Podcast 27th November 2015
In all this debate on intolerance in India, lets talk about tolerance. Indian investors would be amongst the most tolerant in the World and I do not say this in a positive sense.
Tolerance for poor management, bad corporate governance, mis selling of products, bad performance and even outright fraud is high amongst investors in India. Poor management where bad decisions destroy shareholder value or fail to create shareholder value is left unpunished by investors. There have been no cases where management has been overthrown on investor activism.
Management believe that they are indispensible, no matter what their performance is, whether it is based on value creation or on any other metrics. Hence the urgency to create shareholder wealth does not exist in many Indian corporates listed on the exchanges.
The government, which is the largest shareholder in India, both directly and indirectly through LIC, is not an activist shareholder. Government’s tolerance towards underperformance of its entities leads to lower price on disinvestment, lack of dividend income and also frequent bouts of capital infusion. In many government companies, the government itself is directly responsible for underperformance as in the case of oil marketing companies.
Corporate governance in India is talked about but nothing is done on poor corporate governance. Investors would rather walk away with losses than get into conflict with management or taking the management to the courts of law.
Mis-selling of products too goes unpunished. Investors tend to embrace the same entity that mis-sold products either causing losses or causing huge expenses. Poor performance of products that investors have invested in is taken into stride and blame is placed on market forces rather than the managers of the products.
Fraud by insiders, management, intermediaries and others too go unpunished. Apart from a few high profile frauds over the last twenty five years, there have been very few instances where the fraudsters have been brought to justice.
It is high time investors start becoming intolerant, which will then make India’s economy, business and markets more efficient.
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