The Telegraph
Since 1st March, 1999
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- Selling off government equity is a step towards disaster

There is this cliché of a story about a Frenchman who arrived at a little town in a remote Latin American country. He was bowled over by the sight of a cadaverous structure at the town square, rising to the sky: “magnifique, it reminds him of a woman”. His companion was puzzled, what in this ordinary-looking column could bring to the mind the visage of a woman' Pat came the Frenchman’s reply, “Oh, don’t ask me, everything reminds me of a woman.”

In the extraordinary times we live in, a similar obsession is noticeable among chronic lovers of disinvestment. The panacea for all ills in the country is apparently the selling-off of government equity. A Union minister the other day was bold enough to suggest that the travails the Unit Trust of India is experiencing are because of its excessive patronage of public sector undertakings; the remedy, the minister hinted, was to hand over the UTI to private parties.

Ministers have the privilege of making assertions without bothering about ground reality. The problems afflicting UTI, facts will testify, are largely related to its penchant to buy, indiscriminately, shares of many bogus and fly-by-night companies. Foul play was obviously involved. A number of its senior officials have been arrested for the misdoings and are facing criminal prosecution. One-eyed Jacks of the calibre of the Union minister do not however have their style cramped; they keep chanting and rechanting the same nonsense rhyme: disinvest, disinvest.

Where society and its politicians are generally corrupt, public institutions, including public financial institutions, will of course be under considerable strain. Politicians will be seduced by private parties to ensure that resources of entities such as the UTI and the Industrial Development Bank of India flow in favoured directions. But since these institutions are in the public domain, at least some checks to runaway malfeasance exist; a conscientious civil servant can make a nuisance of himself and resist proposals for immoral transactions, and parliamentary committees can instil an occasional fear of god.

On the other hand, suppose the UTI, thanks to ceaseless endeavours on the part of interested lobbies is denationalized and handed over, lock, stock and barrel, to private ownership. The regime of checks and balances will then be over. The UTI will in effect be henceforth controlled by buccaneers having the freedom to deploy its funds in whatever manner they like. The government, which has already been given a bad name, will watch helplessly from the sideline; the so-called regulatory authorities too will be without an occupation. The system will be thrown back to the era preceding bank nationalization; the domain will be that of the Great Anarch.

True, if accountants and auditors were amenable to social control or were imbued with a social conscience, the situation could be somewhat less precarious. Consider however the global turmoil we are currently witnessing. Arthur Andersen was one of the two leading auditing firms in the major capitalist countries and had an almost ethereal reputation. The great exposures during the past year have now brought us severely down to earth: Arthur Andersen, it has since been revealed, was a den of crooks and was concurrently responsible for many of the financial outrages perpetuated by multinational corporations which have their principal base in the United States of America.

It has been a fearful chemistry: a free enterprise environment, with disinvestment as king, and shady elements in auditing firms acting in conjunction with similar elements in private businesses. It has often even been a trinity, corrupt private bankers have joined in a concordat with private corporate bodies and private auditing firms. Since public regulation was absent and auditors lacked in integrity, published statements of financial performance by corporate units have been rendered into free displays of imagination.

In the post-globalization phase, the US is the role model in all spheres; there is therefore genuine ground for worry whether the Indian investing class as a whole has not been, and is not being, taken for a ride. Published accounts of financial performance influence share prices and act as pole star for investors. In case such accounts are pure fiction, many investors could be led astray and come a cropper.

There is a further reason for such apprehension. The Indian industrial scene has been generally bleak over the past half a dozen years. Despite the downward slide of production indices, the share price indices have nonetheless been buoyant in all these years, barring temporary kinks here and there. Why the gloom in the industrial production sector, accompanied by lagging physical investment, has not been reflected in the stock exchanges is a relevant question to ask. Equally noteworthy is the fact that the very recent relative decline in Indian share prices has been occasioned by vicissitudes in American bourses and does not mirror any objective reality on the domestic front.

To be fair, one should mention an alternative theory which seeks to reconcile downward movements in physical investments with upward movements in share prices. When investment for capacity creation is down, funds not deployed for building physical assets, it is said, tend to cross over to the share markets and engage in furious speculative activities, thereby creating a bull run. Given this hypothesis, a positive correlation can be established between low level of production and high level of speculation.

The seemingly plausible theory has however its flaws. If share prices are indeed high, enterpreneurs, it is possible to argue, should be interested to expand the production of commodities and services whose share prices show a rising curve and hence make active plans for fresh physical investment. This does not normally happen though, at least it has not happened in India in the recent period, notwithstanding the steady and continuous lowering of interest rates. Entrepreneurs have failed to expand their activities in response to the boom in the share market. The boom, there is hardly any question, has been induced by statements of good economic performance on the part of corporate bodies. But where published accounts of corporate performance are comprehensively doctored, auditors are bribed, and regulatory agencies are in hibernation, what takes place may be a huge confidence trick. Once the bubble bursts, it is going to be disaster time for investors.

The neighbourhood cynic will not be deterred. He will perhaps offer a word of consolation: if the entire system is shot full of holes, and things have come to a stage where government ministers, challenged to take lie detector and paternity tests, dissemble, why cavil at small-time hucksters in commerce and finance' The nation, after all, is united in its resolve to be corrupt and stay corrupt.

As an appropriate epilogue to this piece, the following query has found its way in the email: “A company has a little over 500 employees with the following statistics: (a) 29 of them have been accused of spouse abuse; (b) 7 have been arrested for fraud; (c) 19 have more than three criminal cases pending against them; (d) 117 have been charged and are being investigated for murder, rape, assault, extortion and robbery; (e) 71 cannot get credit or loans due to bad credit histories; (f) 21 are current defendents in various lawsuits; and (g) 84 have been involved in other offences and have paid fines. Can you guess which mighty organization this is'”

It is dangerous to hazard a guess. The probability is the company’s scrip is a leading blue-chip in the stock exchanges.

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