Strategic investor for Satyam Computer Services

Much has been talked about conjecturing on what could possibly be an attractive stake for an investor to have strategic interest in the company. Whether 26% would do or nothing less than 51%. While the company’s board has stated before the honourable CLB , inter alia , that to enable the company to induct a strategic investor with equity capital, the authorized equity capital has to be increased from 160 cr to 280 cr and also to make preferential allotments. Ms. Pallavi Shroff submitted that no strategic investor would be interested unless a minimum of 26% of the enhanced equity capital is allotted on a preferential basis.

Since honourable CLB has permitted the company to increase the authorized capital from 160 cr to 280 cr, accepting the merit of the board’s case , there should not be any hindrance for the compay to go ahead and raise 120 cr of equity capital , make preferential allotment of shares at par or at a premium and induct a strategic investor. This 120 cr will be roughly 42% , which should be adequate for the investor to feel confident as regards it’s holding in the company. At any rate it is a paltry sum to be paid for what Satyam is potentially worth.

It is now widely accepted , particularly after the CLB order that a strategic investor is necessary who will chart out a revival plan for the company, regain confidence of clients, further the business of the company and in general put the house in order. The hapless shareholders will then find a reason to cheer after a traumatic erosion of shareholders wealth.
As it is, the current economic scenario is making life difficult for even the established players and a beleaguered one needs all the help. The company should therefore quickly get on with the job at hand.

Capitalism dying ??

In an article in the Times of India, Swaminathan A Iyer has made an interesting list of writers of obituary of Capitalism and has shown that despite all the forebodings, Capitalism has survived so far and it has survived because of its inherent ability to re-engineer itself and also due to its character being, in a broader sense, that of a govt-private JV .
Here are some arguments in support of capitalism.
First on the self correcting nature of capitalism. As long as land, labor & capital are owned, operated and traded by private individuals/corporations which is what happens in capitalism, there exists a profit motive . It is this urge to make profits that breeds entrepreneurs who use their knowledge, skills and resources for economic activity. Economic freedom draws in more participants which leads to competition which further leads to better and more affordable goods and services thereby benefiting larger proportion of population. Thus capitalism promotes economic growth which is higher GDP. Benefit to people is in terms of improved living standard through greater availability of food, housing, clothing and health care. Understandably, this is what welfare – the dictum of socialism - is all about . The ingenuity of human entrepreneurship in fostering widespread economic activity cannot be replicated by state machinery which can be handicapped by lack of motive, resources and ability.
In a free economy it’s the demand supply equilibrium which works. Freedom has with it the excesses i.e. the booms and busts and these have been known to exist in cycles. In times of one or the other , demand and supply adjust to a state of equilibrium from where human greed and fear start taking over and the cycle repeats itself. But importantly in the process, learnings are adopted, earlier shortcomings corrected and the system goes on to improve itself .
Now, no state can ensure welfare of its people without a prospering economy. In that sense the state can create a climate for free economic activity i.e. where market forces can play . It can also be a part of that market force, albeit ensuring level playing field is not disturbed. Ultimately the state also benefits through tax collection. Thus in a capitalist state the government does have a role, as it must, in ensuring welfare . A socialist state on the other hand can attempt welfare but will lack the entrepreneurship to propel a flourishing economy. India is a fitting example of this. India’s progress is there for all to see. From Gold control order of the 60s to bludgeoning forex reserves , the impressive rise in per capita income, and the cellphones and two wheelers in the hands of millions are truly eye opening.
According to Nobel laureate Milton Friedman (1912 – 2006) , economic freedom of competitive capitalism is a requisite of political freedom and that centralized control of economic activity is always accompanied by political repression.
India’s policy makers would do well to continue with the reforms more vigorously and not get tempted to swing back to the old ways.