The most curious aspect of the IPL controversy is how a highly calibrated valuation game was being played by a few select insiders, who seemed to know things many others didn?t. Consider this: of late there has been a flurry of acquisitions of existing IPL teams being talked about at valuations 5-6 times of what was originally paid a few years ago.
Some of the initial IPL teams were bought by consortiums at $60-70 million. Now, the same teams are being valued at close to $400 million. The controversial Kochi team, too, was auctioned at $333 million. It turns out now that these valuations may be way out of line with reality. This reality was captured by the way in which a savvy global banker Anshu Jain, who heads Deutsche bank, sold his small stake in Mumbai Indians at just the same price he had bought the shares.
The most commonsensical question to ask is: How is it that a top global banker was so unaware of the great IPL valuation story that he sold his stake in one of the three most valued teams at par value? If you can really answer this question, you might understand the great valuation game going on in the IPL.
The other question that needs answering is: How can the IPL teams command such valuations when revenue projections show that they will run losses for the next 7-10 years? There is nothing illegal about some of the key IPL actors playing the valuation game. It is just a punt or a view being taken by Lalit Modi and others. The IPL now resembles the dotcom boom of 2000, when many entrepreneurs and punters had put their faith in the tech story. Lalit Modi and company are placing their faith in the great IPL valuation story that may or may not pan out the way they imagine it. The income tax department or other enforcement agencies cannot fault Modi for dreaming about future valuations. That indeed is Modi?s prerogative.
What the enforcement authorities can do is ask the IPL administration and the teams run by various consortia to be transparent about their business practices, so that all the economic agents associated with the IPL, whether investors or customers, have a level-playing field.
One aspect of IPL dotcom that seems a bit unnerving is the kind of money that is coming into the business from tax havens, which seems to be driving the valuations. Again, there is nothing wrong with bringing in money from tax havens like Mauritius, as these are legitimate and covered under treaties between nations. What is non-transparent is who is investing where through which entities abroad.
To be fair, this practice is not confined to the IPL alone. In all other businesses, investments are made from tax havens like Mauritius but there is relatively more transparency as to the identity of the investors.
In the case of IPL, non-transparency is at many levels. One, there is a suspicion of some sort of organised oligopoly in which a select club of businessmen, filmstars and politicians control many teams. There seems to be a hidden entry barrier created by the organisers. It appears that Lalit Modi would want to increase the number of IPL teams or franchisees in a calibrated manner so that the overall valuation of the business does not go down. The larger the number of teams, the lesser the valuation for each of them. It is a simple demand-supply rule.
So, supply must be controlled. After controlling supply, it can hypothetically be ensured that Indian money?largely unaccounted?is taken out of the country and channelled back through tax havens to buy up stakes in existing or new teams at a higher valuation. The valuation game is simple. After limiting the supply of teams, more money is pumped into the same properties and thus valuation is upped regularly. Soon, gradually rising valuation will attract other domestic and foreign bidders. Some stake can be sold at a much higher price so that the original investments are recovered even as the select club retains control of the teams with a 51% stake.
To be fair, this valuation model has been tried and tested in India. Some years ago, RBI and Sebi had banned Foreign Institutional Investments (FIIs) into India through what were then described as Overseas Corporate Bodies (OCBs). The OCBs were nothing but a body floated overseas by a group of NRIs who were essentially fronts for Indian promoters. These OCBs would pump dollars supplied by the promoters back into their companies in India. Share prices of these domestic companies would keep rising. The only problem was when share prices fell suddenly, the small investors were taken by surprise. This practice had become so widespread that at one stage the NDA regime decided to clampdown on the OCBs, who were banned from operations.
This ban did not prevent circular movement of money, called round tripping. It started happening through the participatory note (PN) route, where big registered FIIs would issue PNs to NRI investors abroad.
In 2007, FM P Chidambaram tried to regulate the PN money that came from unknown sources abroad into India and drove up valuations of various companies. But he did not succeed beyond a point, as the nature of global finance is such that it goes into whichever nook and corner of the world it likes.
The source of funds is impossible to trace. Money can move through several hands before reaching India, so no one knows who the real investor is. Such is the nature of funny money.
The income tax sleuths have been making a lot of noise over the past week or so. These very tax investigators, assisted by other enforcement agencies, have forever been working on money trails and suspected round tripping in the case of other companies. Have they cracked even one case in the last five years? The answer is a big no.
So it is best that the government comes up with a pragmatic plan to clean up the IPL administration in a manner that there is a semblance of transparency. Otherwise, it will be one long wild goose chase for tax and other enforcement officials. Of course, tax and other enforcement officials would keenly look forward to many foreign trips even if they know failure stares them in the face!
mk.venu@expressindia.com