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What is the real reason behind the present rise in prices?

Akhilesh Bhargava

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Considering the constant hike in prices, is the hike in the interest rates in response to the surging consumer inflation or are there other factors involved? Mr. Akhilesh Bhargava, Business Editor of HW Business and Finance shares his insights on the matter.

Business Tit-Bits

The Borrowing Spree Of ILFS

Akhilesh Bhargava

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As the ILFS Group threatens to collapse like a pack of cards, more and more instances of its mismanagement and reckless financial policies are coming out in the open. The spate of resignations of its top honchos, starting from its CEO of 30 years, Shri Ravi Parthasarthy is only confirming the chronic malpractices and financial mismanagement of ILFS, which engineered its collapse. It now turns out that with loans of over Rs.90000 crores, ILFS had heavily borrowed, far beyond its sustainable capacity and its failure was imminent.

Prudence is the key to good financial management and careful borrowing is its essence. A primary parameter that bankers/lenders adhere to when they lend, is to maintain a safe proportion of promoters equity versus borrowing in any project. The more the capital that a borrower invests in a project, the more is his skin in the game, which improves the viability of the project and gives safety to the lender. The chances of failure of a project where the promoters capital in the project is very low are always very high, thus putting a lender at risk. As a general tendency, borrowers prefer to invest the least in a project, which puts the lender, borrower, as well as the project at risk. The story of the failed projects in power, infrastructure and the real estate sector in India, is one where the borrower put in very little equity capital and most of the project fund came by way of loans. Such projects were doomed to fail at the very inception and they did. Moreover, in those projects where the borrower has invested little, in case of failure, the borrower becomes indifferent to the project, making it what Raghuram Rajan calls a zombie project or otherwise like in the case of Nirav Modi/Mehul Chokshi, the borrower chooses to run away.

The saga of failure of the ILFS and its shocking flock of 169 subsidiaries is also that of over borrowings. ILFS operated in the infrastructure segment, where a maximum borrowing of up to five times of borrower’s equity is considered to be safe. Any borrowing beyond that is considered to be financially dangerous. As against a safe multiple of 5 times, ILFS it turns out borrowed up to 17 times its equity. In other words, against a borrowing of Rs.90000 crore, by ILFS, its own capital was just about Rs. 5000 crores. No wonder, the entire ILFS edifice is in danger of collapse. This parlous financial mismanagement of ILFS raises serious doubts about the intent and ability of its top management, led by its founder CEO Ravi Parthsarthy, who has resigned on health grounds. It also raises questions on the conduct of the lenders, who recklessly lent to ILFS, ignoring sense and prudence. ILFS having been promoted by the likes of LIC and other institutions, operated as a quasi-government entity, with no checks and balances. But it was not so. Its top three executives were given a combined salary of Rs.47 crores last year, more than what the private sector would pay and their performance were worse than a public sector employee.

As ILFS sinks lower into a collapse, its financial mismanagement stares in the face. It calls for an investigation by agencies like SFIO, MCA etc. to find out whether such mismanagement also has angles of fraud, misfeasance and corruption to it.

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Lena Dena Maaf

Akhilesh Bhargava

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The bankrupt Dena Bank is being merged into Vijaya Bank and Bank of Baroda. So huge are the losses in the Bank that it needed two healthy banks to be able to absorb and withstand its losses. Its carcass of mismanagement is so heavy that it needed more than one bank to be able to carry it. But these are the privileges of being a government-owned entity, where accountability and answerability are not enforced even in a case of blatant misconduct and criminal misfeasance, which is the true story of Dena Bank.


If the utterly mismanaged and bankrupt Dena Bank was a private sector organization, it would not have been revived by merger as we are seeing, but would have been closed down and would have been sent to the courts for liquidation. Its depositors and investors would have lost tens of thousands of crores, due to the fraud and mismanagement perpetrated by its top management not just in giving bad loans, but in also thereafter showing indulgent leniency to the wilful defaulters.  Their deliberate forbearance added to the success of the frauds and the scot-free escape of the fraudsters. During the liquidation of the bank, a mandatory forensic audit would have revealed the criminal saga of bad loans, outrageous siphoning of funds, the deliberate unwillingness of the Bank to recognize cases of frauds and going soft on the recovery of loans.

