Investment or lottery?

Low entry barriers to companies going public and raising public money has given India’s capital market the dubious distinction of having among the largest number of listed companies in the world, as the on-going series— ‘Loot and Scoot’—in the Express, highlights. At the same time it has made equity investment so risky that investing in a public issue is little better than gambling or buying a lottery ticket. Of the 6,000-odd companies listed on the Bombay Stock Exchange (BSE), a few thousand are being suspended or delisted every year because most of them are reduced to shells with no trading volumes.

The promoters of these companies, have walked away with a whopping Rs 10,000 crore of investors’ money and, in the process, killed the primary market for over seven years. Industrialists and investment bankers however argue that that equity investment is essentially risk capital, which means that investors should be prepared to lose all their investment. What they conveniently forget is that although equity is risk capital, the risk is different from gambling. It is a calculated risk, based on project details and profit projections made by the management in the prospectus, which is a legal document. However, shoddy investigation and enforcement has allowed companies to loot public money and to scoot without any fear of punishment. While some of these companies have simply ‘vanished’ others have siphoned off several hundred crore from mega projects that raised institutional finance and funds from individual investors. While the latter category of scrips remain listed, the share price has often dropped to a few paise per share.

Over the years, each successive scam has raised the entry barriers to prevent shady companies from raising public money and disclosures in the prospectus have also become very detailed. More recently, the Companies Act (Amendment) Bill 2003 proposes to plug the diversion of funds through the investment company route. There is also a move by the law ministry to make diversion of funds a crime under the Indian Penal Code. But all this is cold comfort for investors who have been repeatedly looted by corporate scamsters through a variety of investment vehicles. Whatever the size of the scam, the bottomline for the investor has been that their money has vanished and the scamsters have never been punished. And, although the belated bolting of various stable doors is welcome, it is certainly not enough. The government needs to revive the primary market by rebuilding investor confidence. But that can only happen if it begins to complete decade old investigations, punishes a few scamsters, forces them to disgorge their ill-gotten wealth and return the money to investors. Otherwise, the Indian capital market will fail in its primary function of financial intermediation and turn into a large, high-tech gambling arena for a small group of speculators.