CRB scam and lessons; family controlled conglomerates; George Soros and his pink comrades.
The salon circles in the capital and the ever-so-smart hucksters in the western metropolis, of course, have it all pat. "What is one more seam between friends" is the refrain in the rat packs. However, this writer differs and would submit that there are four critical areas which need to be discussed in detail. The first, of course, pertains to the role of the Reserve Bank of India in monitoring and regulating non-banking finance companies (NBFCs) like the CRB group.
The apex bank came out with its revised and more stringent guidelines on NBFCs just a couple of weeks ago and the general reaction was one of guarded welcome. The cautionary note was because of the old maxim that rules and law are useless unless they are effectively implemented. The old lady of Mint Road has again demonstrated her total ineptness in regulating the financial sector; first, it was the Harshad Mehta affair; then it was the Indian Bank contretemps and now this.
The role of the credit rating agencies also needs to be brought up. In the CRB swindle, the culprit is the third credit rating organisation CARE, which gave a satisfactory grading to the company's fixed deposits as late as in August 1996 and never bothered to review it afterwards. This ignominious performance follows the earlier snafu made by CRISIL, the pioneer credit rating organisation, in the case of the Mesco/Mideast India group. When every treasury person in the country knew about the defaults made by these companies in their inter-corporate borrowings, the sahibs in CRISIL were blissfully unaware of them. To cap it all, the agency's chief made the preposterous statement in public that it was not possible for them to monitor all defaults and the fellow got away with this drivel.
The apex capital market regulatory authority SEBI, does not come out smelling of roses either. After having announced its guidelines for credit rating agencies in September 1996, it has obviously not been able to implement them. The fourth issue is the hasty decision of the giant Korean financial company, Daewoo Securities, to join hands with the CRB lot; it is Small consolation that the boys in Seoul are as poor in carrying out their due diligence exercises as we are.
Finally (and this is uncomfortable for all of us), is there something about the Indian psyche that we get taken in so easily by poseurs and frauds? From Dharma Teja to Harshad Mehta, Pawan Sachdeva, Rajarathinam, Dadi Balsara and Bhansali, it has been the same story all the way.
ADIEU FAMILY-RUN CONGLOMERATES?
IN recent weeks, one of the major items of debate in the corporate sector has been the performance (or lack of it) of some of the well known conglomerates. Interestingly, these conglomerates are family controlled and have been the darlings of the capital market in the last few decades.
In the case of the Aditya Vikram Birla group, the fall hem grace has been precipitate indeed, while the smaller JCT group has had an equally grim period. There are more substantive issues involved here than the succession factor The first relates to why family-controlled groups in this country ventured into unrelated and widely-diversified areas in the past. The main compulsion was the licence-raj system which encouraged private business to enter sectors whose products were in short supply and where the initial entrants could laugh all the way to the bank. This unhealthy practice was termed 'pre-empting entry by cornering licences' and has been extensively documented.
The second factor is connected to the risk aversion of Indian business, coupled with the ready availability of long-term loans from public sector financial institutions. Basically, entrepreneurs opted for putting up projects with small equity contributions of their own, which meant a large number of different projects instead of a smaller number of projects of bigger capacity. The third issue is the inability of family business to delegate decision making and monitoring, barring a few exceptions. This has led to highly-centralised command centres. The results of this approach in today's complex business environment have predictably been disastrous.
The stockmarkets, too, have priced down the scrips of family-run conglomerates. It does seem that the good old their wings clipped and glib references to the success of General Electric's diversified operations under Jack Welch are so much wishful thinking. The inner sanctums in many business houses will need a major change in their mindset.
HOOGHLY TURNS THE HUDSON PINK?
FOR an arch-capitalist who, in 1956, escaped by a whisker from the Russian tanks in Hungary George Soros almost provoked a riot in salon circles in the West with his recent critique of capitalism, specially the American variety. Akio Morita had said similar things seven years ago, but the Sony chief did not quite have the same cachet as brother George. The resultant angst in New York's financial circles was understandable, since it is George's watering hole and the bastion of free enterprise does not treat lapsed believers kindly. Wags in Wall Street are now saying that Sores may have been infected by the pink comrades in West Bengal, where he is the largest single foreign investor. The Hooghly seems to be working its magic on its distant American cousin.
(The author, a corporate analyst, is a stockbroker on the NSE and DSE)