If conventional/conservative logic was to prevail, then the Indian stock markets should be in depressed moods. If the overall economic trends were to be followed, then the markets need to exercise cautious optimism and not be in a bull fervour, as they are at the moment. Notwithstanding the fact that there are clouds of concern and uncertainty on the domestic and the global economy, the Sensex touched a record high of 32634 and continues to be in a northbound trajectory. India’s GDP growth has receded to a three year low at 5/7%, its gigantic NPA crisis remains unresolved, private sector investment is at an all time low, consumer confidence has fallen, fiscal deficit is not expected to be contained at 3/2%, CAD is rising, unemployment remains untamed and the RBI refuses to prune interest rates, fearing a rise in inflation. If the North Korean crisis fails to unnerve global investors, confident that better sense will finally prevail, even the imminent rise in interest rates in USA, which will reduce the attractiveness of the Indian markets to foreign investors, has failed to put brakes on the Indian stock market indices, which at a 29% rise in dollar terms, have rallied the highest in Asia, this year.
The Indian bourses are ignoring the gloom news and have been in a state of optimism, hope and exuberance. The statement of the World Bank that India is on a solid growth path and that the present lull in its growth is a mere aberration, that the likes of the Reserve bank, the PMEAC and the WB see green shoots of recovery in the Indian economy and the IMF Chief’s statement that India is for medium and long term on a growth track that is much more solid as a result of the structural reforms that have been conducted in the last couple of years, has bolstered the bull market spirits. The domestic investors led by the mutual funds and the insurance companies have been pumping in record funds into the Indian equities (Rs.70000 cr. this year so far), unmindful of the net exit of USD 1/8bn by the foreign investors. The delayed recovery in the corporate profits/growth, as also the high valuations of the Indian stocks does not faze the investors, as they see cheer in the better than expected statistics, including the nine month rise of 4/3% in industrial production, the increase in merchandise exports to 25/7%, the unchanged retail inflation at 3/28%, the smart pick up in festival shopping and the innate confidence that the rise in corporate profits will dilute and set right the high valuations. It is Diwali time and the mood of the season should be cheerful and upbeat, however irrational it be. Let the bullish investors bask in the golden glow of a rising Sensex.
ICICI Findings Must Be Made Public
It is a well known fact, since the time the malpractices come out in the open in February 2018, that there has been gross misconduct in the management of ICICI Bank, at the highest levels. That included its high profile CEO Ms. Chanda Kochhar, its complaisant board of directors and also its auditors, who did not object/report on these misdoings. What is now being probed by a slew of agencies which includes SEBI. ITD and the CBI, is not just charges of negligence and violation of the corporate code of conduct, but also deliberate non disclosure of information and corruption. At the centre of this investigation, which seeks to unravel the truth is SEBI, for violation of listing norms and the code of corporate governance and Justice B. N. Srikrishna for conflict of interest, quid pro quo in loans given and the code of conduct violations. An internal audit team of ICICI Bank and the RBI is also probing systemic negligence/lapses in loans given.
While little is known of the Justice Srikrishna enquiry, which is at a preliminary stage, there is some information known about the status of the SEBI proceedings against Ms. Chanda Kochhar and ICICI Bank, both have not responded to the SEBI notices and have been seeking adjournments. The very fact that multiple adjournments have been sought and no meaningful reply has been given, indicates that there is substance in the allegation of violation of norms of disclosure, corporate governance, conflict of interest and quid pro quo for loans given. A similar situation of a series of adjournments, is said to be so, in the case of the income tax proceedings, against the Kochhar family.
Thus while ICICI Bank and Ms. Chanda Kochhar have not yet responded to the umpteen SEBI notices, the Business Standard now reports that ICICI Bank is intensely pursuing SEBI to settle the matter through a consent plea, which would involve no hearing as such, and yet a closure of the case. That is like an out of court settlement, where ICICI Bank will not plead guilty of charges and will be let off by SEBI, through the levy of penalty or through lighter charges. The new chairman of ICICI Bank Shri Girish Chandra Chaturvedi and its COO Mr. Sandip Bakshi are said to have met the SEBI chairman, pleading for a settlement through a consent plea. At present SEBI has given them a fresh date of August 24, 2018 to file their submissions, in response to its charges.
A settlement/closure of the ICICI case, which involves serious malpractices, detrimental to public interest, means a kind of a hush hush closure of the case. The public which has a huge stake in the Bank needs to be made aware of the findings of investigations, which perhaps would be dropped upon such consent closure of charges by SEBI. ICICI Bank is a large public institution and the malpractices which have damaged its reputation and have eroded its shareholder wealth need to be made public and the guilty must not be let off easily, as happens in the case of a consent plea. Every probe agency must conduct a detailed investigation into the ICICI affair and the findings must be made public.
