What central banks can learn from the Indian cricket team


A few days back, a list of thirty probables who could make it to the Indian cricket team for the 50 over cricket World Cup scheduled in Australia early next year, was declared. Interestingly, only four out of the 15 players who had played for India in the 2011 World Cup, made the cut.
This disbanding of the Class of 2011 led to a lot of nostalgia in the media.
In one such piece published on www.cricinfo.com, the writer said: “The class of 2011 has been well and truly disbanded. Only four have made it through to the 2015 list…For the rest, all we have for now are memories.”
I sincerely feel that instead of being nostalgic about the entire thing we should be happy about the situation. The selection of players is just about the only thing that is currently right about Indian cricket, which remains surrounded by a whole host of controversies.
The players who did not perform over the last few years (the likes of Virender Sehwag, Gautam Gambhir, Zaheer Khan, Harbhajan Singh, Munaf Patel and Piyush Chawla who played in the 2011 World Cup) have fallen by the wayside and have had to make way for a new set of players.
And that is how any market should operate. The non-performers need to be weeded out and not rescued. Nevertheless, that is not how the world at large operates. A great example of this are the financial firms all over the world, which had to be rescued by central banks in the aftermath of the financial crisis that started in September 2008, around the time the investment bank Lehman Brothers went bust.
As Nigel Dodd writes in
The Social Life of Money: “Since the collapse of Lehman Brothers in September 2008, the world’s major central banks have been plowing vast quantities of money into the banking system. The U.S. Federal Reserve has made commitments totalling some $29 trillion, lending $7 trillion to banks during the course of one single fraught week…The U.K. government has committed a total of £1.162 trillion to bank rescues. The European Central Bank has made low-interest loans directly to banks worth at least 1.1 trillion.”
Scores of financial institutions across the United States and Europe were bailed out, nationalized, or simply merged to ensure that they continued to survive. If these financial institutions had not been rescued, the trouble would have spilled over to other financial institutions and from there to the general economy. This would have had a negative impact on the economic growth of the countries which they belonged to. Hence, it was necessary to rescue them. This was the explanation offered by central banks and governments which came to their rescue.
Soon after the central banks came to the rescue of financial institutions a quotation “supposedly” from Karl Marx’s
Das Capital went viral on the internet: “Owners of capital will stimulate the working class to buy more and more of expensive goods…until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.”
As Dodd puts it: “The passage appeared on countless blogs…The quotation was a fake.” Nevertheless, whoever wrote it summarised very well how things had turned out in the aftermath of the financial crisis.
The move to rescue financial firms all over the world built in a huge amount of moral hazard into the financial system. As
economist Alan Blinder puts it in After the Music Stopped : “ [the]central idea behind moral hazard is that people who are well insured against some risk are less likely to take pains (and incur costs) to avoid it.”
Moral hazard, other than encouraging the insiders of the financial system to take on increased risk gives them the impression of the financial system being a safer place to do business in than it actu­ally is. This is because the financial firms assume that in case of a crisis, the government(s) will come to their rescue. And this is not good for the financial system as a whole.
Interestingly, in the aftermath of the financial crisis, the American government passed the Dodd–Frank Act. The Act, prohibits government bailouts and the form of support that the Fed used to bailout AIG and other financial institutions. In fact, when he signed the bill into law, Barack Obama, the President of the United States said: “The American people will never again be asked to foot the bill for Wall Street’s mistakes.” He went on to add that in the time to come, there would be “no more taxpayer-funded bailouts.”
But former Federal Reserve Chairman, Alan Greenspan, does not buy this at all. In his book
The Map and the Territory, Greenspan writes that “most of the American financial system would be guaranteed by the US government,” in the event of the next crisis. He explains his reasoning through an example.
On May 10, 2012, J.P. Morgan, the largest bank in the United States, reported a loss of $2 billion from a failed hedging operation. The loss barely reduced the bank’s net worth. And more than that, the shareholders of the bank suffered the loss and not its depositors. Nevertheless, the loss was considered to be a threat to the American taxpayers and Jamie Dimon, J.P. Morgan’s CEO, was called to testify before the Senate Banking Committee. Why did this happen?
As Greenspan writes: “The world has so changed that this…loss was implicitly considered a threat to taxpayers. Why? Because of the poorly kept secret of the marketplace that JPMorgan will not be allowed to fail any more than Fannie and Freddie have been allowed to fail. In short, JPMorgan, much to its chagrin, I am sure, has become a defacto government sponsored enterprise no different from Fannie Mae prior to its conservatorship.”
Fannie Mae and Freddie Mac were government sponsored financial firms which the United States government had to take over in early September 2008. Greenspan further points out that: “When adverse events depleted JPMorgan’s shareholder equity, it was perceived by the market that its liabilities were effectively, in the end, taxpayer liabilities. Otherwise why the political umbrage and congressional hearings following the reported loss?”
To conclude, this also explains to some extent why global financial firms have been borrowing money at rock bottom interest rates, and investing them in “risky” financial markets all over the world. They know that if things go wrong, the central banks and the governments are likely to come to a rescue.
As Anat Admati and Martin Hellwig write in
The Bankers’ New Clothes: “It is very difficult for governments to convincingly commit to removing these guarantees. In a crisis it will be even more difficult to maintain this commitment and provide no support to institutions that are deemed critical for economic survival. Once a crisis is present, it may even be undesirable to do so, because letting banks fail in a crisis can be very damaging.”
Or as the Americans like to put it You ain’t seen nothin’ yet”.

