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Business News/ Market / Stock-market-news/  How ‘politically connected’ firms have fared on the stock market
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How ‘politically connected’ firms have fared on the stock market

Ambit Capital index suggests series of corruption scandals may have worked to these firms’ disadvantage

Photo: Hemant Mishra/Mint (Hemant Mishra/Mint)Premium
Photo: Hemant Mishra/Mint
(Hemant Mishra/Mint)

Mumbai: Companies that are regarded as being politically connected by Ambit Capital Pvt. Ltd have had a mixed correlation with the BSE-500 index over the past few years, the brokerage said in a survey.

The index was almost in sync with the BSE-500 until June 2009, then outperformed the wider group until June 2011 and has been underperforming since then, suggesting that a series of corruption scandals coming to light in the past few years may have worked to the disadvantage of companies perceived to have clout.

“The operating model where political connections used to be the core of competitive advantage has been broken," said Gaurav Mehta, who drew up the index. “Several reasons, including the splintering away of political power from the Centre towards regional parties, have led to this. More importantly, the rise of independent regulators and auditors along with legislations like the Right to Information (RTI) Act have been important factors contributing towards this."

The Congress-led United Progressive Alliance government has been battling a series of corruption scandals in its second term in office, including allegations of wrongdoing in the allocation of telecom spectrum and coal mines.

The Comptroller and Auditor General (CAG), in a report that was tabled in Parliament in 17 August, had said it had found irregularities in coal block allocations. The report pointed out that allocations were made in a non-transparent manner and pegged the notional loss at 1.76 trillion to the exchequer.

The telecom scandal concerns the 2008 allotment of second-generation (2G) cellular licences on a first-come, first-served basis. The auditor said the government lost as much as $36 billion in potential revenue by not auctioning the licences. The scandal forced the resignation of then telecom minister A. Raja, who subsequently spent some time in prison. He has denied any wrongdoing.

These and other scandals put the spotlight on the ability of companies to capture the legislative and policy processes to generate gains. The underperformance of Ambit’s index is seen to represent the caution that investors are exercising while investing in firms that are seen to be have such political clout.

“Business nowadays is affected by government policies which are fickle and ad hoc. So much so that even companies themselves are worried, so it should not surprise that investors are worried about investing in such firms," said Shriram Subramanian, managing director of InGovern, a corporate governance research firm.

The introduction of RTI and the jailing of top officials has had an impact on investors, said Nirakar Pradhan, chief investment officer at life insurance company Future Generali India.

“Investors are looking to invest in firms with good corporate governance and greater transparency. Emergence of proxy advisory firms such as InGovern and IIAS (Institutional Investors Advisory Services) in India...has put the spotlight on corporate governance," he said. “We have seen cabinet ministers going to jail in recent times. Hence, investors are apprehensive in investing in those firms which use their political connections to get business."

With elections to be held next year, investors are also treading a cautious path as measures may be withdrawn by a new government, the analyst said.

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Published: 03 Jul 2013, 07:03 PM IST
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