From the perspective of equity investors of any scale, the impact of the Supreme Court’s order on the telecom sectors has hardly any negative. Most of the negatively impacted companies are unlisted and the most positively impacted company—Bharti—has a wide ownership. Within mutual funds, it finds a place in the portfolios of as many as 350 schemes. And these are not small positions—most funds that are invested in Bharti have reasonably large investments in the stock. In sharp contrast, Unitech has no investment by any fund, but that should be obvious in any case.
However, there are some decidedly complicated broader implications. Generally speaking, investors and investment analysts are in the business of valuing out the positives in a company’s future while discounting the negatives. The Supreme Court’s decision has added a joker in the pack as far as the negatives are concerned. From now on, besides all the other negatives, investors will also have to take a view on the likelihood of something like this happening.
The stock price and the market valuation of companies will have to take into account regulatory and legal risk in a very new way. The new risks go far beyond what regulatory risks traditionally mean. There can be little doubt that there are many, many businesses in India that are built on a base that can’t survive a harsh light shining brightly on them. While this is true of practically entire industries like telecom, realty, mining and airlines, it’s probably true of many other as well.
Come to think of it, practically every part of the broad infrastructure sector is especially liable to these problems. Licenses, permissions, even land (as we saw in the Greater Noida affair a few months ago) can effectively just disappear overnight in one stroke of the judicial pen. There are various estimates being made of the exposure of upstream investors like banks and foreign parties in the 11 tainted telecom companies. However, the downstream mess, whereby employees and vendors will end up suffering will be much less obvious.
The current affair is unique in the involvement of foreign investors. It wouldn’t be surprising if debt as well as equity investors start looking at many more businesses more closely from this perspective. Think of it this way. Let’s say you are a equity or debt investor and an Indian business comes to you for getting a large bolus of funds injected. However, the business exists only because it holds a piece of paper from a government in India. And that paper could be removed from existence even a long way down the road after you have made the investments. Clearly, the current lot of cancelled telecom licenses are just the beginning. Down the road, this has the potential to be a far a bigger problem.
In a way, this struggle is inevitable and it has to be gone through so the sooner the better. Over the last few years, a lot of businesses seem to have gained advantages in questionable manner. Now, as the tide turns, so to speak we could see many more upheavals of this kind. At this point, there’s no way of avoiding them. In fact, it could get a lot worse before it gets better. Back when the current telecom scandal was just beginning to unfold, I remember meeting the promoter of one the newer telecom operator (one whose licenses got cancelled last week). He roundly abused the well-known CEO of one of the established operators and said that it was disgusting to see the holier-than-thou attitude of the established operators. ‘Every knew’ that they had all paid bribes in the previous decade to start their businesses. Once this thing gets going, no one knows where it will stop.
From an investment perspective, it’s yet another factor to consider, and an awfully hard one to get grips on, whether you are a small retail investor or the biggest FII.
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