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Business Tit-Bits

Why should we raid politicians and not be selective about it

Akhilesh Bhargava

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It has always been well known, that apart from the tax evader businessman and industrialist, the biggest hoarders of black money have been the politicians and the bureaucrats. In fact it is often seen that seniority in politics is directly determined by the size of the loot at the disposal of the politician. While the source of the black money of the businessman has been tax evasion and crime, that of the politician has been much more disturbing and serious viz. corruption and crime.

Business Tit-Bits

Why is India’s fiscal deficit rising ?

Akhilesh Bhargava

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Business Tit-Bits

RATING AGENCIES HAVE BEEN INCOMPETENT AND NEGLIGENT

Akhilesh Bhargava

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SEBI

The giant ILFS scam was not an overnite creation. It started in 2012 and continued for years, becoming bigger and bigger with each passing year. It is the stark negligence of the credit rating agencies (CRAs), that has been responsible for the ILFS scam, ballooning to such a big one, whose very size in terms of loans taken, still remains a mystrey. Had the CRAs exercised just ordinary vigilance and had not shut their eyes to the most obvious signals of distress and default by ILFS, the scam would have been nipped in the bud, much earlier in the day and its size would have been a fraction of what it is today. There were obvious signals of losses and financial fatigue in the ILFS group, starting from 2012 itself. These very apparent signals that the CRAs ignored were that the liabilities of the ILFS group increased year after year, with no matching increase in the assets, its disputes over claims with the likes of NHAI kept increasing and remained unresolved, its holding company had started incurring losses and cashflows were receding, the support of its investor shareholders like LIC, SBI etc. on which basis ILFS was given AAA ratings, was clearly missing, that in the June 2018 board meeting of ILFS, the directors warned these shareholders that if they did not immediately infuse an additional equity of Rs.4500 crores in ILFS, its collapse was imminent and yet right upto Aug.2018, these rating agencies gave a AAA rating to ILFS.

If the CRAs were sleeping and gave no downgrade ratings/warnings to the lenders to ILFS, they were also very incompetent in their job. They failed to spot that ILFS had borrowed far in excess of its repayment capability, its liquidity was shrinking rapidly, it was incurring more and more losses by padding up project costs (called gold plating), its own investment in projects was actually NIL and that it had indulged in money laundering and siphoning of funds. The CRAs were also very willingly hoodwinked by the smart/oblique Ravi Parthasarathy and his team of highly paid executives and were also overpowered by the gang of top notch very well connected, retired bureaucrats at his disposal. The rating agencies thus were clearly negligent and incompetent, who compromised their integrity, whether intentionally or otherwise and are now being questioned for their failure, by the likes of SFIO.

The CRAs in India are regulated/governed by SEBI, and unsurprisingly SEBI has got into action only after the loot took place. SEBI too is guilty of being reactive and not proactive, that enabled the negligence of the CRAs. SEBI has now tightened the rating agency regulations, primarily entailing more and more disclosures, particularly in respect of liquidity position, asset-liability mismatches, rationale for any expectations of support from the promoters, adequacy of cashflows for servicing maturing debt obligations, and the extent of consolidation in the case of subsidiaries to understand the overall financial position of a company.

These additional SEBI requirements are anyway a must and it is surprising that mandatory regulations are needed to enforce them. These should have anyway been a part of routine rating procedures and methodology. Rating is not a tick in the box job. It needs an intense vigilance/alertness to look out for early warning signals, which was missing in the case of ILFS. Higher disclosure norms are no substitute for basic human common sense/due diligence that CRAs failed to exercise in the case of ILFS and that needs a detailed investigation.

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Business Tit-Bits

The bogus turnover business

Akhilesh Bhargava

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The hawala operators had a business turnover consisted of giving bogus bills of purchase and sale, for almost any item and of almost any company too. These fake bills helped companies not just to show a rosy picture of performance, but to also evade taxes, by booking bogus expenses. In this episode of Business Tit-Bits, our Business Editor Akhilesh Bhargava discusses how implementation of GST led to crackdown on this bogus turnover.

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