Mining shares fell on Thursday after the Supreme Court banned mining in the Bellary district of Karnataka and the state Lokayukta accused companies such as Adani Enterprises, Sesa Goa, JSW Steel and National Mineral Development Corp. of benefiting from the mining scandal.
This was just the latest episode of what seems to be a growing wariness among investors of companies that have strong political links that allowed them to take advantage of government policies in sectors such as telecom, real estate, mining and petroleum. Ambit Capital estimated in June that shares of 75 such companies underperformed the benchmark Sensex by 14% over the past 12 months.
The loss of confidence in these companies is basically a reaction against the spreading scandals that have sent several chief executive officers and senior executives to jail. But it also hopefully signals a change in investor preference away from companies that prosper on the back of political patronage rather than because of their ability to compete based on factors such as brands and innovation.
One of the most popular indicators of growing crony capitalism in India is that the Indians who make it into lists of the world’s richest people have usually made their fortunes in sectors that are dominated by oligopolies and where access to government licences and clearances are important parts of the success formula. Many of these sectors are also protected by high import tariffs or restrictions on foreign direct investment. The few worthy exceptions were found in software and pharmaceuticals billionaires.
Mint has over the years used these plutocracy rankings—based on market value of the firms they control—to argue that we are still far away from liberal and competitive capitalism. The recent selling of shares in oligopolistic sectors with dollops of government patronage could hopefully send investor money towards businesses in more competitive industries.
Has the extractive industries sector become a political liability for investors? Tell us at firstname.lastname@example.org