The tide has begun to run out, as Warren Buffett would have said. Additionally, the drying up of easy money and a tighter scrutiny on the actual value of collateralized assets has, in turn, caused many asset bubbles to burst.
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Many high-flying firms survived by ensuring that each successive project (financed by generous investments raised from the capital markets) was larger than the one implemented in earlier years—which is what a Ponzi scheme is all about. They’ve suddenly found that their nakedness is beginning to show. Satyam Computer Services Ltd could have been a victim of this phenomenon which compelled it to resort to desperate measures such as inflating profits and the abortive takeover of Maytas Properties Pvt. Ltd and Maytas Infra Ltd. This is something only investigations will reveal. A similar fate could confront many players in the steel and infrastructure sectors as well. An interesting report by Edelweiss reveals how many of the steel companies in the West could actually start haemorrhaging from 2009 itself. This could make a mockery of the high valuations they boasted over the past five years. Some of the players don’t even have plants in India or China where the industry could be pinning its hopes for recovery.
Also Read R.N. Bhaskar’s earlier columns
What will worsen the problem in 2009 and 2010 is the inventory pile-up from unsold production. This will be compounded by stocks held by steel traders who hoped to benefit from the spiralling steel prices during 2007-08. See the difference between production and consumption in the table above, and you’ll get an idea of the mounting stockpiles.
And what about India? Many of the steel units will find domestic demand comforting, especially if infrastructure projects take off. But cheap imports will keep prices down. Watch out for companies that have depended on repeated public offerings year after year under one guise or another. This is because raising additional funds from the capital markets won’t be easy for the next few years.
There is a possibility that Lakshmi Mittal may defer his steel plans in India, and Indiabulls Group too could defer its acquisition of iron ore mines. After all, Indiabulls, not steel, was Mittal’s first direct investment in India. The other interest he had was in the oil sector, where another bubble was in the making. He will most probably be nursing the headaches that ArcelorMittal’s declining sales (and the debts which financed its acquisition) will cause him in the near future.
Software & Satyam
The use of software exports as a means of laundering money was becoming quite evident as early as 1997. That is when the mushrooming of software companies began.
Since then the bubble has grown. In fact, just a few years ago, Chip—a technology publication—pointed out a glaring discrepancy between the figures of software imported by the US from India and the figures touted by the Confederation of Indian Industry (CII). The US department of commerce quoted a figure of $1.6 billion (Rs7,792 crore now) in 2002-03 from India; CII’s figure read $6.3 billion. How did one account for the difference—a discrepancy of $4.7 billion—between India’s figures and those of the US? Mind you, that was in 2002-03. The figures should have grown in subsequent years.
It is quite possible that investigations into Satyam’s affairs might show that some of the “invisible” profits relate to the years when software export profits were tax-free. But that could mean that someone’s funds got laundered. That could possibly throw up more muck.
The reason for this type of laundering was quite simple. The conversion cost of unaccounted money into foreign exchange is seldom more than 5%. Creating a track record and fictitious parties overseas would account for another 5%. Cumulatively, a 10% cost is cheaper than a 30% corporate tax. So why declare the real source of income and pay taxes, when a 10% laundering cost is available for declaring the same as tax-free software exports?
Obviously, this could not have been done without the connivance of the officers of the economic offences wings of India’s intelligence and security establishments. And this could not have been possible on such a massive scale without a wink and a nudge from some very powerful politicians.
Last week’s news underscored the reluctance of the government to actually investigate economic offences. First, it took the government at least three days to arrest the chairman and the financial officers of Satyam. Some even said that the chairman’s confession letter was just not enough to warrant arrest. Then what does, pray?
Then take the case of Hassan Ali Khan, the Pune horse-breeder, charged with laundering and salting away in overseas accounts $8 billion. He is out on bail, despite having four passports of which at least one is allegedly fake. True, the income-tax department has sent him a notice for payment of tax, but the enforcement directorate (ED) went on record last week (reported by Mint on 10 January): “We will serve him (Khan) and his associates another show-cause notice... within two months. However, investigations under money laundering case may take six months before we arrive at a conclusion.”
Meanwhile, Ramesh Gelli, erstwhile chairman and promoter of India’s first private bank, continues to walk free, despite the bank virtually closing down due to mismanagement and reckless lending practices”. It could be sheer coincidence, but Pricewaterhouse- Coopers audited the books of both Global Trust Bank and Satyam. And Gelli’s links with Andhra Bank, Vysya Bank and with some of the biggest business houses from Andhra Pradesh are legendary!
So it is bail for a multiple passport holder. two months for an ED notice, freedom for an ex-banker, and four days to execute an arrest even after a public confession. “Mera Bharat Mahan!”
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at email@example.com
Graphics by Paras Jain / Mint