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Business Commentary/Harshad Mehta

Wake up, Indian leaders! We are part of global finance

Anyone wanting a better commentary on how stock markets the world over have evolved from being dominated by financial institutions to now being dominated by corporates; anyone wanting an instance of how capitalism has helped improve the world; anyone wanting an instance of how corporate dynamism and responsiveness has helped increase shareholder wealth; anyone wanting an example of how sentiment's and corporate communications can add to market capitalisation without a proportionate investment in the market; and anyone wanting to see how India lags behind the world in investor-friendliness needs to look no further than the crash in the global stock markets over the last week.

Even as the stock markets were plunging, the CEOs of Intel and IBM emerged with a simple statement: they would pump funds to buy their own stock. Given the price prevailing on the markets, these CEOs felt that their respective scrips offered an excellent opportunity. One of the companies immediately committed $3.5 billion -- the kind of money that exceeds the total investment in India by FIIs in a financial year -- for equity buyback.

It is an amazing instance of investor sentiment and confidence that these statements -- not any genuine buying -- resulted in a sharp rebound in the market. Wall Street revived in the face of this corporate aggression and the markets the world over, inspired, turned around in a hurry. In my estimate, the crash of 1997 will be remembered more for how two CEOs in America helped protect the savings of those living as far as Mumbai (Bombay), Manila and Manhattan who have either never used a computer or who cannot think of a chip as anything beyond a potato wafer. That's globalisation.

But as an Indian, I am embarrassed. The size of the investments made by FIIs in the country's secondary markets is estimated at around Rs 300 billion -- the kind of money that has admitted us as part of a borderless world. When the market dropped seven per cent on Black Tuesday, the drop in the country's market capitalisation was almost equal to this amount. Which means that the amount that has admitted us into the global playing field was wiped out in a day. Hypothetically assume that had the same amount of foreign investment had gone into assets and disappeared in a single day, it would have been the biggest national tragedy in the country's independent history.

What amazes me is the global concern about the collapse of the emerging markets. The IMF has given Indonesia a loan of $36 billion. The US has advanced $3 billion. If this is the kind of concern that the global agencies are showing towards the emerging markets in Asia, my question is: what is the Indian government doing in the face of this tragedy?

Nothing.

When the prime minister was asked about the drop in the stock market and how this would affect the nation, he confessed that he had no clue since the finance minister was out of the country and some of his economic advisers were also away. The most important man in India -- the finance minister -- had one presumes no cellphone with a global SIM card on which he could be contacted within minutes for an immediate response to the situation. It was only a day later that the FM could emerge with an observation, but by then his observations were of little importance. Intel and IBM had already saved the world. (For Indians wanting some comfort, we had to be satisfied with an immediate response from President Clinton who insisted that the US economy was robust and would continue to grow).

How much the world has changed. In 1991 when Saddam Husain stepped into Kuwait, stock markets the world over dropped over fears that the price of oil would rise and jeopardise the global economy. The Indian stock markets refused to be intimidated and we embarked on a bull run. Over the next few years India was to have its private honeymoon independent of global trends.

But that was one of the last instances when India moved independent of the principal global trend. Thereafter, whenever the global markets have sneezed, India has caught the cold. The irony: when the Indian market was in the 4000 range (the BSE Sensex), the Dow was around the same level too. But the Dow has doubled while the Indian market dropped. Now that the Dow has retracted from its all-time high, the BSE Sensex also appears to be heading south. Inference: we were never partners in their euphoria, but are being forced into sharing their misery. Strange!

Even stranger because what is cheap in India is now getting ridiculously cheaper. Escorts registered a 65 per cent increase in the net profit for the first half of 1997-98 and the stock has gone down. Hotel Leela Venture reported no drop in earnings -- in what is generally accepted as a bad year for the hospitality industry -- and the stock sells for a fraction of the resale value of the property. Reliance reports results that industrialists see in their dreams but the stock turns out to be nightmare. On a broader scale, the Indian economy does not appear to have done as badly in the first half as a number of observers would have imagined, which means that once the impact of the still-lower interest rates filters down to the economy in the busy second half, there could well be an interesting industrial revival. BPL, India's largest consumer electronics entity, appears to be showing the way: the media reported that against a 12 per cent expansion in the Indian colour TV market in the first half of 1997-98, BPL has grown 24 per cent. So there is something that most of playing the market do not know -- and it is optimism!

The basic thrust of writing this column is not to confuse the reader. I am on the contrary asking a simple question: what is the Indian government going to do to protect the wealth of all those who hold shares in Indian equity?

The time has come when the government cannot be excused and let off with the argument that it is only playing the role of a regulator and pray what can they do in the face of the global financial onslaught. If the SEBI can make dematerialised trading in all stocks compulsory by January 1998 -- which a number of industrialists have called unreasonable for the paucity of time -- then I wonder why the Indian government cannot move in double-haste time and make equity buyback legal and permissible.

I can visualise a simple scenario. If equity buyback were possible, Reliance could well have stepped in to buy its own stock and stopped it from dropping below Rs 200 (ex-bonus). The sentiment would have improved as a result and this revival would have rippled across a number of other pivotals. The Sensex would have been relatively less hammered and the broad cash list -- which draws inspiration from the Sensex -- would have survived with less damage. In our own way, we would have created an insurance against large and unexpected meltdowns in the international markets.

I continue to be bullish on India. Hong Kong and Indonesia have suffered because interest rates have begun to rise and some of the banks in the latter country have battered balance sheets because of defaults arising from the property markets. In India, interest rates are heading down, the defaults have not been as bad as one would imagine and stocks are probably the cheapest across Asia. More importantly, the rupee has held forth even as other Asian currencies have tumbled. In this scenario, if banking finance liberalises, and options and futures come into play, there is likely to be a greater investment inflow into Indian equities.

I dream of a day when a Reliance buyback leads the rally in the international markets. But when I rub my eyes and see reality, I realise that our members of Parliament have first to converge and make this proposal a legal reality.

God knows when.

Harshad Mehta