Capital Dilemmas

The capital markets have a new kind of beast: QIPs, or Qualified Institutional Placements. As soon as the key indices started looking up post April, the market witnessed a deluge of issues. A lot of companies raised money from the markets because they desperately needed new capital to finish pending projects. But, then, some companies also raised cash because it was available. This is a dilemma that probably all companies face today: raise money when you need it or scoop it up only because it’s freely available, even if you don’t need it.

Capital market dudes from investment banks are back, casting a long shadow on the doorsteps of many companies. They are persuading managements to take advantage of the current downturn and scoop up truck-loads of capital from the system. The rhetoric intensifies when it is a bank, which is forever capital-hungry. The logic: you’ll never get capital in such abundance in a long, long time to come. Stock up and use it during the go-go days (which are bound to come back, never mind all this talk about brown weeds). The hidden logic: after a dismal 2008, time for some fee-generation and ensure some year-end bonus.

On the other hand, the broking guys are watching carefully – the moment you raise additional equity capital (through whatever form, whether it is warrants or convertibles), they ready to put a sell on your stock. Reason: any capital raising exercise dilutes the shareholding of every large shareholder, an event that is unlikely to go down smoothly.

What’s more, here’s the dilemma within a dilemma: even assuming you bite the bait, and you do pick up equity capital from the market today, then is your company in a shape to service this additional capital? So, should companies raise capital just because liquidity is sloshing around in the system or should they wait till they are ready to put to those funds to good use? Conversely, premium might be low today, than some unpredictable time in the future, making servicing of capital easier. In the end guys, here is what this column feels is necessary: don’t fall into the trap of the smooth-talking, silver-tongued, cloven-hoofed, snake-oil salesmen. Remember they sold derivatives of derivatives of derivatives...and see where it’s got us today. Raise capital only if you need it; if it has no immediate deployment strategy, it’s going to sit on your books and force people to ask questions.

The ICICI Itch

Being big is not always such a good thing. For starters, you become an easy target for peashooters who give expression to their envy through feeble pot-shots. But, there’s another danger: size also invests people and organisations with gratuitous arrogance which manipulates them to view all criticism through a prism layered with suspicion and contempt. ICICI Bank has been at the receiving end of two comments made by its rivals. Here they are:

• State Bank of India chairman O P Bhatt is a man not normally given to controversial public statements, unlike some of his other worthy predecessors. Yet, about three weeks ago, during the bank’s annual general meeting, he allowed himself one uncharacteristic wisecrack – call it a sarcastic side-swipe – that got picked up a grateful media and was reported with great relish. Mr Bhatt is reported to have said that ICICI Bank was an “unfit” candidate for acquisition and State Bank had no plans to acquire it. According to Chinese Whispers column (dated June 23, 2009) in Business Standard newspaper: “He said, tongue firmly in cheek, that his bank had no plans to acquire ICICI Bank as it was not advisable to take over the country’s largest private sector bank in its present state.” What does “present state” really mean, pray?

• The second instance is a comment allegedly made by Mandeep Maitra, head of human resources at HDFC Bank. In a story on HDFC Bank, Business World magazine wrote this: It (HDFC Bank) also has the people, managing to get nearly 900 ICICI Bank staffers every year over the past three years. In some places, almost the entire top brass of an ICICI Bank branch would walk in for interviews. “Of course, the first thing I ask is ‘how many of you are from ICICI Bank?’ I do not want that culture out here,” quips Maitra. Of the people hired in the past three years, about 40 per cent came from other banks.
ICICI Bank has responded by sending a legal notice to Maitra, seeking an apology for the statement.

What do these two stray, and definitely unrelated, incidents indicate? One, has ICICI’s phenomenal growth, or pace of expansion, left the banking and financial services industry with many green faces and are they venting their spleen at the first inopportune moment? Or, has ICICI’s supercilious behaviour really got everybody’s goat and a general industry-wide repugnance is now finding expression through every available public forum? You decide.

Two Big Bs -- Budget & Babu

Now that the media dust is beginning to settle on the Budget, here are some random thoughts and observations.

• The sleight of hand on Fringe Benefit Tax sucks. Making a grand announcement in Parliament (“I propose to abolish Fringe Benefit Tax”) while slipping in a proposal through the Explanatory Memorandum (to shift the burden to employees) not only stinks but reeks of traditional Congress behaviour – double standards and hypocrisy. It is also symptomatic of the party’s historical political culture. One would have expected the Ministry and the Finance Minister to be a bit more transparent. If this is how the government of the day behaves – surreptitiously, hiding behind opaque deals while making pious announcements in Lok Sabha – then one wonders what kind of example they’re setting.
• The market has come under heavy flak, and rightly so. It overplayed its hand and came up short. But, the market never seems to learn – this is a kind of behavourial pattern that keeps repeating itself. Many institutions published reports stating that the government was unlikely to accelerate its reforms programme from 0 mph to 90 mph in just a month after getting elected. And, that sounded pretty logical. But, markets never leave anything to chance – what in case Pranab-babu has a change of heart? What if Rahul-baba weighs in? Buy now or repent later. Interestingly, it may be instructive to read some of the Budget reports published by the broking houses – both foreign and domestic – the next day. Almost all of them have taken this holier-than-thou attitude and have roundly criticised the market for over-reacting. If everybody in the market is criticising everybody else, then who – in the name of the sweet lord -- sold? Somebody’s gotta come clean soon.

• Some governance rules never change. When not in favour of fast-tracking a proposal or an idea, set up a committee. Pranab-babu has announced a huge number of committees in his budget speech. Mocha Master’s pick from the many committees announced – an expert group “to advise on a viable and sustainable system of pricing petroleum products”. Which means: free pricing in petroleum products is unlikely till the Maharashtra Assembly polls next year.

• And, finally, this is what a friend and former colleague, who now lives in Hyderabad, had to say about the Budget: “Pranabda was doing more than just sniffling behind his hanky...he was playing hanky-panky..!”