This is a blog post from
“When a debt becomes too cumbersome, then, it is banished to a virtual space where it resembles a deep frozen catastrophe in orbit.”
~ Jean Baudrillard, Transparency of Evil (1990)
And it is from that orbit that the NPA issue has been brought back. We now see the movement to clean up the NPA woes gaining momentum and seriousness. We must recognise that this isn’t a one-off problem. NPAs are a byproduct of the business cycle. Not all those who borrow are in a position to repay. This has happened before and will continue to happen in the future. NPAs are an inevitable consequence of business cycles and the economic model the world has embraced. However, a few simple ideas can have an impact on the magnitude of the problem. Shareholder activism is one such idea that could help us navigate future NPA crises better.
So far, our solutions to the NPA issue derive from the view that it as an economic problem to be dealt with through economic measures. While that would seem to be the need of the hour, the NPA problem is a much larger issue. American economist Robin Hahnel put forth a conceptual framework called Complementary Holism which posits that social life has four spheres — economic, political, community and kinship. When we look at the evolution of the current NPA problem, it has its origins in and impact on these four spheres. It is important to keep these spheres in mind while looking at developing medium- to long-term solutions.
What happened?
From 2009 to 2012, banks stepped up lending to a few large firms in certain sectors such as infrastructure, steel, power, etc. A ‘Policy Paralysis’ on the domestic front, combined with the drop in global commodity prices, affected a lot the fundamentals on which some of these industries got into different projects. As these assets began to show signs of stress, banks didn’t fully recognise the magnitude or respond suitably in their dealings and provisioning. Dr. Viral Acharya, while addressing the Indian Banks’ Association Banking Technology Conference, eloquently spoke about the relation between the lack of comprehensive recognition of stressed assets by banks and the absence of any resolution. “The end result has been a silent atrophy of the true potential of these assets.”. An article in the Financial Times also pointed out that these is widespread belief among Indians that corruption and political pressure may have played a role in this entire scheme of things.
Walter Frick wrote an article titled the “ The Case for Activist Investors ” which was published in the March 2016 Edition of the Harvard Business Review . He cites an incident relating to Benjamin Graham in the mid-1920s. As a small shareholder in Norther Pipeline, Benjamin Graham, wrote to the management of the company to distribute the profits they had accumulated, to their shareholders. The company's bristled reply to him was that running a pipeline was a “complex and specialised business about which you can know very little, but which we have done for a lifetime”. Frick aptly describes the forces at play. “The battle was over competing ideas of capitalism. To Graham, managers were hired by shareholders to run their company. The folks in charge at Northern Pipeline believed it was their company and that investors had no understanding of the business — their only contribution to its success was cash.” One can see this thinking still prevail in the Indian market.
In India, shareholders rarely feel a sense of ownership in the company (community sphere). The only consideration is the increase in stock price over time. Businesses are still looked at from the perspective of family ownership (kinship sphere). While this view isn’t wrong, there is a need for it to evolve and shareholders to recognise that they are owners of the company.
In 2013, Governor Raghuram Rajan had made a statement that “promoters do not have a divine right to stay in charge regardless of how badly they mismanaged their companies...”. Earlier this year, Dr. Viral Acharya made a similar observation earlier this year: “Original promoters, who rarely put in any financing and primarily provide sweat equity , have had somewhat of a field day, facing limited dilution, if any, of their initial stakes nor much of a threat of being outright replaced.”
There is a need for shareholders to take more interest in their stakes, irrespective of how small or large it is. Shareholders must question the management when the company shows signs of mismanagement. This doesn’t mean a witch hunt must ensue. But it is important to bring in this sense of accountability in the management and ownership among shareholders while recognising that every shareholder is the owner of the company.
Globally, there has been a rise in activist investors. A McKinsey article published in December 2015 noted “one of the biggest lessons from the rise of activist investing is that it often prompts positive action — both strategically and with regard to generating long-term value”. Investors can create wealth for themselves while working together with the management. Analysis by Novus Partners shows that activist hedge funds continue to outperform the market. According to eVestment, Activist Funds returned 10.43% in 2016, outperforming event driven (8.9%) and long-short equity funds (5.8%).
This approach needs to be inculcated among shareholders. This approach of value creation in sync with the management will significantly benefit the entire system. Another NPA-like scenario can be handled better and swiftly as all stakeholders would be actively involved in avoiding a situation where the company reaches high stress levels.
