The High Noon of Indian Capitalism

As we watched the first few office workers get on to buses and trams, the taxi driver asked me in Hindi, ‘Reliance Power…sir kya lagta? Company kaisa hai?’ [‘What do you think of Reliance Power?’]. When I replied that since I didn’t live in India, I did not know about Reliance Power, the driver realised that he could help me out. ‘Riks kam hai, security zyada hai’ said the driver [The risk associated with the company is low. It looks like a secure company.’] I chided myself for not having realised that the taxi driver was asking me about Reliance Power’s IPO, the largest ever in India wherein the company was planning to issue to the public shares with a value in excess of INR 100 billion.

By now, in spite of the wintry fog and my son’s demands for attention, I was intrigued. I was after all in Kolkata, the capital of a state ruled by a Communist government for nearly 30 years, a city known for its intellectuals and its food but not renowned for its risk appetite. And yet almost every second person I had met in the preceding week was discussing the Reliance Power IPO. The evening before, at the dinner table I heard elderly relatives – lawyers, architects, accountants, executives – discussing amongst themselves how many shares of Reliance Power they might be able to get at the upcoming IPO. My Bengali relatives had never before shown such enthusiasm either for the stock market or for free market enterprise. I was pleasantly surprised but also taken aback by the winds of change sweeping this bastion of Left-wing thought.

I asked the driver a few questions to understand how much he was planning to invest in the IPO. The driver, a migrant from the state of Bihar, earned around INR 100,000 a year. He was hoping to be able to invest INR 20,000 in the IPO. These were the savings he had accumulated over the last couple of years. The previous tranche of savings had been invested in buying a water pump back in his village in Bihar where his wife and children lived with the extended family. He had an account at a local sub-brokerage of a national brokerage chain and the sub-broker had told his customers that this IPO would give investors lucky enough to get shares 40 per cent returns per annum.

A few weeks later, Reliance Power went public on 11 February 2008. I never found out whether the taxi driver was ‘lucky enough’ to buy shares in Reliance Power’s IPO. Several of my relatives did invest in the IPO. They are still trying to figure out what hit them. An investor who bought Reliance Power shares worth INR 100,000 at the IPO, will have at the prices prevalent in August 2014 a mere INR 32,000 worth of shares. That translates into a negative rate of return of 17 per cent per annum in the intervening six and a half years.

In totality, the public invested INR103 billion in the IPO. Six years later, that INR103 billion has now become INR 33 billion. Where has the INR 70 billion gone? This after all is a utility company which promised to invest the public’s money in power plants. Did those investments actually take place? Or did the government short-change the utility and indulge in post-contractual opportunism? Or are there other factors at play which explain the sub-par post-IPO performance of Reliance Power?

Reliance Power is an extreme version of the sort of issues which make investing in the Indian market so challenging. The investment opportunities in India are so obvious that almost every newspaper reader is aware of them. And yet, the overwhelming majority of Indian companies seem to struggle to turn these opportunities into double digit returns for their shareholders. In fact, over the past 20 years, over 80 per cent of listed Indian companies have failed to give share price returns better than the rate of inflation (which has been around 7 per cent over the period in question). And yet, whilst the vast majority of companies have failed to generate even double digit shareholder returns, the remaining minority has given healthy returns better than or equal to GDP growth (which has been around 14 per cent, in nominal terms over the past two decades).

These challenges mean that only a very small number of investors in the Indian stock market are able to deliver market beating returns over long periods of time. They excel in investing in that minority of companies which are able to profit from the Indian economy’s robust performance over the last 20 years.

Ever since I returned from London to work in the Indian stock market, the success of this elite group of investors has fascinated me. How do they stay calm in the face of mass hysteria over a company’s prospects? How are they able to understand which company will deal with politicians and bureaucrats ably and still deliver healthy returns for their shareholders? How are they able to see through the accounting subterfuges that a significant minority of Indian companies resorts to?

This book seeks to shed more light on how the Gurus of Chaos in the Indian stock market build their portfolios and, just as importantly, nurture their successful multi-decadal careers in a turbulent market which, to the untrained eye, seems more characterised by risk than by reward.