Freeloading Promoters ~ Love the RBI Governor,Raghuram Rajan’s Strong Speech at the Third Verghese Kurien Lecture at the Institute of Rural Development Anand yesterday
…resonates with the tagline of my blog “In India, Companies may fall sick but Promoters rarely do !”
Here are some superb extracts from the Address as linked above
” The Promoter enjoys riskless capitalism -even in these times of very slow growth,how many large promoters have lost their homes or have had to curb their lifestyles despite offering personal guarantee to lenders?”
“We need a change in mindset, where the wilful or non-cooperative defaulter is not lionized as a captain of industry, but justly chastised as a freeloader on the hardworking people of this country,”
“In India, too many large borrowers insist on their divine right to stay in control…”
“…the promoter threatens to run the enterprise into the ground unless the government, banks, and regulators make the concessions that are necessary to keep it alive. And if the enterprise regains health, the promoter retains all the upside….!
“No wonder government ministers worry about a country where we have many sick companies but no “sick” promoters.”
“I also don’t want to argue against risk taking in business. If business does not take risks, we will not get architectural marvels like our new international airports, the “developed-for-India” low cost business model in the telecom sector, or our world class refineries. Risk taking inevitably means the possibility of default. An economy where there is no default is an economy where promoters and banks are taking too little risk. What I am warning against is the uneven sharing of risk and returns in enterprise, against all contractual norms established the world over – where promoters have a class of “super” equity which retains all the upside in good times and very little of the downside in bad times, while creditors, typically public sector banks, hold “junior” debt and get none of the fat returns in good times while absorbing much of the losses in bad times.
“The public believes the large promoter makes merry because of sweet deals between him and the banker. While these views have gained currency because of recent revelations of possible corruption in banks, my sense is that Occam’s Razor suggests a more relevant explanation – the system renders the banker helpless vis-a-vis the large and influential promoter.”