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A couple of years ago, newspapers in the capital were full of reports about the Sheila Dikshit-led Delhi government’s decision to regularize some 895 illegal colonies. Squatters, who had bought land illegally and built illegal structures flouting all norms and greasing palms along the way, were made to look like super-smart investors as the values of these properties skyrocketed overnight.
The tax-paying, law-abiding citizen was made to look like an idiot for either paying a multiple to buy a legal roof over his head in a legal colony or for simply closing his/her eyes when the treasure was there for taking.
Another version of the same story unfolded in the financial capital in the form of protests against demolition of the illegal structures in the Campa Cola compound. The civic body had found a part of the structures which housed some 140 families to be illegal and had ordered their demolition. After lengthy legal battles and spectacular TV battles, the BMC demolished a portion and disconnected power, water and gas connections.
Another example is the National Spot Exchange, where the bourse squatted on what it thought was a regulatory grey area to benefit out of the super profits from potential regularisation. But the regulators put their foot down.
While the results were different, the investment rationale of people who put their money into these illegal structures is the same: the ability to turn what is illegal today into legal tomorrow. The examples themselves show that it was a high-risk, high-return strategy.
Private equity funds, which are investing in internet companies that operate in spaces where there are legal, regulatory and policy gaps, seem no better than such squatters. It seems that they are almost hoping that they can grow undeterred by prudential and customer safety norms which regulations usually focus on and after a point they can retro-fit the regulation to suit the manner in which they have grown and get ‘regularized’.
Thus, you can have your cake and eat it, too.
Take the recent Uber case. One of its competitors had been complaining to the central bank for over eight months about the various payments system rules it was violating. Only after the complaint came through an umbrella body and was reported widely in the media did the RBI take notice. By then, enough damage had been done. Further, the radio taxi operators, who were operating in the capital, also brought it to the notice of capital’s transport authorities how this ‘so-called’ model does not conform with requirements such as ‘minimum fleet’, parking space etc.
Now, as an investor in this company, should I not be bothered about these violations? Or should I be happy that I am getting away with these and that hopefully one day my investee company will be big enough to dictate the rules of the game? Aren’t statements coming from Uber’s chief about helping the Indian government improve safety and driver check procedures too patronising for a violator? A violator who also ignores customer complaints like the latest revelation from US-based Nidhi Shah shows.
Similar is the attitude of funds which are investing in the e-commerce space. Reams upon reams have been written about how these entities are operating in grey areas. Some even have fictitious entities floated through relatives to pull the wool over regulators’ and investigative agency eyes. The political class has been too clever by half in taking a middle path. The party is on. But, when a “Uber“ event happens, everyone will pounce on them. Again our dear private equity investor will be left carrying the can. He’ll call India unfriendly for investors.
God forbid this should come to pass. But, let me present a hypothetical scenario. The driver equivalent of an e-commerce company is a delivery boy. The e-commerce delivery boy is everywhere. He knows where you live. He has your mobile number. He knows your office. He knows your girlfriend there. And, he also knows your wife. What damage he can do is limited only by his imagination. What if some terrorist taps these poorly-paid over-worked foot soldiers? What other hazards they can bring? Something goes wrong. Then, Twitter will light up about background checks of delivery boys. Our ministers always can then coolly invoke the FDI policy which does not allow FDI in multi-brand retail, and ask them to pay back the PE money before they sell another Redmi or MotoG and, in the process, get a pat in the back in Parliament for quick action.
Private equity funds seem to be smitten by this squatter model, which can give 10X, 20X returns if and when it clicks. But as more Campa Colas and Ubers happen, the grapes will begin to sour for such squatter funds. They should focus on investing in ethical and legal businesses, which conform to existing laws and regulations and help create value for all stakeholders in a legal and sustainable way. Regulatory arbitrage used to be a multi-bagger, but not anymore.
