India Inc. In Distress

A fear psychosis has pervaded India Inc. unleashed by a mountain of bad corporate loans and a dictatorial insolvency law. Alam Srinivas explores how financial terror has gripped the country.

Alam Srinivas

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 “a 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 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 favor of sovereign bonds ever since he was a joint secretary.

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 ₹10,000, instead of ₹7,100, if the dollar zooms from ₹71 to ₹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 importantly, increase their leverage by rotating the money.