If the Niira Radia tapes blew off the lid on the cosy collaboration between media and companies they cover, the secret recordings of phone conversations of a US hedge fund promoter, Raj Rajaratnam, has entangled respected figures on Wall Street and even Corporate America. The similarity between the investigation into the throwaway sale of second-generation (2G) telecom spectrum and the trial to press charges of conspiracy to profit from illegal stock tips is the shortchanging of ordinary investors by insiders. Rajaratnam has been accused of cultivating a network of spies in various companies to alert him of possible breakthroughs or deals. He is said to have made $45 million by trading in 35 different stocks. The informants ranged from scientists as well as corporate movers and shakers such as Rajat Gupta, the first Indian to head the global consultancy firm, Mckinsey, and also a director of MNC Proctor & Gamble. While still being on the board of Goldman Sachs, Gupta was believed to have disclosed the impending $ 5-billion investment by Berkshire Hathaway into the investment bank. Rajaratnam, whose hedge fund Galleon once managed $7-billion assets, has dismissed these charges, claiming that he spoke to officials of various companies as part of research. His lawyers have compared Rajaratnam to a dogged investigative journalist, working with disparate sources to collect as much data as he could about the companies in which he invested. What is trading on insider information to prosecutors is “detailed meticulous research into company fundamentals” to the defending team, which has called him “a distinguished and an exceptional analyst and portfolio manager”.
The thin line dividing trading on legal and illegal information makes it as difficult to determine guilt as does policy makers’ response that revisions in framework are often made as a reaction to the altered dynamics of the market place rather than to enable a few to profit. Yet companies that have managed to bag the first round of 2G licences have blamed the eagerness of the new entrants for the changes in policy, while the latecomers have accused the older ones of trying to restrict competition. The first-mover advantage was mostly enjoyed by Old Economy groups. Ideally their entrenched positions should have been under threat due to the opening up of the economy. Instead, their effortless entry signifies how easy it is for dominant businesses to consolidate their status at the top of the pole by pressing the appropriate levers of powers to get rules customized to fit their shape and size. The winners of the second round of 2G licences were tier II companies that had won their spurs on the eve of liberalisation in tightly-controlled sectors. Most of the asset management companies are offshoots of industrial groups, just as telecom services providers are, and are set to become even more influential as the Reserve Bank of India prepares to hand them licences to run banks. Even among the Old Economy group, there are companies with excellent corporate governance record and lots of cash like Bajaj Auto, which have not ventured into unnecessary diversification, least of all telecom and real estate. L&T manufactures capital goods and also gets revenue from infrastructure construction, but has refrained from turning into a developer of residential and commercial properties.
These companies perhaps smelled the stink and balked at the compromises that certain emerging sectors entail. The fear is that, in the absence of fresh entrepreneurial talent, the Indian economy would be run over by oligarchs as in Russia. It is understandable if a power distributor wants to put up plants to generate energy and bid for oil and natural gas blocks to ensure smooth supplies. But why should the group provide telecom services and make movies as well? One of the last global conglomerates is General Electric of the US, which manufactures equipment for the power and healthcare sectors and also owned broadcast television network NBC, before selling in December 2009 a controlling 51% stake to cable operator Comcast, with an option to divest its remain holding after seven years. Of late, however, a majority of GE’s revenue is coming from financial services. How difficult it is for newcomers to gatecarsh into the exclusive club comprising established players, politicians and bureaucrats is illustrated by the meteoric rise and fall of Shahid Balwa, the promoter of real estate company DB Realty and the second-round winner of 2G licence, who is now alleged to have sought finances from outside the mainstream channels. What should investors do? Should they take exposure to a trailblazing stock knowing well that the growth is based on promoter-politician nexus? Or should they snap up a mutual fund providing solid returns based on insider information? A cruel dilemma, indeed!
Mohan Sule
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