Not so corporate India. Big business' attitude to borrowing has been quite the opposite, and the results are there for all to see. The plight of the Ruias--who are making the headlines daily in their mad rush to avoid a default on their foreign debt (FRNs)--would not have been half as bad today if they had not developed this fatal attraction for debt in their halcyon days.

Now, lets get this clear. Debt has its uses. Interest charges can serve as a tax shield for profitable companies. Moreover, if you cannot borrow and make money, you are probably destroying shareholder value since you obviously aren't making enough profits to cover your cost of capital.

However, many Indian businessmen--the Ruias included--got themselves into debt for the wrong reason:they believed that diluting equity would lead to loss of control of their companies. Now, control is not necessarily a bad thing to desire; most businessmen would like to control the businesses they set up. But a good entrepreneur knows when to give up control. One such time is when he needs external capital for growth. If he doesn't give up control then, he would be working against the company's overall interests.

When you are into a risky, capital-intensive business, and when you do not have the personal wealth required to put in enough equity to stay in control, you have two choices: get deeper into debt and stay in control in the hope that unusually favourable market winds will bring you the profits; or you can dilute control and put a company on a sounder equity base that can weather all storms.

The Ruias chose the first option. In their blind charge for growth, they went in for huge projects in steel, power, oil and telecom on the basis of borrowed capital. And this at a time when the economy wasliberalising and a licence to put up projects did not mean a licence to print money (as in the past). Not surprisingly, they took on huge debt. They are now sinking under it. They put up good projects (in power and steel), but they got their finances wrong. Essar Steel, for example, paid nearly a quarter of its sales revenues as interest in 1998-99. To rescue themselves from lenders, the Ruias are selling their power plant, and both telecom and oil must be considered lost causes for them. There is no way they can finance all these cash-guzzling projects unless there is a miraculous recovery in steel prices worldwide.

The lesson in it all? No Indian businessman has the kind of personal wealth (excluding the cash stashed away in Swiss vaults) to invest in the equity of such huge projects and stay in control. This has always been the case, and will remain so for the foreseeable future except in low-capital, knowledge-intensive industries like software, where brainpower compensates to some extent for moneymuscle. But even in software, entrepreneurs today are able to retain control only till they establish their track records; after they achieve critical mass, they have the same two options as other entrepreneurs: cash out, or expand equity to grow, and risk diluting control. Bill Gates may be a dominating personality at Microsoft, but he does not own 51 per cent of the stock. If he did, Microsoft would not be the success it was.

Indian businessmen have to rethink their attitudes to equity expansion and control in the interests of overall corporate growth. The Ruias have almost destroyed Essar Steel due to their cussed attitude to equity expansion when they could have done it easily. They are now planning a rights issue--when investors may be less than willing to cough up. Was it worth trying to stay in control at the cost of destroying the company? Today, they are close to losing control anyway--with the lending institutions calling the shots.

Businessmen have been foolishly resisting equity expansion inthe recent past because they think they must raise premium equity. A wise company will, no doubt, raise equity when the markets are buoyant, but if the choice is between corporate solvency and equity dilution at lower premium, what should one choose?

Indian promoters are at the crossroads: they can improve their chances of success by expanding equity now and risk loss of control; or they keep control and risk the probability of complete failure.