The Telegraph
Since 1st March, 1999
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Investment, as John Maynard Keynes famously remarked, is an act of faith. The faith grows on a number of elements: track record, current level of performance, expectation of returns and security. But in India, companies accepting deposits from the public do not often pass on information that can inspire faith and confidence among investors. The latter, when they take their decision to deposit money with a company, have before them only the advertisements which the company puts out while soliciting deposits. These hardly ever provide adequate information. Investors, for example, are unaware that there is no security backing the deposits. Thus investment in company deposits, often the savings of small investors, is extremely vulnerable. Hence the validity of the proposal put forward by ICICI to restrict companies from accepting deposits. The paucity of the information provided by companies when soliciting deposits is in sharp contrast to the detailed information that companies have to provide when trying to raise loans from banks or financial institutions.

There is an obvious link between the debt market and the capital market. The latter can never be completely risk-free. Risk, like faith, is an essential component of a thriving and stable capital market. Faith can be made to prevail over risk through transparency and by making investors conscious about what exactly their risks are. Capital markets thus need strict regulations about who can accept deposits from the public. Banks and certain regulated financial intermediaries are the obvious candidates because in these cases the investor is in a position to evaluate the viability of the deposit-taker. Moreover, deposits in banks up to a certain value are covered by deposit insurance which is not the case with company deposits. Company deposits are thus designed not to inspire faith but make investors more aware of the vulnerabilities involved.

The most vocal opposition to the ICICI proposal has expectedly come from the companies themselves. They see in the proposal a threat to raising capital cheaply and without too many checks and scrutiny by professionals. A company, when it takes a loan from a bank, is subjected to a credit appraisal; but when it asks for deposits from the public, it issues advertisements in newspapers with the vaguest possible information about its own economic condition. Against their opposition to the proposal is the long queue of depositors who have lost their life-savings and have no hopes of getting back their money. Company deposits fall under the purview of the department of company affairs, but the latter offers no protection to investors who are hoodwinked by companies. In the heyday of nationalized banks, companies could legitimately complain of red-tapism and other bureaucratic hassles which hindered their access to capital. This is no longer valid, and there are enough banks eager to provide capital to companies with good credentials. Neither faith nor capital are in short supply in India.

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