Chapter 12F: if you don’t lend money, how do you pay interest to the depositors. How do the cash books balance. What do you show in your regulatory filings ?
Regulators are not bloodhounds. Nor are auditors. You give them some papers. They type them out nicely. Collect their fees. And life goes on. Once in a while a Satyam or ILFS or Srei or DHFL or Reliance Cap happen – u make some song and dance and life goes on. Ramesh Geli of Global Trust Bank or Rana Kapoor of Yes Bank is the way every private bank eventually goes. Even Rupee Bank in Pune exploded. With the likes of PMC inbetween. The regulator runs around like a blind man trying his level best to do something.
Subramaniam Swamy recently asked a very pertinent question. What is the accountability of the RBI Director on the boards of banks. But it seems RBI didn’t have any director on the board of Citibank. They didn’t have much of an oversight either. And Citi did know or does know how to manage everyone in India. Judges, buteaucrats, politicians. Most used their cross border cash movement logistics. There has never been any secret on what was their real business.
But back to how do you pay interest. You pay interest by earning 30 or 40% return on that money without taking any risk. Pay the depositor 5% and pocket the rest. Pay no tax and pay everyone. Some want money, some want donations, some want havala, some want briefs, some want scholarships for children, some want jobs for their kids. They had something for everyone. Citibank never ever lost a court case in India. No whistleblower ever lived to see the end of his complaint. But back to the investment strategy.
25 years ago they came up with a rs 10,000 crore fund. In those days Ibdian funds like Infinity were say Rs 100 crores. The iit alumni ones were maybe 50 crores. Here is what they did.
They figured out, it was possible to build a company topline quickly in commodities by reducing price. Go a little below cost and the others opt out. Your sales revenue explodes. So that is how they found KS Oils. It was an obtuse rapeseed and mustard oil manufacturer in Morena, Madhya Pradesh. They had some kind of a brand in Kalash. Citi pumped in 90 crores. Then got New Silk Route of Rajarathinam and Rajat Gupta fame to put in another 400. With ability to lose 200 cr, sales rocketed. Citi took the co public, ramped up market cap to 4000 crores, walked away with 500 crores in profits and another 100 cr in fees. The company then got debt of Rs 1000 crores from State Bank of India. Helped the promoters export this money. Probably made another 100 cr doing that. And then hip hip huray.
Stock went down 99%. SBI lost all their money. A friend of their bought the assets for pennies to the dollar. Some TV channels made some money. Some early investors rode the tiger.
The rest got eaten up by the tiger. The bubble exploded. Invested 90 cr. Got back at least 500. Now to the next one.
It is called smart investing.
Pramit was head of ibanking.
