India Inc. in distress

This is the age of terror – physical (blasts, shootings, and crashes), cyber-warfare (Russia’s alleged influence on elections in the US, Latin America, Africa, Europe and Asia), and financial (attacks on currencies, stocks, and businesses). India is clearly affected by the first two, which is evident from events in Kashmir and the North East, and the extensive misuse of social media for political and electoral reasons. However, a sacking and a death in the past few weeks indicate that financial terror too has gripped the country.

Last month, the body of the 60-year-old VG Siddhartha was recovered from a river in Mangalore (Karnataka). A mysterious letter purported that he was troubled by the debt in his businesses and the aggressive attitude of the income-tax authorities. The letter, whose authenticity will be investigated by Ernst & Young, talked about “pressure from one of the private equity partners forcing me to buy back shares”, “tremendous pressure from other lenders”, and “lot of harassment from the previous DG, Income Tax”.

In early August, Finance Secretary Subhash Garg was sacked; officially, he was shifted to the power ministry and he then opted for voluntary retirement. The allegation against him was that he had deliberately forced Finance Minister Nirmala Sitharaman to include a new policy to raise foreign money through sovereign bonds designated in foreign currency. This was done without proper thought and without understanding its implications.

The first was clearly a case of financial terror, a terrifying wave that was unleashed by a mountain of bad corporate loans, followed by a dictatorial insolvency law. The new rules allow public and private lenders to declare any company bankrupt if it was not in a position to repay its loans, whether deliberately or because of external factors not in its control. This created a fear and scare among the entire business community, especially those who had built up huge debts for expansion and growth.

Although it wasn’t obvious, the controversy over sovereign bonds was related to global financial terror, and international finance lobbies that are at each other’s throats at every opportunity. India has long been their battleground: one side wants the country to raise foreign capital in foreign markets and the other is scared to do so. Garg was willy-nilly an important cog in the first one, and he was in favour of sovereign bonds ever since he was a joint secretary.

An argument in favour of sovereign foreign bonds is that it enhances global liquidity. In effect, it paves the way for the government to easily raise money, be less dependent on multilateral agencies and bilateral partners

It is a simple case of cheap credit. However, inter-related with it is the argument that sovereign foreign credit can bring countries down on their knees. Foreign bonds can be sold at lower interest rates because the respective dollar or yen rates are lower than India’s. But this logic doesn’t take into account the genuine possibility of rupee devaluation. If this happens, the payout of the principal amount can be high. A bond of $100 may be issued at 3% interest instead of 10% but the principal repayment may shoot up to Rs. 10,000, instead of Rs. 7,100, if the dollar zooms from Rs. 71 to Rs. 100.

The second rationale is that foreign currency bonds can woo a larger and newer set of global investors. Since they are tradeable in foreign markets, they can be easily purchased by anyone, including those who are not registered in India. Indian laws force investors in the domestic stock and bond markets to file strict KYC norms. Ease of finance business is crucial for large investors, especially the hedge funds, which invest trillions of dollars every year and, more important, increase their leverage by rotating the money.

According to former RBI Governor Raghuram Rajan, who looks like a part of the anti-lobby, therein lies the catch. “We should worry about the nature of such investors. If they cannot be bothered to register… will they really be the kind of investors we want?” he asked in a column. Since the government cannot control who buys the foreign currency bonds, illegitimate narcotics, gun running, and smuggling money may find its way into sovereign bonds. More importantly, bond traders will control India’s destiny.

Not too long ago, a renowned financial expert said that earlier he thought that he would like to be born again as a Pope or a prime minister. But now he is convinced that he would like to be a bond trader in his next birth. The reason is simple: bond traders today can bring governments down, and unleash waves of financial terror on elected democracies and dictatorships. They can ruin currencies, negatively influence trade deficits and the fiscal state of a nation, primarily through trading in sovereign bonds.

Since the 1980s, in the past four decades, several nations have faced the wrath of these traders, who decimated their bonds, which led to financial ruination. It happened in Latin America (Mexico and Argentina), Asia (East Asia and Russia), and recently in Europe (Greece). Traders have also directly decimated the currencies of New Zealand, Germany, and Britain in the past. The Euro, which became more powerful than the dollar, too was successfully attacked.

Yet another logical argument in favour of sovereign foreign bonds is that it enhances global liquidity. In effect, it paves the way for the government to easily raise money, be less dependent on multilateral agencies (World Bank and IMF), and bilateral partners (Japan). Over time, it allows the country’s public and private sector too to raise money abroad, and at cheaper rates. When the interest on government bonds becomes the benchmark, companies may have to pay a slightly higher interest. Today, due to lack of such a benchmark, corporate interest rates are excessively high.

Bond traders today can bring governments down: they can ruin currencies, negatively influence trade deficits and the fiscal state ofa nation, primarily through trading in sovereign bonds

Added to this was a technical logic. As Rajan wrote, “They (global lobby) argued that Indian government’s foreign issuances at different maturities would create a yield curve that would allow foreign issuance of Indian corporations to be more easily priced.” However, Rajan dismissed it with the contention that even bonds by “quasi-sovereigns like State Bank of India” can provide benchmarks to global traders to price other Indian bonds.

