No. 53, May 2013
Large Corporate Firms on Investment Strike, Playing with Cash
A recent note by an equities firm reported that just 54 large firms (for which the researchers were able to obtain figures) held cash and cash equivalents (i.e., paper instruments that can easily be converted into cash) of Rs 4,30,000 crore, or Rs 4.3 trillion (one crore = 10 million). (See Table 1) That is, they were hanging on to a sum worth roughly 4.3 per cent of GDP instead of investing it in productive activity. Thus, while some individual firms or sectors may be short of funds, the corporate sector as a whole is not.
The Indian corporate sector has been calling for the RBI to revive growth by reducing interest rates, implying that productive investment is being held back by the cost of credit. The RBI has been advancing certain arguments for not reducing interest rates, or doing so very slowly. Leaving these wrong arguments aside for the moment, what should be noted is that the large corporate firms as a group are not short of funds. What they lack is the desire to invest, because the prospects for profits look poor with the downturn in the economy.
In fact, large firms not only enjoy first claim on domestic bank lending (for example, just 10 corporate groups account for 13 per cent of all of bank lending in India, a ratio that has more than doubled in five years; they also have access to foreign capital, which other borrowers do not have. Since foreign loans are available at lower interest rates than domestic loans, there is considerable scope for Indian corporate firms to make money by becoming lenders in turn. In February, the Minister of State for Finance informed Parliament that, in just the period since 2009-10, the RBI has found as many as 154 cases of private corporate firms misusing or diverting funds raised through external commercial borrowings (ECBs). Although these funds were raised in the name of one or the other physical investment, they were diverted to “working capital, general corporate purpose and on-lending to another company.”
Among the firms guilty of this were Anil Ambani’s Reliance Communications, Reliance Infratel, Huawei Technologies, Walt Disney Company (India), Educomp Solutions, Shri Adhikari Brothers Television Networks, D B Corp Ltd, Metro Cash & Carry India Pvt Ltd and Blackrock India Pvt Ltd. Among the companies which were allowed to raise fresh ECBs despite existing allegations against them or current investigations by the Enforcement Directorate were Tata Power, Reliance Communications, Reliance Infrastructure, Reliance Power and Jaiprakash Associates
The practice of borrowing cheap abroad and lending dear at home, termed ‘interest rate arbitrage’, has been raised to a fine art by Mukesh Ambani’s Reliance Industries Ltd (RIL). RIL, with an international credit rating higher than India’s sovereign rating, is able to raise funds abroad at very low interest rates; it raised Rs 8,200 crore of loans this financial year (April-March). As of December-end 2012, RIL had gross borrowings of Rs 72,266 crore, the majority of which consisted of foreign borrowings. At the same time, it had cash and equivalents of Rs 80,962 crore, which, rather than use to draw down its own debt, it deployed in various interest-earning assets. For the nine months ending December 2012, its interest rate spread – the margin between its borrowing costs and its interest earnings – came to 5.66 percentage points, much higher than the most profitable private banks in India. The corporate sector is relatively freer than banks of regulatory restrictions on what it does with its funds.
It appears, then, that instead of creating productive assets, the private corporate sector is deploying funds in financial assets and speculative transactions. This is corroborated by the latest RBI study of the non-financial private corporate sector. The RBI finds that the share of net fixed assets (i.e., physical investment) in total assets has gone down over the five years 2007-08 to 2011-12, but the share of financial investments has risen, as has the share of loans and advances. Whereas the share of fixed assets fell from 38.5 per cent to 33 per cent, the share of financial investments plus loans and advances rose from 40.5 per cent to 45.7 per cent.
Even more telling are the trends in corporate profits. The RBI’s latest figures for the corporate sector show that growth of operating profit averaged just 0.2 per cent, year on year, in the four quarters ending September 2012. However, a shadowy category called ‘other income’, which is not included in operating income, and which includes earnings from financial operations, has grown dramatically: from a slow growth of 7 per cent in 2010-11, it grew 49.3 per cent in 2011-12, and 49.6 per cent in the four quarters ending in September 2012. Data from the top 200 companies on the Bombay Stock Exchangeindicate that almost one-third of net profit of these firms now comes from ‘other income’. RIL’s ‘other income’ comes to Rs 5,756 crore in the first nine months of the current financial year; the share of ‘other income’ in RIL’s profits has quadrupled over the past two years. To put it bluntly, the corporate sector today finds it less attractive to put money into productive activity than to put it into rentier and parasitic activity.
This even as small enterprises – which account for the overwhelming bulk of non-farm employment – are starved of credit, are unable to invest, and are seeing their income shrink. Unorganised sector manufacturing accounts for about 27 per cent of the value added in manufacturing, and employs 80 per cent of workers in manufacturing. (It is worth noting how small these units are: Two-thirds of the workers in unorganised sector manufacturing are employed in “Own Account” manufacturing enterprises, i.e., without an employer and working on their own account.) The share of unregistered manufacturing units in investment in all sectors of the economy has shrunk from 9.7 per cent in 2004-05 to just 3 per cent in 2011-12. Looked at in another way, the share in investment of the unregistered manufacturing units was only 12 per cent of the figure for the registered manufacturing sector. The share of micro and small industry in gross bank credit is just 5.8 per cent (on January 25, 2013), down from 6.1 per cent a year earlier.
Just as the failure of great landed estates to farm the land productively bolstered the social argument for the abolition of landlordism, the refusal of corporate giants to put vast surpluses to productive use further bolsters the case for socialising the ownership of their capital. However, the present social order, unwilling even to redistribute land, can hardly be expected to abolish monopoly capital.
 Credit Suisse, India Financial Sector: House of Debt, August 2012. (back)
 Krishna Kant, “RIL’s growth takes wings on surge in treasury income”, Business Standard, 18/3/13. (back)
 “Finances of Non-Government Non-Financial Large Public Limited Companies, 2011-12”, Reserve Bank of India Bulletin, March 2013. (back)
 Earnings before interest, tax, depreciation and amortisation of debt, or EBITDA. (back)
 RBI, Macroeconomic and Monetary Developments, 3rd Quarter Review. The sample is of 2,241 companies. (back)
 The firms covered in the three periods differ, but the periods for which there are common sets indicate that the trend is broadly as given here. RBI, Macroeconomic and Monetary Developments in 2011-12, April 2012; Macroeconomic and Monetary Developments, 2nd Quarter Review 2012-13; Macroeconomic and Monetary Developments, 3rd Quarter Review 2012-13. (back)
 Excluding financial firms and the public sector oil marketing companies IOC, HPCL, and BPCL. Capitaline data. (back)
 Krishna Kant, op. cit. (back)
 R. Hasan and K.R.L. Jandoc, “The Distribution of Firm Size in India: What Can Survey Data Tell Us?”, ADB Economics Working Paper Series no. 213, 2010. (back)
 Economic Survey 2012-13, p. 195. (back)
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