Never forget, there is no FREE LUNCH

Posted by Avinash Narula

October 10, 2008

Let me take this opportunity to comment on the current financial crisis. The major reason behind what has happened is our quest for high growth combined with our reluctance to logically question the reason for the high growth. This is also true for the financial crisis that gripped India after the Harshad Mehta scam.

Let me try to explain what I mean. I came to visit India from US at the time when Harshad Mehta was creating history. The stock market was booming and so was the real estate market. The reason behind the stock market boom was a guy called Harshad Mehta. At every party I went to, everybody was talking about their stock portfolio and how much money they were making. I heard a number of stories about Harshad Mehta. One of the stories was that he wrote a cheque for Rs. 500 crores to buy some stocks. Now what bothered me was that how could a unknown business guy with no solid business background write a cheque for Rs. 500 crores? I knew that writing a cheque for such a huge amount was even difficult for top industrialist and big business families. I asked a number of people if they could tell me where this guy was getting his money from but nobody could give me an answer. In fact, most of the people I asked this question gave me a look which said “why should I care? I am making money.” Since everybody seemed to be making money, nobody was interested in asking questions behibd the booming stock market.

We all know that there is no free lunch. So finally when it came to light how and from where Harshad Mehta was getting his money, the boom came to an end and everybody in the stock market suffered.

What I am concerned about is that the media also plays along. I am surprised that none of the business and daily newspapers investigated the fact that how was an unknown businessman was writing cheques for Rs. 500 crores. It is surprising that this fact didn’t raise any flags with anyone in the media.

The same thing has happened now. First, why was someone not questioning financing of risky home loans in US. I think most of the financial circles knew about the risk being taken but nobody seriously considered raising the flag. In India, I was concerned at the way the property prices and the stock market were rising. Valuations of the companies were going through the roof. I have discussed the case of the IPO of Reliance Power on my blog. I was asking a simple question. Anil Ambani of Reliance Power had priced his shares at Rs. 550 but the market was expecting the price after IPO to be Rs. 900. Now this was for a company which didn’t have any revenues worth talking about. I was shocked to learn the number of times the issue was oversubscribed and the amount involved. It created a record of sorts. Even big financial institutions from all over the world applied for the shares. We know everybody lost money. Now I have no respect for the investment bankers or analyst because how can you invest money like. I think anybody who would have analyzed the assets of the company and its revenues, it would have been difficult to justify the price. Also, I read an interesting article which suggested that Anil Ambani had already raised funds on the same asset when they were with Reliance Energy the parent company.

About a year back, I was trying to buy a property and I remember asking the property dealer if he could tell who was buying all the expensive properties. I told him that I am financially reasonably well-off but I am afraid to buy a property of Rs. 50 lakhs as that would involve my paying a monthly installment of Rs. 60,000. For a person to pay Rs. 60,000 as monthly installment he has to have an income of Rs. 2.00 lakhs a month. Now how many people had that kind of income? He had no clear answer. Even with reasonable income and reasonable solid financial base, I was hesitant to buy the property because it would have stretched my finances to the limit and any adverse situation could have created serious problems for me.

Now while the going was good, the media played along. Some newspapers even came out with ad campaigns to celebrate the high valuations of India Inc. Everyday the headlines talked about some big deal or the other. Times of India and Economic Times were at the forefront. Even Economic Times make no effort to analyze the situation ans warn its readers. Somebody should have asked the questions as to how would the investment be profitable at such high valuations without appropriate income to match.

It is beacuse of this reason that I am tracking all the ventures and initiatives announced by Kishore Biyani. I am concerned as to from where is he getting the money to fund so many joint ventures, numerous formats and new brand launches. I hope somebody in the media will take note and analyze what Biyani says before printing the same.

I think when the going is good we tend to forget that “there is no free lunch.” We need to remember that there is no free lunch anytime. There is a reason behind good and bad times and we need to find out whether the reason behind the good or bad times is logical or not.

Avinash Narula

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