Of Doles of Bail outs

Till the beginning of March, most people were of the opinion that we are in the midst of a deep depression and that it will take at least 4-5 years for the world economy to revive. With the individual countries’ economies being intertwined more than ever before, no country could be optimistic individually about the prospects of a revival. Even when the cyclical periods of recession have hit in the past, the economies have taken at least 1-2 years to turn the corner. So what has transpired in the last two months that we are now hearing noises that the recession will be over by September of this year.

Scores of companies have lined up to raise money by offering fresh shares to Qualified Institutional Investors (QIPs) during May – July 2009. DLF – the biggest Indian realtor has issued Rs 3900 Cr worth of shares to QIPs recently. The idea is to tap the system which is flush with liquidity. According to an estimate issues worth Rs 75000 Crores ($15 Billion) are in pipeline. The financial institutions including banks are keen to subscribe to these issues. The atmosphere is upbeat as it is believed that the economic downturn is a thing of the past and the worst depression since the great one of 1929 is already over in a period of less than a year !!!?? We no longer play test cricket these days, only 20-20, some may argue.

The question is, then, why are the companies raising fresh capital from these QIPs? Is it for further expansion? The growth in GDP the world over is shrinking and in many cases the de-growth is as high as 12%. No company will be in an expansion mode under such a situation. The capital being raised is therefore to help them come out of troubled waters. It is not long ago that leading Indian companies (mostly real estates) defaulted in their payment obligations. Therefore, it is safe to presume that the money will be used for fire fighting and improving the crises faced by their balance sheets. Money to be used for non-productive purposes.

So, the moneys collected by the governments from the taxpayers flow to the banks / financial institutions (FI) in the form of stimulus packages. These institutions in turn are subscribing to the capital issued by troubled corporates. We do not know how productive this capital is going to be for the banks/ FIs.

Excessive leverage was the root-cause of the problem both at the end of the FIs and at corporates. The FIs took highly leveraged positions in the derivatives markets and the corporates leveraged themselves in greed for higher, quicker profits. Typically, real estate companies acquired large land banks leveraging themselves far beyond their capacity and when prices crashed so did their balance sheets.

Are the bail -out packages to FIs and to corporates through QIP offerings, therefore justified?

Last year the Government of India (GOI) announced a waiver of Rs 60000 Cr loan disbursed by the scheduled commercial banks, regional rural banks and cooperative credit institutions to about 3 crore marginal and small farmers. The corporate sector described it as a move which was bad management of the economy by the government and the capital markets reacted adversely. The move was widely described as anti- reformist and populist keeping the election in mind. It will give rise to higher inflation and deficit it was said. The modern educated folks frowned upon at the move. The loan waiver in this case addressed to the more basic needs of “Roti Kapada aur Makaan” of a very large number of beneficiaries, whereas in the case of stimulus packages the money is doled out to greedy and wicked FIs and corporates who have swindled billions through their nefarious operations & forged and fudged balance sheets.

Question is, will these FIs and corporates exhibit more responsible behaviour now. The volatility and the gyrations in the stock / commodity markets across the world in the last three months do not indicate so. Without heavy and highly leveraged positions being taken, stock indices could not have gone up so much so fast. They have gone up by more than 80% in many cases. Ditto for commodities. So greed is again at play as causing this kind of volatility cannot be the collective handiwork of retail or high net-worth individuals.

The big corporates have the muscle power to sway a government policy decision in their favour. They may collectively lobby or even use money to have their way. They have the most sophisticated (albeit wicked) managerial brains; effective & professional PR.

In contrast, an ordinary individual (who is neither belongs to a corporate nor is a marginal or small farmer) has no such privileges - he is not the subect matter of any bail out or stimulus package. He is, in fact at the mercy of these corporates. He must compulsively buy products, created fancy for by these companies, he can do without. He must not only pay higher income tax (being taxed on gross income whereas companies are taxed on income net of expenses) but also be subjected to tax on expenses (VAT, service tax). Taxes in his case are deducted at source whereas those for companies are paid by them after all adjustments and fudgings. The individual has no collective voice unlike companies. The individual, above all is blackmailed emotionally by his conscience which prevents him from blatant wrongdoings whereas companies do not have any such obligation being without any conscience anyway. The individual being an individual has to fear the law whereas companies always work with schemes as to how they can circumvent the law. They would weigh the penalties and if the reward for breaking a law is larger than the penalty (if, as and when they are caught) / bribe, they would happily break the law.

Oh God!! Bail ME out of my conscience, honesty & hardwork. Give me the wherewithal to swindle millions (not billions, I have modest ambitions).