Recently we have seen a spate of financial defaults where the so-called giants in industry and business have financially played havoc. Mallya, Sahara Chief Subroto Roy, Unitech Chandras list goes on and on and on! Question came to my mind who is the worst of the lot? I missed on adding the name of our local hero from Pune D S Kulkarni, who has joined the elite list though not on that scale.
In such matters two major aspects need to be checked. Whose action has caused the problems to the health of banking & financial system, and whose action has caused the most damage to the livelihood of individuals besides the banking system? The first group which has caused the issues to banking system are led by Mallya. Before he could be “caught”, he managed to change ownership of companies and to my knowledge companies are running reasonably alright! It appears that both Mallya and the new management have managed to siphon money to tax free heavens. Mallya apparently has billions of dollars in his personal name and has managed to evade tax in many locations in the world. How to get money back from such people? Assets he created all over India have become tricky to dispose-off, now that these have become tainted assets. Same issue is there in case of Amby valley, near Pune, huge asset created by Roy!
How to decide who is the worst of the lot? My thought process tells me that those who have cheated individuals, many of them retired, who invested most of their life savings, are the worst culprits. By this test Mallya may appear to be a saint. No individual has launched any complaint against Mallya. By this logic other three appear to be major culprits. Roy and Chandra are in jail for some time, thanks to Supreme Court; has their families’ life style changed, no way! They have no money to return but have enough money to blow! Our friend D S Kulkarni’s family lives in rented flat! So sad! Not really, the flat is in Trump Tower in Pune with a rent Rs. 400,000/ per month! Extremely high by Indian standards. Mallya’s case is totally different. He moved to UK when there was no criminal case against him. So, when he entered UK, he was not “tainted”! The propah British law says that when Mallya entered Britain, he was not “tainted”. So procedures had to be followed, as he was not a fugitive when he entered Britain! British took their own sweet time to start the extradition processes. The Indian authorities are now tensed up and keeping their fingers crossed. In another similar case in Britain, the judge who will be handling Mallya’s case gave a decision that the concerned culprit will not be extradited, as jails in India are in extremely poor condition. Same logic may be applied in Mallya’s case!
I don’t have knowledge of various laws but my common sense tells me that such people’s factories shut down, businesses close down; the so-called owners are still having fun whether there is profit or loss. The workers, financial institutes, and vendors are facing the main brunt. I remember when in Pune, Garware Nylons shut down, the loss was to the workers, vendors and banks! Garware’s have been moving around in their helicopters!
Why does this happen? How is this allowed to happen? Where is the lacuna? When any organization starts, it needs money; it gets money in the form of equity, loans and fixed deposits and working capital. The persons who start the company are also expected to put in the seed capital. Everything works quite all right in the initial phase. How business runs, depends on many factors some under control and some not under control. When people invest money in business as equity, it is a risk taken knowingly. When business does well people get dividend; and at some stage some investors liquidate their shares, based on share market variation and make their kill. But when the business does not perform well they are in for a loss. This is a known risk for investors. Same things happen in case of fixed deposits by people. Interests are paid on time, whenever requested deposits are refunded. Problems begin when businesses start floundering. Promoters, at this stage probably start treating FD’s as equity! If business conditions deteriorate further then the deposits become Ponzi schemes! Take deposits from someone promising high rate of interest and try to pay interest to older depositors. Vicious circle goes on and on and on till the court and Police cases start. Unfortunately for individuals, the first right on recovery from such organizations is with financial institutions!
In the meanwhile, the smart promoters have done something in between. They take deposit under the name of one company and transfer the money to their other businesses. This is done like hedging when intentions are not good . So, their other businesses run well. The assets and incomes made in these businesses are not in the name of original promoters of the main company. You don’t need to own a helicopter or a Mercedes to use it! 😃Holidays in cool climes continue because it is never done under parent company. Wealth is flaunted and social activities continue. I am by no means a socialist or a communist but what I have just explained is simply cheating. Small vendors, retired teachers, others are affected badly. This is what is happening in case of D S Kulkarni. He even has gumption to claim that his business started suffering when Lehman Brothers collapsed in 2008!
How do these people maintain their lifestyle even after they are in jail or court cases are on? Here is an example from building trade. It is pretty simple. Company A buys a plot of land. B, C, D and E are other companies from the group. The plot is finally purchased by E following the straight path via B/C/D. By the time plot is in possession of E its price maybe five times! This is loaded on the project to sell homes to us. A is the company who takes FD’s from people but income of A is meagre and this money is routed to “other” companies. A & E ownerships may have some connect but B, C, D are owned by other family members or are trusts. These companies will have high profits! Another way of making the killing is that when E sells a home either B/C/D gets say 3 % commission on each sell as they are “Sells Agents” for E! Got it.
What is the solution? Believe in market rumours! Smoke is seen only when there is fire! It is impossible to know which organization can go into difficult times. The moment you hear some story, withdraw money from such organizations. Don’t keep on hoping that they will come up again! If they do come up put your hard money with them again! After all it’s your money! My take is that those who put individuals in difficulty are worst of the lot!