Moneylife:R Balakrishnan:Wednesday,September 21, 2011.
The recent Bellary mining scandal exposé by the Karnataka Lokayukta should be a wake-up call for investors. The real estate and mining industries are prime examples of the unholy nexus between politicians and business. They line their pockets at the cost of the exchequer. Does it make sense to remain invested in these sectors? Companies from these sectors do not carry much credibility.
Institutional investors, perhaps, bet on the ability of the promoter to pull strings, grease his way through the system and deliver on the bottom-line. As long as the relationship is cosy, all is fine. But the favourable period, generally, tends to be very short. If I were an institutional investor, I would perhaps dump these stocks and keep away from these sectors for a long, long time. Unless there is active price manipulation, there is no way these sectors can attract investor interest. For a while, the promoter and his cabal may be able to prop up the stock prices.
Promoters are also known to bribe some government-owned institutional investors to buy stocks. In fact, I see that as the next focus of investigation.
Questions are going to be raised about whether domestic institutional investors have held, and bought into, stocks of companies that figure in the Lokayukta report. Government entities, like the LIC (Life Insurance Corporation of India), are already under the public glare for having invested in some of these tainted companies. Staying invested or adding to positions in the tainted companies, will also raise eyebrows.
The companies named in the Lokayukta report seem to have greased palms to get mining concessions and indulged in all kinds of unethical practices. Corruption is so deep-rooted that one wonders how an auditor could have ever approved the books of accounts of these companies. The auditors have to be either incompetent or in cahoots with the head honchos of these companies. One of these tainted firms has been accused of donating Rs10 crore to an educational trust run by the family of the former Karnataka chief minister BS Yeddyurappa. In all these cases, the shareholder gets the short end of the stick.
The real estate sector has always been mired in corruption black money for upfront payments, bribes for registration & title clearances and what have you. As investors, we always have a choice stay clear of sectors like real estate or mining. As a shareholder, it would be foolish on our part to assume that the promoter will not cheat us. When he has to pay a bribe, the money will come from the listed entity. And, if a promoter can dip into the capital of a listed entity to pay a politician, what stops him from enriching himself?
At times, companies have been using political authority to build personal empires, using the listed company route. These companies borrow from government-owned financial institutions, default subsequently and then carry on with life as if all is hunky-dory. As creditors, government entities suffer huge losses even if these ‘sick’ companies manage to start generating profits, none of these public-sector institutions even tries to get back the monies that it ought to demand.
Unfortunately, corruption is what is generating fortunes not just in India, but also in a number of developed countries. Of course, not every Indian corporate house is corrupt. But, as an investor, if you smell a rat, vote with your feet.
Thanks to the RTI (Right to Information) Act, media & judicial activism and a few good men, there is more than a fair chance that wrongdoing will be exposed. So, be practical. Avoid investing in these robber barons. All said and done, I must admit that it makes sense to judge a company by the ‘degree’ of corruption it indulges in, rather than the absolute lack of it. If we expect lily-white corporate ethics, we may have no stocks to invest in.
The author can be reached at balakrishnanr@gmail.com
Institutional investors, perhaps, bet on the ability of the promoter to pull strings, grease his way through the system and deliver on the bottom-line. As long as the relationship is cosy, all is fine. But the favourable period, generally, tends to be very short. If I were an institutional investor, I would perhaps dump these stocks and keep away from these sectors for a long, long time. Unless there is active price manipulation, there is no way these sectors can attract investor interest. For a while, the promoter and his cabal may be able to prop up the stock prices.
Promoters are also known to bribe some government-owned institutional investors to buy stocks. In fact, I see that as the next focus of investigation.
Questions are going to be raised about whether domestic institutional investors have held, and bought into, stocks of companies that figure in the Lokayukta report. Government entities, like the LIC (Life Insurance Corporation of India), are already under the public glare for having invested in some of these tainted companies. Staying invested or adding to positions in the tainted companies, will also raise eyebrows.
The companies named in the Lokayukta report seem to have greased palms to get mining concessions and indulged in all kinds of unethical practices. Corruption is so deep-rooted that one wonders how an auditor could have ever approved the books of accounts of these companies. The auditors have to be either incompetent or in cahoots with the head honchos of these companies. One of these tainted firms has been accused of donating Rs10 crore to an educational trust run by the family of the former Karnataka chief minister BS Yeddyurappa. In all these cases, the shareholder gets the short end of the stick.
The real estate sector has always been mired in corruption black money for upfront payments, bribes for registration & title clearances and what have you. As investors, we always have a choice stay clear of sectors like real estate or mining. As a shareholder, it would be foolish on our part to assume that the promoter will not cheat us. When he has to pay a bribe, the money will come from the listed entity. And, if a promoter can dip into the capital of a listed entity to pay a politician, what stops him from enriching himself?
At times, companies have been using political authority to build personal empires, using the listed company route. These companies borrow from government-owned financial institutions, default subsequently and then carry on with life as if all is hunky-dory. As creditors, government entities suffer huge losses even if these ‘sick’ companies manage to start generating profits, none of these public-sector institutions even tries to get back the monies that it ought to demand.
Unfortunately, corruption is what is generating fortunes not just in India, but also in a number of developed countries. Of course, not every Indian corporate house is corrupt. But, as an investor, if you smell a rat, vote with your feet.
Thanks to the RTI (Right to Information) Act, media & judicial activism and a few good men, there is more than a fair chance that wrongdoing will be exposed. So, be practical. Avoid investing in these robber barons. All said and done, I must admit that it makes sense to judge a company by the ‘degree’ of corruption it indulges in, rather than the absolute lack of it. If we expect lily-white corporate ethics, we may have no stocks to invest in.
The author can be reached at balakrishnanr@gmail.com
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