Between promoters who are in jail, promoters who are on their way to jail and promoters who should have been in jail long ago, a number of Indian businesses are undergoing interesting times. Apart from the current and prospective jailbirds, there is also the large cast of businessmen who are waiting to be inquisitioned by various parliamentary committees, not to speak of the ones whose taped conversations are freely downloadable on the net.
From an investor’s perspective, you can no longer continue to ignore the fallout of these events on shareholder value. Investors need to have some awareness of whether a company can get embroiled in a crisis and more importantly, they need to take this into account while evaluating an investment.
Look at the scale at which some companies have destroyed shareholder value because of such issues. The worst offenders are obviously in the telecom and the realty sectors. Amongst companies that were once mainstream stocks with large capitalisations, the biggest such case is that of Unitech, which straddles both these tainted sectors. From its height to its recent bottom, Unitech managed to destroy over 90 per cent of shareholder value. Unitech’s story embodies everything that is wrong with Indian businesses. It was in the thick of the real estate boom-bust and then was among the biggest beneficiaries of A. Raja’s first-come first served license policy.
It made a huge killing on the license by selling stake in the telecom business to Norway’s Telenor. Soon after A. Raja was arrested, there were daily rumours of the imminent arrest of Unitech’s promoter. Now, over the last few days, Unitech’s stock price has shot up by almost 40 per cent.
Ostensibly, this is a reaction to an upgradation of the stock by JP Morgan. JP Morgan disingenuously refers to Unitech’s troubles as ‘newsflow around the telecom issue’ and lets it go at that. Apparently, the fact that the company’s promoters are embroiled in the thick of the biggest scandal that India has ever seen is nothing more than ‘newsflow’. That’s like dismissing a life-threatening disease as a bad x-ray. The fact that the newsflow reflects real events seems irrelevant to JP Morgan’s analysts.
It’s clear that the world of professional stock research exists on a different plane than the rest of India. The reality that is clearly visible to Anna Hazare and the lakhs of people who support him is breezily dismissed by these analysts as ‘newsflow’.
Unfortunately for the subjects of this newsflow, the scale of the corrupt business-political nexus has now assumed such massive proportions that something has go to give. Up till now, shareholders haven’t really been bothered if a company facilitates its business by any means. In fact, quite the opposite-the ability to do business by any means, fair or foul, has generally been a marker for success. This has been especially true in telecom, realty and other sectors that require close government action and case-by-case permissions.
Perhaps the times are changing now. The cynics may be right when they say that there will always be corruption, but that doesn’t actually matter. As long as there’s a strong public pushback against them, the corrupt and their cronies will keep looking over their shoulders, and things won’t cross all limits as they have done so now.