Richie Rich!

RIchieRich

 

Richie Rich! This is my favourite comic character, in fact I still read these comics when I get a chance to read them. This kid is from a rich family and has everything that one may dream of. I used to wonder, how hard his family must have worked to reach this stage. Even today I dream of becoming Richie Rich but now there appear to be simpler ways than working hard, slogging all through life!

Nirav Modi has shown us the way of doing these things. This Modus Operandi had started with Harshad Mehta when he got a bogus Rs.200/ crores fixed deposit certificate. This was done in connivance with some bank official from Bank of Karad. The original FD certificate was for Rs.2/ crore and was conveniently changed the certificate to Rs.200/ crores. Using this fictitious certificate Mehta borrowed money from institutions, and rest as they say is history. When you borrow money against a Bank Deposit, it is assumed to be correct one in all respects and loan is simply given against the most liquid asset. Bank of Karad later went into liquidation. Why work  hard when you can cheat? A little jail term and some bad name is ok as long thousands of crores are available to you.

What we all have seen is that real money is created over a period a few generations of consistent efforts and hard work, sometimes a bit of luck also plays part. But during last 50 years, share markets, and IT companies with their very high  valuations and hence their skyrocketing share prices, have created billionaires. But in share markets real billionaires are far and in between. Not like those from IT industry. Classic case is Jeff Bezos, founder of Amazon. Even after 25 years in business, Amazon is constantly in loss, but keeps on doing business, gives deep discounts on products, Bezos is currently the richest person in the world. Some years back he bought iconic Washington Post for US $ 250 million , in all cash deal. These people have huge personal wealth, they have money to pump in business continuously, but their companies are loss making all the time! But at least they are not cheating banks and you and me!

In normal course, non- IT businesses do become bankrupt, fail but in IT industry failed companies on your CV make you special! Venture Capitalists pump more money in your next  ventures. Cheating happened to some extent, like in case of Enron. There are normal cheats but those of the size of Mallya’s and Modi’s were not many. There was a classic case of Chrysler corporation, who were given special loan by US Government. After a couple of years, this loan was repaid! The Chairman, Lee Iacocca at that time made a famous statement. “We borrow the money the old way, we repay it!” This one statement explained the way the business is done, world over, including India !

But with Modi’s and Mallya’s of this world, things are different. In recent years, there is a big list of people, from different sectors of industry like, power, construction and steel. These companies were given such huge loans that they have sucked the banks in trouble because they are all on the verge of bankruptcy. The beauty of current law in India is that the personal assets of the defaulting promoters cannot be attached. So, most are enjoying life as if nothing has happened.  A bankrupt company’s assets were being auctioned. The original promoters had failed to repay Rs.800/ crore. Original promoters took part in the auction and bought the same assets back at Rs.50/ crores; due to declaration of bankruptcy Rs.800/ crores went into thin air! A law was recently modified to stop people from cheating further.

In case of Modi, fraudulent LOU (Letter of undertaking) were issued by Punjab National Bank. Officers from the Bank issued these without any guarantees. This issue came up in January as the suspect officer had retired and when Modi needed fresh LOU’s, the new officer asked for guarantees. Modi’s people said that they had never given any guarantees before. Why they are being asked now? The whole Pandora’s box opened!

There are many checks and balances in the system but those who are supposed to check, break the rules, how to stop such frauds? It seems that the sizes of fraud are increasing in proportion to inflation and lifestyle. With whatever wealth they had,  before fraud, both Modi and Mallya could easily have lived with whatever lifestyle they wanted! But why do something fraudulent? What is enough money? It comes to basic question; how much land does a man need? What does one do with tens of thousands of crores of Rupees? There is a reverse trend started by Bill Gates who is encouraging the superrich to donate their assets because those assets by remaining under control of an individual or organization, remain idle. If these are donated and correctly used, world will be a better place to live.

In case of Modi he has been living in Europe most of the times, in case of Mallya also it is the same! At least at present they are lucky otherwise, when and if they are brought back to India, they will meet the same fate as Sahara Chief, Unitech boss, Jaypee team and now probably D S Kulkarni. What is the thinking of these people? All these people had done reasonably well in life, till they started doing wrong things. What were they trying to achieve? To become biggest in their field? These four groups have cheated individuals like you and me! Many of us have taken loans to buy flats, many have given life’s savings as FD’s after retirement!  Now there is no way for any new infusion of funds; income for these retired people have stopped, and capital is locked!

Let us hope that government of India, irrespective of party in power, continues the good work they are doing. They are ably supported by our courts by giving strongest possible indictment for bad deeds of the suave looking bad guys! But in discussions with some friends, I found that some people have sympathy for the these fraudulent people! They felt that it is just bad luck in their business cycle and people should support such business people. If you are supposed to be doing Rs.10,000/ crores of projects, and cannot raise Rs.50/ crores to repay depositors money, you do not deserve sympathy, they deserve law to take over and may free stay in Tihar jail or jail of your choice!

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Who is the worst? 

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!