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Syndicate Bank chairman arrest case: Why retail investors cannot really avoid risks on the Street

Tuesday, 19 August 2014 - 6:10pm IST | Place: Mumbai | Agency: DNA Webdesk

The CBI is yet to provide decisive documents exposing the exact nature of transactions and fraud involved in the Syndicate Bank chairman arrest case. However, the markets have already given its verdict. Prakash Industries, Syndicate Bank and Bhushan Steel have lost heavily on the bourses, with Bhushan Steel losing more than half its value. The question of corporate governance has been rightly raised by the media as the bank consortium that has an exposure of Rs 40,000 crore to Bhushan Steel will audit the financials of the company.

As a article in Firstpost points out, "The fall in the stock prices of these companies is not driven by what the market defines as the fundamentals of the stock, but is purely due to the absence of corporate governance. It is being said that Bhushan Steel, in spite of borrowing Rs 40,000 crores, has not defaulted on payments till now." It goes on to argue that investors should invest in a company which has strong corporate governance and is not blemished, but also accepts that corporate governance of small or mid-sized companies are difficult to gauge. The way out suggested in the article is to trust only the large established players and avoid small and medium-sized companies.

However, this argument falters for two reasons.

One, if investors start avoiding small and mid-sized players, the purpose of a free and fair share market is defeated. A stock market provides a platform for higher growth for a company that could be restricted if it had to depend entirely on bank funds. Also, what the economy gains is a method by which more transparency can be ensured in the corporate world, by making the company liable to the public. It is mandatory for the company to let the public know about its corporate and policy decisions which is important to make a more fair system. So avoiding small and medium enterprises and not encouraging more listing on the bourses might have a worse effect.

Two, it is a faulty assumption that the big sharks in the corporate world are not guilty of similar lapses. In 2010, the CBI arrested eight finance executives, including the chief of LIC Housing Finance, accusing them of taking bribes to give big corporate loans. Over time, names like State Bank of India, IDBI Bank have been under the scanner for continuing to increase their exposure to Kingfisher Airlines when its unviability had become common public knowledge. So avoiding small and medium companies for investment and favouring big players will not mean supporting the ones that are following the best corporate governance rules.

It is not possible for retail investors to keep track of the corporate governance of any company. Forget retail investors, even the regulators in the country are not up to the mark. Take the Satyam scam for example. Nobody had a clue about what was going on till the chairman Ramalinga Raju confessed that the company's accounts had been falsified. Despite the confession, the case has not been solved yet and no verdict has been passed.

The way out is to make the reporting procedures more stringent but give more teeth to investigating agencies and regulators. In case there is misdemeanour on the part of a company, the investigation and verdict both must be speedy. White-collar crimes must be taken more seriously in the country so that they can be avoided. But retail investors will never be free from risks. Ignoring small and medium companies will be merely suppressing the symptoms of the disease when what we need is a proper diagnosis and cure.




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