India’s Fast Growing Economy based on Consumption rather than Exports has made it a Darling for International Fund Managers.When the whole world is suffering from some structural crisis or the other,India seems an like an oasis in the desert.However like a Mirage,the Governance and Regulatory Shortcomings make India look much better than what it is.$90 Billion of Record Foreign Inflows have been invested into India mostly into the booming Stock Market even as Indian Retail investors have fled.The dichotomy is perhaps explained by the problems faced by people on the ground who have a better sense than Fund Managers sitting in their Glass Towers in Singapore,New York and London.Insitutional Investors in India are mostly Compromised or Incompetent in my view herding into the Indian Markets dazed by the positive aspects of the Indian Economy while glossing over the Risks.Crushing Income Disparity where a $2 Billion Home is constructed while 80% of Indians live on less than $2 day,Pervasive Corruption with Billions being Swindled in Telecom and Land Scams,Massive Red Tape and Policy Bankruptcy has been ignored.However these Risks remain as can be seen by the SKS Microfinance Debacle.
SKS Microfinance Exposes the Regulatory Risk
SKS Microfinance is India’s largest microfinance institution that came out with a very successful IPO in 2010.There were hardly any negative reviews about the company despite frothy valuations.The stock went up by 40% as investors lapped into the Indian growth story.However a societal backlash against these Private Equity Microfinance Institutions has resulted in a sharp fall for the stock.With accusations of intimidation and money gouging,these companies have suddenly become Evil with both the administration and legal branches of the government cracking down.Note the 2G Telecom Scam has also resulted in huge regulatory uncertainty for a number of Foreign Telecom Companies who invested in small Indian telecom firms with licenses.Most of these License were procured through Fraud and Bribing of India’s Top Ministers.The Scale of Corruption is Mind Boggling with estimates as high as $50 Billion.The government’s own auditing and vigilance branches have exposed the conspiracy.However there is no prosecution or punishment as top politicians and bureaucrats were involved.Note Real Estate is another Hot Corruption Sector with most of the large Real Estate Companies like Unitech,IREO,Emaar MGF,DLF involved in one or more scams.The Mining Sector is another prime target for rogue politicians and robber barons.Its an open secret that ministers of the Karnataka government have made billions of dollar through illegal mining.Vedanta recently got its license revoked for bauxite mining as it was found to violate numerous law in collusion with state officials.
Shares in SKS Microfinance, India’s largest and only publicly traded lender to the poor in India, dropped 20 percent on Thursday after the microfinance company warned that an ordinance enacted on October 15 by Andhra Pradesh government on collections could have an impact on its profitability.India’s microfinance industry, which surged to prominence when George Soros-backed SKS raised $358 million in an IPO, faces a regulatory clampdown that could erode profits and hurt growth.Apart from Soros, SKS is also backed by investors like Sequoia, Kismet Capital, Unitus, venture capitalist Vinod Khosla and Infosys Technologies founder N.R. Narayana Murthy.