Good going

Investors should have little to complain about in the five-fold rise in cash balances with Indian companies. Normally, having a large amount of idle cash in the balance sheet is frowned upon by investors, because it's a sign that the company is not able to use the money properly.

The cash hoards built up by the IT services companies, for instance, have come in for a lot of criticism by analysts, who want these companies to quickly use the money to acquire companies.

In the absence of plans for expansion or acquisition, investors have often demanded that the money be returned to them.

The rationale for doing so is simple""the individual investor may have a better use for the money than the company.

However, the current build-up of cash balances is not an indication that companies are cash-rich, rather that they have big plans for investment in fixed assets, and the cash is held in banks till such time as the capital expenditure gets under way.

In other words, the cash balances are a reflection of the easy money conditions prevailing not only in emerging market bonds and convertibles, but also in the IPO market.

And as every company treasurer knows, the best time to raise money is not when the company needs it, but when market conditions are right.

That said, several inferences can be drawn from the build-up of cash in corporate balance sheets. The most obvious one is that, if the amount of cash is anything to go by, there should soon be a boom in capital expenditure.

Part of that is already under way, as can be seen from the bulging order books of engineering companies. That should be welcome news for those concerned that India Inc. is running out of steam""margin pressures can be overcome once new revenues from the expanded capacities are available.

True, the return on assets will be lower because of the cash, but the effect is strictly a temporary one.

The second implication is that, if the current boom conditions continue for emerging market bonds and convertibles, more and more companies will continue to take this route for funding their capex requirements.

Indian companies have been the biggest issuers of foreign currency convertible bonds in the Asia-Pacific region in the first half of the year.

The upshot has been that the pressure on the domestic banking system for funding capex requirements has eased.

If the safety valve of foreign borrowing did not exist, credit offtake from the banking system, already high, would shoot up, and banks would have had no alternative but to raise interest rates.

That could have led to a recurrence of the situation faced in the mid-nineties, when companies were faced with falling demand at a time when they had built up capacities by borrowing at high interest rates.

This time, with interest rates continuing to be low, that is unlikely to happen. Moreover, besides cash, companies also have plenty of liquid assets in the form of investments on their books.

The bottom line is that, this time around, the capex cycle seems far more sustainable.