The article originally appeared on www.equitymaster.com as a part of The Daily Reckoning, on December 10, 2014

How Sahara hoodwinked Sebi, RBI and the Supreme Court

 subroto-roy (1)Vivek Kaul 
The Rs 24,000 crore question for the Sahara group is where did it get the money from to repay the investors who had invested in its housing bonds or the optionally fully convertible debentures(OFCDs)? The group had raised this money through Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL).
This happened after the Reserve Bank of India(RBI) ordered the group to shut-down its para-banking operations through which it used to raise money to fund its capital intensive businesses from real estate to an airline.
To get around the RBI directive, the Sahara group started issuing housing bonds through SIRECL and SHICL. These bonds were technically referred to as OFCDs. The Sahara group noted that these bonds were being issued to “friends, associates, group companies, workers/ employees and other individuals associated/affiliated or connected in any manner with Sahara India Group of Companies.”
On this pretext, the group felt that issuance of these OFCDs did not amount to a public issue. As per Section 67 of the Companies Act, 1956, an offer of shares or debentures made to 50 persons or more is construed to be a public offer. It is estimated that the Sahara group sold the housing bonds or OFCDs to around 2.96 crore investors and raised over Rs 24,000 crore.
Hence, the issuance of OFCDs was a public issue and given that it needed to be listed on a stock exchange, which it wasn’t. The Securities and Exchange Board of India(Sebi) came calling and KM Abraham, who was a whole-time member of Sebi, issued an order dated June 23, 2011, 
in which he asked Sahara to “refund the money collected by the aforesaid companies[i.e. SIRECL and SHCL]…to the subscribers of such Optionally Fully Convertible Debentures with interest of 15% per annum from the date of receipt of money till the date of such repayment.”
In the order Abraham also contested how could Sahara raise such a huge amount of money only through members associated with the Sahara group. “The case of the two Companies is that they have issued OFCDs only to members associated with the Sahara group…Even the listed company with the biggest market capitalisation and the largest investor base in India has only under 4 million investors. In fact, the total investor base in India currently (reckoned on the basis of unique depository accounts in the two Depositories taken together) is only of the order of 15 million,” wrote Abraham. Given this, how did Sahara manage to issue bonds to 2.96 crore investors, who were largely members associated with the group?
This Sebi order was challenged in court by Sahara. It led to a series of events, which finally led to the Supreme Court judgement on August 31, 2012. The apex court in the country basically stood by Sebi’s decision and asked Sahara to refund Rs 24,029 crore that it had raised through OFCDs, to the investors by November 2012.
The Supreme Court directed the Sahara group to hand over money to Sebi, which would in turn refund the money to the investors. The group was soon given more time to repay the money, and further directed to deposit Rs 5,120 crore immediately. This the group paid up on December 5, 2012 and hasn’t paid up anything since then.
It has since contested that it has already paid its investors and handing over the money to Sebi would mean double payment. The group claims that it refunded Rs 16,177 crore to investors in May and June 2012. In fact, the Business Standard had reported in November 2012 that the agents of the Sahara Group were being pushed to collect 
sehmat patras (consent letters) from investors to show that their money had already been returned to them. “Agents, estimated to be a million strong, who sold OFCDs, often termed housing bonds, have been ordered to collect these letters, failing which their commissions are being stopped. With these consent letters, many of which are pre-dated, with dates ranging from as early as April to show that refunds were spread over a long period, documents such as account statements and passbooks in the hands of the customers are being collected,” the newspaper reported. This happened after the Supreme Court judgement asking Sahara to hand over Rs 24,000 crore to Sebi. If the group was refunding the investors as early as April 2012, why was it fighting a case in the Supreme Court at the same time?
Further, where did the group get the money from? Rs 24,000 crore is clearly not small change. Interestingly, the group has offered an explanation for this.
The group claims that the Sahara India Cooperative Credit Society and Sahara Q Shop bought the real estate assets worth thousands of crores from SIRECL and SHICL, the companies which had issued the OFCDs. This money was then used to repay the investors who had invested in the OFCDs.
But where did Sahara India Cooperative Credit Society and Sahara Q Shop get the money to buy the real estate assets of SIRECL and SHICL? The group claims to have raised this money through the Sahara India partnership firm which raised money on behalf of Sahara India Cooperative Credit Society and Sahara Q Shop, across 4,700 locations throughout the country. The group essentially put its vast network of branches to work, it claims.
The next question is that what was the pretext on which Sahara India Cooperative Credit Society and Sahara Q Shop raised money? Sahara Q Shop could have raised money as an advance against the promise of providing consumer goods to investors who invested in it. The Sahara Q Shop had got immense credibility in small town India, given that it was being advertised by the Indian cricket team.
On the face of it Q Shop seems like a money raising scheme that is being marketed as a retail venture. In fact, in an affidavit filed with the Allahabad High Court, Sebi has alleged that the group was “forcibly and unilaterally converting the investments in Sahara India Real Estate and Sahara Housing Invest to Sahara Q Shop without any consent of the investor, in defiance of the orders of the Supreme Court.”
Also, the question is why shouldn’t the Sahara Q Shop venture qualify as a collective investment scheme. A collective investment scheme is defined as “Any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilised with a view to receive profits, income, produce or property, and is managed on behalf of the investors is a CIS(collective investment scheme). Investors do not have day to day control over the management and operation of such scheme or arrangement.” And this should bring the Sahara Q Shop under the regulatory ambit of Sebi. 

Interestingly, the Sahara Q Shop seems to have also invested in the troubled National Spot ExchangeAs the Business Standard reports Recent data put out by the troubled National Spot Exchange (NSEL) showed that Sahara Q Shop had invested a little over Rs 220 crore through Indian Bullion Markets Association, a subsidiary of NSEL.” 
What all this tells us is that Sahara continues to be a para-banking operation on the ground.
The article originally appeared on www.FirstBiz.com on February 27, 2014
 (Vivek Kaul is a writer. He tweets @kaul_vivek)