Interview with Uday Kotak: ‘Massive amount of Indian savers’ money is now going into few hundred stocks’

Also Read | Uday Kotak red flag over market rally, says savings going to ‘few hundred stocks’

Earlier the creditor lent money but he can’t get it back. In the leveraged institutions, that bechara (helpless) position is unsustainable. If you have borrowed money from depositors, our obligation to repay remains irrespective of what happens on the asset side. We have to ensure that the creditor is in a superior position as he has to protect the depositors’ money. Rightly, the balance has shifted in favour of the creditor. This is the big change which is happening. Today when we lend, we are feeling lot more confident. We have done our due diligence properly. We should logically be able to recover our money.

We have seen a surge in stocks over the last year with plenty of domestic savings flowing into the stock market. Are you worried about these valuations and is there is a bubble to be pricked ?

While we are in the right direction, I always worry about excesses. What’s the excess which worries me? Here we have got a wonderful situation where massive amounts of savings are moving to the financial savings. Within the financial savings space, (money flows) into mutual funds, unit linked schemes of insurance companies and directly into the equity markets. Money is coming to a broad funnel and it’s going into a narrow pipe where massive amount of Indian savers’ money is now going into few hundred stocks. And you come back to the question of how good is the governance of these companies. The amount of money that’s going into small and mid-cap stocks is something on which we have to ask tough questions. Is there a risk of a bubble?

Are you saying the market rally is a bubble and not based on fundamentals?

You’re pushing all this (money) into a narrow funnel which inevitably runs the risk of a bubble. Micro improving but the speed at which stock prices are going up is even faster. Micro is better and macro headwinds have started. The speed at which stock prices are going up is sheer money power.

In the past when we had scams, it took years for investors to return. Now that we have lot of retail investors too putting money in stocks, would you worry ?

Keep in mind now you have EPFO money, insurance money, pension, investors and savers money. People think nothing can go wrong. Sanguine gets the risk… next step of complacency. Therefore, I would increase my level of alert from the policy point of view and dramatically improve the level of governance and transparency.

Do you think the huge investment by foreign investors in Indian debt is a worry? How do you think foreign investment has impacted the ownership of Indian companies?

How are we filling up the loss (current account deficit)… through two routes — debt and equity. We have been conservative in general in debt. We have encouraged more and more foreign flows to come in. Because we have a shortfall in current account, what have we done? We have basically got some of our jewels majority foreign owned.

I can give the example of one of the most outstanding companies of our times – HDFC. In 1982 when I started my career, HDFC Ltd’s total market capitalization was Rs 500 crore and foreign ownership was zero. Today that Rs 500 crore has become Rs 275,000 crore. More than 80 per cent is foreign owned. Here’s a company whose core business is money from retail savers – Indian house owners. And of the entire gain made by that company, 80 per cent belongs to foreign investors. Why has it happened? Our policy makers, in their desire to be conservative on debt borrowings, opened up the equity. I’m not against opening up of equity. We should have opened up the strengthening of Indian financial savings 30 or 40 years ago. I think as a nation, and us as Indians, we should ask a question how are we going to address this?

Are you proposing curbs or policy action to restrict foreign ownership in Indian companies?

I’m not trying to put any curbs. We need to ensure out mindsets are there. Let me give you another example… in the context of banking. Four out of five Indian private banks have majority foreign ownership. Only one with Indian majority is us (Kotak Mahindra Bank). Voting on that is based on global proxy advisors. On the one hand, look at our banking system. Public sector banks are going through challenges. We’re giving more and more space to private sector banks. Foreign saver is going to benefit. What are we doing?

Let me give the comparison of America and China. The biggest growth companies in the US are Amazon, Facebook, Google, Microsoft and Apple. Go and check out. The majority of these companies are American owned. American savers benefited by them. In China, Alibaba, Tencents and Baidu. What’s the majority holding?

How do we get the balance right in creating such Indian owned companies in a market economy?

We must have mindset that for the right governed companies, we will want Indian champions on the basis of what they do in the marketplace and not based on favours from the government. The policy framework should encourage outstanding Indian companies over the next 10 or 20 years. And let broadbased Indian savers over time gain out of that.

Are you suggesting some kind of policy nudge to create Indian companies for Indian savers?

Some sort of direction. Direction to say that we want the benefits of fruits of our best governed companies to be shared more for Indian savers. Why is it not happening? It’s linked to the structural challenges of our current account. All that I’m saying is that create a policy environment which enables companies to raise capital freely. But what we are right now seeing is bubble or the risk of a bubble. Broadbase it by making sure that we have a lot more listed companies in India for Indian savers. Anything which is not of proper quality – which is why governance is important — ensure you take tough measures against them.

