Why should sane investors pay a dear price
for the folly of a greedy handful?
I am worried. Extremely so.
The entire CRB Group is up for sale or liquidation.
Chain Roop Bhansali has disappeared. And so have the hard-earned savings of
thousands of small depositors.
But if you think this is another bleeding-heart appeal that these investors
should somehow get their money back, think again. I am fervently hoping
that they don't -- and certainly not via the route of bleeding-heart
politicians out to make hay from their distress. Or via the route of the
regulatory authorities -- under pressure from the politicians -- making an
exception in this case.
There are three fallouts to a scenario where the CRB Capital Markets fixed
deposit investors get back their money -- or even any percentage of it --
out of turn. That is, before any of the shareholders or secured loan
creditors get theirs. All three fallouts are scary enough to have
me worried to death. Because all three will mean the death of the financial
markets as we know them.
Fallout One. If I invest in a company that offers me more than 20 per cent
annual returns on my money with no thought to the safety of my principal, I
deserve to lose it. In the case of CRB Caps, there were more than enough
indicators that all was not hunky-dory with the company or the group.
(How it was even allowed to raise money from the public is one of the
mysteries of our regulatory processes, but that is not the point here.
Neither is the very mysterious fact CRB got a licence to start a bank
when solid-foundation groups like Reliance and the Birlas were denied
one.)
Anyone with even a cursory eye on newspaper headlines would have run a
mile from an agent or salesman peddling a CRB deposit. And yet many did
not. Many chose to assume the high risk associated with investing in CRB,
when put against the 20-plus per cent returns being offered.
If these people are allowed to get their money back out of turn, will they
learn their lesson? I doubt it. They will get the message that no matter
what risk they take chasing unnaturally high returns, there will always be
a politician who will provide them with a soft cushion when they fall.
Fallout Two. Fly-by-night finance companies will be getting the message
that if they can arrange matters well (meaning: make provisions for their
disappearance the way good ol' Chain Roop has done), they can take the
money and run. There will always be a bleeding heart to take care of the
depositors they have left in the lurch.
There will come a day when phenomenal rates of return will be offered by
the flimsiest of finance companies. They will all receive a tremendous
response. And the really responsible ones will be left out in the cold.
Are we willing to take such a long-term burden imposed by a few
muddle-headed depositors's inability to balance risk and return?
Fallout Three. Given a few politicians's desperation to be seen as the
heroes of the small investor, rules and regulations will remain simply
squiggles on paper. We have a very clearcut set of rules that define the
order in which creditors are paid when a company collapses. The secured --
against the assets of the company -- creditors take precedence. That is why
loans raised against assets do not carry a very high rate of return. Once
all the secured creditors are paid off, comes the turn of the unsecured
creditors, who generally are offered a higher rate because their risk is
relatively greater.
What is the point of having these regulations if a politician can ask the
authorities to bend them in any case that becomes high-profile enough to
fetch high returns on the political and media stage? Where are all these
bleeding-heart politicians when it comes to the tiny chit funds that go
under on an almost daily basis in Calcutta? Are those depositors' monies
not worth saving as well?
The rest of India (as opposed to the greedy handful who are now wailing
about their lost life's savings in CRB Caps) should send a strong message
to the political firmament that any politician who tries to act as a
'saviour' to the CRB handful will get this handful of votes, certainly. But
not the votes of the rest of the investing community.
Why should the majority -- who are sane and safe investors -- pay such a
dear price for the folly of a greedy handful?
I'm afraid I feel no pity for the retired government servant who invested
Rs 50,000 in CRB and now is terrified his wife will find out about her
husband's folly. Did he spread his investments like any good investor, or
was Rs 50,000 the bulk of his savings? If the former, his lot is not all
that pitiful anyway. If the latter, well he proves the point I am making
about insane, greedy investment strategies.
Neither do I feel pity for the middle class yuppie for whom the Rs 25,000
invested in CRB Caps is the equivalent of a year's savings. All these sob
stories appearing in all the newspapers today have acted like a red rag to
politicians, who are now attacking the regulators like angry bulls. I can
only pray that the regulators do not crumble before this onslaught and find
a way to reward stupid greed.
In the meantime, nobody seems to be talking about the means of tightening
regulations to, if not prevent, at least make another CRB difficult. There
will always be a Harshad Mehta or a Bhupen Dalal or a Chain Roop Bhansali
willing to take the sucker for a ride if the regulatory loophole is wide
enough. A lot of loopholes were sealed in the wake of the Rs 50 billion
bank scam of 1992. It is time to look at the holes that allowed the CRB
meltdown to affect so many depositors. But more on that next week.
RELATED STORY:
'People like me will never invest in the stock market'
Tell us what you think of this column
|
