises of corporate governance in the country does call for a thorough introspection among the “wealth creators”, whose record of rewarding the shareholders is very poor so far. A quick calculation would show that most of the leading blue chip companies in India have not given the shareholders a capital appreciation of more than 7 per cent per annum in the decade of reforms.

Even Reliance Industries, which claims to have ushered in the equity cult, has not given a capital appreciation of more than 8 per cent since 1992-93. Others companies such as the Tatas, Birlas and the like, of course, have fared worse.

So one wonders whether small shareholders might have been better off putting their money in bank deposits and earned much more compounded returns (over 10 per cent) with no risk at all.

The Indian stock market's sensitive index was in the region of 3300 in 1993-94, and is at the same level today. In comparison, the American Dow Jones index has doubled from 5000 to over 10,000 since 1994-95. There has been no sustained upward movement in the Sensitive index since reforms began in 1992.

The state of the Indian stock markets clearly reflects what our “wealth creators” have done in terms of rewarding the shareholders in the decade of economic reforms. The proof of the pudding is after all in its eating.

India’s wealth creating class has evolved in rather peculiar ways since the days of Nehruvian socialism. In the initial decades, the businesses freely accessed industrial finance from public finance institutions and banks.

India, like Germany and Japan, relied mainly on banks and financial institution-driven industrial growth in the private sector. Here a nexus developed between the industrialists and the socialist bureaucracy, which had its control on the levers of industrial finance. The result: banks and FIs saddled with bad loans worth over Rs.600billion.

However, in the eighties and nineties, there was more capital market driven growth in the industry wherein businesses accessed huge fund from the public through equity issues.

Reliance Industries really began the equity cult and picked up massive funds from the public and relied less on debt from financial institutions. There were others, small and big companies, who followed in Reliance's footsteps.

But overall, the Indian corporates, as a whole, seem to have disappointed the shareholders in terms of rewarding them adequately. The gap is stark when compared with global standards. The small investor would have lost several thousand crore in the capital market in the nineties. A sizable portion of this loss is not due to companies not performing adequately, but on account of companies having disappeared from the scene completely after picking up money from the public!

The losses in the secondary market where investors have been taken for a ride by the broker-promoter nexus is another kettle of fish altogether. The agencies of the state are guilty of acts of omission and commission, relating to corporate and capital market governance.

Last year, a former Marxist argued at a seminar in India International Centre that shareholder democracy is very robust in the United States and Europe as the institutional investors and mutual funds, who truly represent the small shareholders, control the boards of big companies. If the top management of a company does not perform, it is summarily removed by the small shareholder's collective. He described this collective ownership of capital as “socialization of capitalism”.

In India what we have largely witnessed so far is “capitalization of socialism”, exemplified most recently by the government's attempt to sell off good PSU assets at hugely discounted price to the private sector. Indeed, we need a different class of wealth creators altogether.

Copyright(c) MK Venu, 2001. All rights reserved. Reprinted with permission.