India Economy

God has no voice at shareholder meetings

J Mulraj | Updated on January 23, 2018 Published on July 26, 2015

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Taking a short-term view is leading to bubbles and crises

The focus of global investors today is on how the situation in Greece will pan out, and on how China’s bubbles in the stock market and in the housing market, will behave.

The context for investors to view these events is how shareholder capitalism works. Today, institutional investors own over 75 per cent of corporate equity, and the fund management business, with over $200 trillion in management, is larger than the banking business, worldwide. So, institutional investors can, and do, put pressure on corporate managers for delivering better quarterly performances. Given their shareholding clout, corporate managers succumb to these pressures, often at the cost of a long-term future.

This is how the two bubbles grew in China. Greece, too, borrowed at low rates offered to it to overspend, without making the required structural changes to its extravagant pension system. Several people have expressed concern about excessive short term-ism. Larry Fink, head of BlackRock, the largest fund house which manages $4.4 trillion, or over two times India’s GDP, laments that more money has been paid out through dividends and share buybacks, than invested in new projects.

Corporate managers heed institutional investors because they can voice displeasure at shareholder meetings. They are not concerned about the harm of their actions, because God does not have a microphone. It was short term-ism that led to the 2008 crisis.

Even after that, the too big to fail banks have not learnt their lessons. A New York Times editorial says that Fannie & Freddie are back, bigger and badder than ever. A crisis is brewing.

Crisis again

Go back to Greece. The European Stability Mechanism (ESM), a corporation owned by 19 countries, holds €145 billion of Greek bonds. If Greece defaults, the ESM has to declare it as non-performing loans within 120 days. ESM has no reserves.

Its other assets are loans to Ireland and Portugal, both shaky economies. ESM raises from selling its bonds to the public.

Rating agencies have given these bonds (backed by assets of three bankrupt countries) an AAA rating!

If Greece defaults, then holders of the bonds, who are individuals, relying on the AAA ratings, would be hit. But then, God does not have a microphone.

India now needs to kick-start the investment cycle, which has been moribund.

The fall in prices of crude oil, and of gold, our two largest imports, has led to savings, estimated by some to be ₹100,000 crore.

One also expects money to come from declarations under the black money scheme.

After October 1, holders if caught, would pay 120 per cent (instead of 60 per cent if declared before end-September) and face a jail term.

But a more successful scheme would be if the government announces that tax disputes outstanding for five years could be settled upon payment of, say, 20 per cent.

The amount stuck in disputes is over ₹4 lakh crore and at 20 per cent the government would get another ₹80,000 crore. It can do this pretty fast.

Maruti has overtaken its Japanese parent in market cap, symbolic of the rising demand in India due to a young population, and falling demand in Japan, with an aging one. It is important to provide jobs to reap a demographic dividend.

Which is why it is criminally irresponsible to block Parliamentary proceedings over an IPL alleged absconder. But then, God doesn’t have a microphone. Politicians do!

Published on July 26, 2015
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