Rahul Bhasin, 46, has been the managing partner at Baring Private Equity Partners India for over a decade now. The fund, which manages $1 billion, had invested in a slew of companies in various sectors, from pharma to financial services. The management graduate from IIM Ahmedabad, in the past, turned around business process outsourcing company MphasiS BFL, which was later sold to EDS Corporation. PE investments face many challenges in India. Bhasin says the main issue for investors ? be it retail, FIIs, institutional or insurance companies ? is that fiduciary responsibility has been abused in the Indian system. ?To my mind, the single biggest challenge is this culture of lack of accountability,? he told FE’s Baiju Kalesh & Shruti Ambavat in an exclusive interview:
In this tough economic scenario, how does the investing environment look like?
The entire distributed capital in India is under threat. When promoters reach out to others for resources, they are obliged to be trustees of the others? money. To me, the entire issue for investors, be it retail, FIIs, institutional or insurance companies, is the fact that this fiduciary responsibility has been abused in the Indian system.
Indian promoters put their interests before the ones who have entrusted them with the finances. If you compare the salaries of people related to the promoters with that of professionals, there will be a difference of anywhere between 2.5 and three times. Corporate investigations are not active enough and, I believe, corporate frauds cannot happen without the active compliance of the chartered accountants and auditors of the company.
There are government agencies and departments that breach the trusteeship agreement with the people. Why is it that, between the central and state governments, there are over 1,060 government companies that haven’t filed audited accounts for the past three years?
How much do you think this affects the mindset of investors?
The big issue is that companies do not talk about other people’s money in trust because it is not considered polite to talk about these things. To me, this is the single biggest issue and affects efficient capital allocation in the whole system, which will reduce the productivity of the capital.
In India, a large proportion of savings is in an unproductive asset like gold because the consequences of breach of trust have been so low here. It is the failure to implement the law that is a huge drain on this country.
Is this hurting your investments?
It hurts our investments too because the overall culture is to not treat third-party investors fairly. You notice that many PE firms get in with some promises and, then, have to exit with some compromises. We rule out the person who will not treat our capital as a trustee, which makes our opportunity significantly smaller.
We have been in the position for so many years that capital allocation is a constraint. People feel that, in a booming and growing economy, investments should be faster but, we end up struggling to deploy capital. Even multinational companies have a different behaviour towards shareholders back home and with Indian shareholders.
How are MNC behaviour different in their home market and in India?
Royalty payments could be a good example. They are usually 1-3% of sales. But, if you look at the profit of the Indian companies, it comes out to be an average 6-7% of sales. Now, that is a significant part of the economic value generation of the company, especially in situations where brands are driving returns. There are also so many companies which never paid royalty. In the past one or two years, they saw everyone else abusing the law and followed suit.
When do you think things took turn for the worse?
For me, this deterioration started from the time we had the Kumar Mangalam Birla Committee or JJ Irani Committee on Corporate Governance. And the regulation was replaced by this concept of independent directors. These directors are supposed to protect the minority shareholders from the very people who put them on the board, which is a complete farce. It is not possible for the independent directors to be protecting the minority shareholders from the majority. The government must do it.
Valuations of some sectors have come down, so what is the challenge there?
If you look historically, sectors that have less government interface have tended to be better than those with government interference ? sectors like IT and FMCG ?to some extent. To my mind, the single biggest challenge is this culture of lack of accountability.
If you are putting up a power plant, the various departments under which you have to go to for land, environment, erection and fuel-linkage permissions are tremendous. Is the government held responsible for
delay in projects because of their delay in giving out permission? And, with time, the project costs also shoot up. Then, the promoter is not able to compete and requests for a higher tariff. The entire cost structure of the economy goes up because of this delay.
Why can’t the various departments within the government coordinate among themselves to give clearances for 30,000 MW of power in this country every year? The government should ideally choose the site with all the requirements and, finally, auction them. Government agencies say they have authority, but they do not speak of holding responsibility to make sure the projects come on time.
LPs may be a bit concerned now. Are they putting in more riders?
We haven?t had any problems yet, but I know generically most LPs are not happy with India
at all. Especially, anybody who has being here for a while is totally fed up.
Friction between promoters and investors is rising in companies. Why?
There is friction between banks and promoters because they don’t match the expectations of the lender. Friction is there because the promoters do not repay. The obligation is with the promoter of the company. The friction can only be if the party obliged has not discharged the responsibility of returning the money.
How can this be avoided?
It is not the first time that friction is happening. We have seen it in the 1990s as well. The problem is that there are a new bunch of people in PE who are not familiar with this. Friction is present in all emerging markets, but the extent to which it happens in India is the worst. And, it is increasing now because of the delay in the court process and since it is socially acceptable now. Today, cheating is done blatantly unlike behind the screens earlier. I do not know a single case where friction is because of macro-economic conditions. Friction only happens when there is malafide intent.
In financial services, we have seen large PE firms selling stake recently? What?s your take on the sector?
Many large funds have held assets for years; so, they need to book profits at some point. As far as Manappuram
is concerned, we are looking into the issues. At first sight, it seems to be far less of an issue than it is made out to be and
I need to validate it. It looks like that the regulator’s instructions are being followed in a non-disruptive manner.
To my mind, the company may have failed in communicating to its various stakeholders its course of action. Somebody from our office is actually sitting in Trichur, validating what’s going on and giving feedback.