De Beers & The Diamond Crisis
The Indian diamond industry which is a major contributor to India’s foreign trade, is a study of contrasts. Its customs certified imports/exports run into billions of dollars, but are interlaced with hawala, tax evasion and FEMA violations. It polishes 90% of the world’s diamonds and is thus deeply interfaced/interlinked with modern global trade, but it is yet run in a traditional desi style, often violating the laws of the land. It deals in diamonds, a most precious item, but often the supporting documents are missing. It relies on traditional couriers, the angadias, for delivery logistics, but often with no paper trail. It is a hugely valuable glamorous item of wealth, but the profit margins in its trade are wafer thin. The entire aura built around a diamond is that of trust and reliability, but more and more diamond companies have cheated banks, such that the infamous duo of Mehul Chokshi and Nirav Modi, have become the poster boys of the industry. The diamond industry today has lost its sheen. It is tainted and is in the doldrums, with dwindling fortuners.
As if these problems were not enough, yet another crisis has hit India’s diamond industry, which is of a dimension not witnessed till date. It is well known that De Beers, the South African giant owned by Anglo American Ltd., has had an iron grip/monopoly over the global diamond industry since over 60 years. If used to control the world diamond business, right from mining to marketing. It is De Beers that coined the memorable slogan, á diamond is forever’, in order to build an aura and allure around the diamonds and market them. If has also consistently battled the onslaught of much cheaper synthetic diamonds under its slogan, ‘rare is real’. The monopoly of De Beers was broken by Alrosa, a Russian company and Rio Tinto an Australian company, about a decade ago. And recently Anglo American, the parent of De Beers was acquired by Vedanta, the company owned by Anil Agarwal, the London based billionaire NRI, by becoming its largest shareholder.
In a strange coincidence or maybe in a deliberate move, De Beers has started marketing synthetic diamond jewellery, under the brand Lightbox, which costs a fraction of the real diamonds that De Beers earlier swore by. Interestingly industry experts now state that a synthetic diamond and a natural one are similar (akin to a natural pearl and a cultured pearl), so why pay much more for a natural stone.
As a result of this marketing campaign, the prices of real diamonds have crashed. In the diamond markets of Mumbai and Surat, diamonds are available at a hefty discount of upto 30%, with liberal payment terms and yet there are no buyers for them. With a major erosion in the value of their inventory and no buyers either, diamond traders are suffering huge losses. A spectre of huge losses and cash shortage now stares in their face. While in the earlier crises, like that of bank loan defaults, the diamond firms illegally gained by not repaying bank loans and siphoning away the funds, this time they are incurring huge losses in reality, because the dethroned diamond king De Beers seems to have resolved to kill competition, by killing the industry itself. A large number of Indian diamond firms face imminent bankruptcy, with no way out of the predicament of falling diamond prices.
With more and more foreign institutional investors (FIIs) investing in Indian companies, an effective corporate democracy, with shareholders keeping a check on promoter directors, has been emerging. In the most recent case, FIIs, which are major shareholders of HDFC, the housing finance giant, decided to vote against the appointment of its key promoter Mr.Deepak Parekh, as its director. They raised concerns about his age and his being director of eight other companies, thus questioning his personal commitment and focus, on the management functions of HDFC. He barely managed to scrape through, with a wafer thin margin of majority of shareholder votes in his favour. Two other directors, seeing the resistance of shareholders to the appointment of directors who are over seventy five years old, viz. Mr. Bimal Jalan and Mr. Bansi Mehta, withdrew their candidature, at the last moment.
Earlier, in May 2018, the institutional shareholders of Fortis Healthcare, ousted its entire board of directors and appointed a new one. In yet another case, the debt laden Suzlon, had to abandon its plans to raise Rs.2900 crores, by way of additional equity, in the wake of fierce opposition by its non institutional shareholders.
The HDFC episode of shareholders opposing the reappointment of Mr. Deepak Parekh as its director, attracted the ire of the cabal of the powerful old guard in Mumbai’s finance/banking circles, dismayed by such opposition to his appointment as director. They ganged up together and demanded that the voting by proxy firms on behalf of FIIs, be regulated by SEBI, for it threatens to destabilize company management, of well run entities. This was a classic instance of crony capitalism.
This objection of Mumbai’s old guard of banking/finance, is to merely protect their personal fiefdoms and not because they have the interest of their corporates at heart. The new found corporate shareholder activism, assisted by an empowered Companies Act, does threaten their cozy domain, and is badly needed. Many listed companies have been run like family owned concerns, totally indifferent to the interest of their shareholders. A check and restraint is needed on these influential/powerful corporate titans like Mr. Deepak Parekh by way of shareholder vigilance. It needs no SEBI surveillance as the old guard demands, since it is conducted within the mandates of the Companies Act and is by no means illegal. Shareholders have a right to decide what is best in their interest and like in the case of HDFC, too may directorships of the director are a matter of concern and must be objected to. Like any democratic institution, the primary responsibility to protect their rights is that of the shareholders themselves and it must be encouraged, than be restrained, as the old guard wants. The FE rightly states that Indian companies must remember that all funds-local or foreign-are looking for top managements and sound businesses. There is no point complaining about how investors are going to vote or deciding on whether the quality of advice they are getting is sound.