The final argument in the case of sovereign bonds is the proposed internationalisation of the rupee. Over the past few years, Indian policy makers have evinced the idea to urge other nations to save their foreign assets in rupees, rather than dollars and Euros, which are the most-favoured currencies. This will greatly enhance the soft financial power of India, and glue it more intimately with a clutch of smaller and mid-size economies. But to achieve this objective, regular issues of sovereign foreign bonds are crucial.

Given the pros and cons, an issuance of bonds of $10 billion can be a good beginning. One, it will start a new trend, and the government can monitor how it trades globally. Two, such a small amount will not cause trouble to a nation with foreign exchange reserves of more than $400 billion. Three, it cannot provide any leverage to the traders to hurt the Indian economy. Finally, it can help Indian companies to somewhat lower the interest on their bonds.

However, the government succumbed to both the pro- and anti-sovereign lobby; like the former, the latter included several former RBI governors who publicly opposed the move. The pro-sovereign lobby was left licking its wounds, and wait for the tide to turn again. Either way, the point is that the Finance Ministry and the Prime Minister’s Office did not take an independent decision – when it was announced, and when it was silently withdrawn.

Siddhartha’s death, which seems like a suicide, was related to financial terror of a different nature, but which seems to have become the norm. In a bid to deal with mounting bad loans, especially with the public sector banks, the government came up with a drastic solution. It gave powers to the lending agencies to come together, and declare any company bankrupt if it fails to repay the loans. It didn’t matter whether the entrepreneur was a genuine or wilful defaulter, honest or dishonest, crook or lawful.

In a bid to deal with mounting bad loans, the government came up with a drastic solution. It gave powers to the lending agencies to come together, and declare any company bankrupt if it fails to repay the loans

Suddenly, everyone, whose debt was unusually high, was scared, especially when thousands of large and small businesses were dragged to the National Company Law Tribunal (NCLT), which could decide the fate of insolvent firms. NCLT randomly changed the ownership of these companies, either by agreeing to the bidders’ demands for huge haircuts on loans, or deciding to auction them off. The previous owners had no choices. Neither did the bankers, who had to listen to the NCLT, and its insistence to sell off to the highest bidder, or the one who agreed to the lowest haircut.

Companies that were built over decades by business families were forcibly snatched away from them. Most of them were indeed crooks, had siphoned off huge amounts from their companies and, therefore, couldn’t pay their loans. However, there were many who were law-abiding; their companies went down the drain either because of external shocks (financial crisis of 2008), internal turmoil (consistent slowdown), or sector-specific reasons (fall in demand). Fear now became pervasive within India Inc.

Coupled with this was tax terror. In its rightful fight against corruption and tax evaders, the government armed the tax officials with more powers. In effect, the authorities believed that everyone was dishonest, and the liability was on the businessperson to prove that she was not. Everyone was guilty unless she could prove otherwise. While this may be right when one deals with dangerous criminals (narcotics-dealers and arms merchants), it cannot become the norm. But it did, and further frightened India Inc.

Siddhartha’s case was one of a mixed bag. After his death, he was generally touted as the ‘King of Coffee’, who ran a successful chain, Café Coffee Day, and built up a global empire in just a few decades. He was identified as how an honest entrepreneur can succeed in the country, and how one doesn’t need to wriggle around the laws to become successful. Dozens of articles and first-person accounts praised him lavishly. He emerged as a model-entrepreneur.

It is also possible that he was indeed hassled by the tax authorities. As he wrote in his letter, whose genuineness will be investigated by Ernst & Young because the signatures don’t match, the income-tax officials attached the promoters’ shares twice “to block our MindTree deal, and then taking position of our Coffee Day shares, although the revised returns have been filed with us. This was very unfair and has led to a serious liquidity crunch”. What he didn’t say was that the situation could easily lead to a loan default – and the empire slipping away from his hands to another owner. Of the 52 companies in the group, Coffee Day Enterprises (CDE) is the parent, and the rest are subsidiaries, associates, and joint ventures. MindTree, an associate company, where the promoters held a 20.3% stake, which was later sold to L&T for almost Rs. 3,300 crore. The consolidated group turnover was more than Rs. 4,300 crore in 2017-18, including MindTree’s contribution, and the profitability was quite high – 20% earnings before depreciation, interest, and tax. However, the coffee business incurred huge losses.

Suddenly, everyone, whose debt was unusually high, was scared, especially when thousands of large and small businesses were dragged to the National Company Law Tribunal (NCLT), which could decide the fate of insolvent firms

Most of the profits, at least CDE’s shares proportionate to its holdings, came from MindTree, Rs. 93 crore. Of the 29 profitable companies in the group, 23 had annual profits of less than Rs. 10 crore each. Twelve companies incurred losses, and there were no profit figures given for another 10. The latter may be shelf, defunct or non-operational. Thus, the Coffee Day Group was unstable, and on hugely shaky ground. Without huge cash inflow, like from the sale of MindTree, it would have collapsed.

Hence, the income-tax authorities’ decision to attach these shares proved to be a huge blow to Siddhartha and his future as a businessman. His lack of success to turn around the coffee business, along with some others, weighed on his head. Cash flow is an inevitable Damocles’ sword that hangs over many businesspersons. So was it with Siddhartha. His future depended on the sale, which was blocked. So, he was in a fix. His method of un-fixing it was allegedly suicide, or his death. Such can be the result of financial terror.