Upon such findings, a criminal prosecution would have been launched against the erstwhile top management of the Bank, by agencies like CBI, SFIO, ED etc. and the entire chain of its complicit officers to bring the wrongdoers to the task. The investigation by multiple agencies and regulators would have brought out/unearthed the criminal nexus that led to the bad loans and their nonrecovery and action would have been initiated against them all. So corrupt was known to be Dena Bank, that not only did its credit officers, who sanctioned /disbursed loans make money, but so did its recovery officers, who happily let the defaulters subvert the judicial recovery process for a bribe.

But then Dena is a government-owned bank, where the rot started from the top because its topmost management was eagerly willing to take orders from their political masters, for their personal gains. They cared little for appraisals, due diligence, credit verification and processes and happily gave large loans on telephone instructions, to those who had influence and reach. They were fully aware while conducting such crimes that is a government-owned bank, they will not be allowed to fail and capital wasted/duped away by them, will ultimately be replenished by the government. They had no scare that if Dena Bank went bankrupt, they would have to face the wrath of its depositors, whose money was looted due to their misconduct and malpractices. These rotten top managers of Dena Bank were clear, that they are following the instructions of the system, and the system will itself look after them, which it has. Dena Bank is being merged, with no criminal investigation or punishment of those who looted it. None have been investigated, prosecuted, punished or arrested for its bankruptcy. It is a case of Lena Dena maaf (forgiven).  

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Irrational And Illogical

Akhilesh Bhargava

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The normal situation in India is that, in response to a crime or violation that may have been committed by a miniscule few, heavy handed measures are initiated, that end up harassing the majority, who did nothing wrong and it is they who end up suffering the most. The saga of shell companies and bogus capital as the government alleges is one such instance, where due to a miniscule number of shell companies, the entire corporate world has suffered. Almost 3 lakh entities have been closed down in this manner. To detect and close down alleged shell companies and to tax share capital, on sheer suspicion, the most irrational and illogical measures have been initiated. To start with, if a company did not file its ROC returns for three years or more, it was deemed to be a bogus shell entity, whose name was struck off and it simply ceased to exist. Due to this rough and ready measure, very often, running entities, with bank loans to repay, tax dues, pending court cases and other proceedings, have been struck off and closed, to the utter dismay of the government itself, which is now itself seeking to revive such entities, to pursue pending tax recovery and other government dues.


Yet another such summary dismissal measure, has been where a company has directors, who are not its shareholders too (which is the key distinctive feature of the corporate structure and law), and do not hold commensurate educational qualifications as the government thinks appropriate. Such companies too, despite running legitimate businesses, have been held to be bogus and benami and have been closed down.

 

Such laws have been enforced even in the matter of receipt of share capital by a company, under the suspicion that all share capital received is bogus. So even if a company receives share capital from its existing promoter shareholders, who may own 100% of its shareholding, yet if such shares are not at a valuation as prescribed by one Rule 11UA of the Income Tax Rules, it will be deemed bogus, even if its source etc. is totally genuine. In such cases, it is the shareholders who have promoted, managed the company, they know what is in the best interests of the company and they are investing their own funds, but if it is at a premium etc. that is not valued as per this Rule 11UA, then the share capital is deemed bogus and is subject to tax penalty and perhaps prosecution too. So the genuineness of a transaction of receipt of share capital by a company from its own promoters, and their wisdom and experience is replaced by the theoretical academic presumption of the tax law and even a bonafide and legal transaction becomes illegal and malafide. The section even overrules genuine market dynamics, where share valuations are done by private negotiation, between private parties and are totally bonafide and genuine, but are held bogus, because they differ from the valuation under the said Rule 11UA.

 

In many cases, the courts have held such deemed income taxed by the Income Tax Department to be wrong, but yet there is no end to such harassment inflicted on companies and their entrepreneurs. Merely because one bureaucrat is found to be corrupt, that does not mean that all others are. But this logic is sadly not applied to companies and entrepreneurs in India, and they are all deemed to be tax violators.

 

 

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