Tenders are not about price discovery
But a certification of fake accounts
Not one company claims bribery costs
India is an interesting but challenging market. Rest of the world has debt free companies. India has equity free companies. Business is run on public funds. Yet almost no business claims a debt to equity of more than 1:1. Indian chartered accountants can produce equity out of thin air. And Indian banks can never find any problem in that equity. The amount of grease required to aid the non discovery goes on increasing. Govt or private – Chanda Kochar or Rana Kapoor – the model is broadly the same.
Now come to the business side after the company has been set up. Almost all govt purchases are through public tenders. And the government is the largest customer. Tenders are a process for price discovery globally. Auctions is another word. Yet in India there is no such thing. Tenders are an exercise in gaming. You first game the tender terms to eliminate competition. The Big4 made a art of doing this for themselves and then made a practice doing it for clients. After the fixed tender is issued – the game doesn’t stop there. The lowest price means nothing. The game is post tender escalations. Escalations can be 200% of tendered value. And there is no tender for escalations.
Defence is no better. Yet if you see the balance sheets of the two or three largest tender players – there is no expense head called bribery. In fact if you were to believe corporate India – not one company has paid a penny of bribes to get orders. Yet these same very companies were hiring the likes of Nira Radia as management and strategy consultant at Rs 56 crore pa remuneration. India is the most honest country in the world because not a single listed company has ever paid a bribe.
Now where do these bribes go. There are two popular heads. One is R&D equipment. The other is land. R&D equipment is subsidised by the government and gets a tax rebate. Land does not have any depreciation. So if you buy a billion dollars of land, it will not dent your profit at all. Best of all land appreciates and at some point in history becomes worth more than the highly inflated amount it was shown at.
Now come to listed companies. Such companies can show you any financials. Expenses can be stated as required. R&D equipment can be speed depreciated to save on taxes whilst still showing a high EBITDA. And when you have the ability to hide tens of crores of cash bribes in Big4 certified financials – where is the big problem is not booking some purchases to inflate profits. Most materials can be bought on cash without tax. All in all, many of the Big4 certified financial statements for are not worth the paper they are typed on.
Is there a way out ? Unfortunately not. The Indigo cofounder went on record to say the accounts were fudged and full of illegal related party transactions. Yet the stock was the darling of the markets.
And stocks are the best asset class to invest in.