What’s the level of governance that you propose?

On governance my view is we must have the best among class rules so that minority savers and investors get protected. If in a company I own 100 per cent, even if there’s one share which is an outsider, it’s not my company. That one share needs protection.

What are the changing trends in the banking landscape? Do you see structural changes in the system?

When I look at banking, I think about three major mega trends which are happening right now. First is a dramatic shift in the industry structure. If you take incremental lending, private sector share is much higher than public sector. If this trend continues, in the next five years I see it becoming 70:30 (public-private sector size) 50:50. The second major structure is formalization of finance. People who used to put money informally in land or gold are moving into formal financial savings. The outshoot of this major trend is broadening of financial services beyond banking — for example, mutual funds. The traditional functions which were done by banking are broad-basing to mutual funds, insurance and equity markets. The third major mega trend is digital. Without necessarily going into the pros and cons of Aadhaar, digital combined with Aadhar is massive game changer.

How do we ensure that capital goes to the best governed companies? Do you think the banking governance structure needs to be changed?

I think a fundamental structural solution to public sector banking is a necessity. But as we do that strengthening Indian private sector banks is crucial… and ensuring that Indian savers benefit out of that. We don’t want the entire banking sector to be dominated by foreign money. Encourage Indian ownership. If a lot of financial savings are coming, how are we ensuring that it’s going into the best governed companies. There’s a need for raising the bar on governance. I’m against Indian champions with poor governance. I’m for Indian champions with best in class global governance.

In the past, there was element of creating Indian champions but with poor governance. That’s why this bank lending problem has happened. Support creation of Indian champions but they must be held to the highest standards of governance and not as cronyism.

Banks which were nationalised 47 years ago have now turned a full circle, weighed down by bad loans to several business houses. What do you see ahead on public sector banks?

In 1969 why were banks nationalised? It was nationalized because private sector banks were giving money to big business. Now public sector banks have lost money lending to big business. It took 47 years to get to the full circle back. The current Rs 2.11 lakh crore (recapitalisation) takes care of the current hole in the balance sheet. It may not be sufficient for growth capital. My view is that make some of the banks narrow and at some point of time you have to think about why do you need majority state-owned banks. But not now. I don’t think it will happen before 2019-20.

Now that oil prices are rising do you think that we lost in terms of a wasted opportunity when oil was at a low?

I will put it differently. We went for reforms. Some of the reforms have had significant execution challenges compared to what was envisaged. The intent of wanting to control black money is something we respect. But execution through demonetization could have been better. Probably yes. Similarly, one nation one tax is the right way to go. But the execution challenges we faced was much more than what was envisaged. The execution challenges did take up significant time.

With inflation rising, do you think we are set for an interest rate hardening cycle?

I think the interest rate dropping cycle is over. Rates won’t drop from here.

The proposed FRDI (Financial Resolution and Deposit Insurance) Bill has raised a debate on depositor protection. How do you view the new law?

There’s nothing as of today other than the belief and trust in people that government owned banks have an implicit government guarantee. There’s nothing written. The fact that each of the banks will have to live within their means is also an important signal. You’re not going to get a free ride at tax-payers money every time you have a problem. You want to protect the depositors’ mindset – finally your money is safe. At the same time, you don’t want the bankers to take it easy and fritter away public money.

Institutions have a key role to play in nation building. How important is their credibility and accountability in instilling public trust?

In India, we have a few temples in our hearts. Supreme Court is a temple. Election Commission, RBI and Comptroller and Auditor General – these are institutional temples which are the foundation of public trust. It’s extremely important leadership of these temples, which are not elected representatives of public, constantly and proactively demonstrate both through real action and perception, principles of accountability and sustainability. The fifth one outside, and the real protector, is the media.

These institutions are like Caeser’s wife. You not only have to be above suspicion, in reality you have to be seen above suspicion.

Is there a case now for revisiting the capital gains tax on equity?

Maybe time has come to look at whether the one year period should be increased to two years. This means only after two years you would consider long term. On dividend distribution tax (DDT), I believe its double taxation. There are three levels of tax… there’s an effective tax rate of 58 per cent. You have to simplify it. If you’re bringing capital gains tax, you have to nullify this (DDT). I think this may not be a bad idea. Corporate tax should be brought down and remove all the exemptions.

What’s impact of US markets, dollar and inflows on Indian economy?

The question is how is US President Mr Trump managing record US markets and the weakest US dollar? I saw last night the US-Euro rate was at 1.22. People are using it will go to 1:1. Imagine the boost the weak US dollar is giving to US exports. We are actually on the other side. Our currency (rupee) is strengthening while the macro is getting tougher because of investment flows. Flows are sheltering the inherent challenge to a weakening macro including weakening current account deficit of India.