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V Shankar Aiyar

AU CONTRAIYAR

Can Dalal Street Reward Cartels?

Last week I went to hear Montek Singh Ahluwalia, member, Planning Commission, speak on "Fears of Globalisation" at the Vasant Seth Memorial Lecture. While expounding rather lucidly on the various corners of fear, the former finance secretary touched upon what he believes to be irrational behaviour of markets. His view was that markets were no longer considered the most efficient tool of judgement. He cited the valuation race on Nasdaq as also the over-reactions in South-East Asia and Brazil.

I joined issue with him and argued that while markets may suffer from late awakening and exaggerate on either side, their movement has not yet been found to be contra-fundamental. Ahuluwalia agreed but maintained that markets cannot be left alone to determine the course of economic agenda. In a sense, we agreed to disagree and the issue ended there. It is with this feeling of having not lost an argument that I went to meet my friend Jayesh Shah at the CCI. He raised an issue which left me wondering if I should have lost the argument with Ahuluwalia.

Consider this: world over when sales of any commodity dip, consumers stand to benefit. Producers faced with capacity utilisation slash prices to increase the offtake or sales. It is the very same phenomenon that caused the fall in prices of chips, semi-conductors, petro-chem, colour picture tubes or computers.

Now juxtapose this maxim in the Indian cement market. Over the past 12 months, cement manufacturers and analysts tried hard to cast a story about a boom in the housing sector, using housing finance and other weak indices to prove their point. None of it worked and demand for cement never really picked up beyond the few odd tonnes. In fact, demand dipped at the very onset of the so-called busy season.

Had it been any other industry or any other commodity, the producers would have been forced to drop prices to push volumes. Not in cement though. Thanks to a somnolent competition watchdog, cement manufacturers Grasim, ACC, Gujarat Ambuja and India Cements, among others, have ganged up to cut production. With supply lines being crimped it was natural for prices to rise. Therefore realtors in Mumbai have found per bag prices shoot up from Rs 135 to Rs 170 within 15 days.

But naturally, the building industry is up in arms and has complained to the government against this totally Indian phenomenon. They have called for action against cement producers under the MRTP Act for collectively slashing production from 109 million tonnes to 81 million tonnes. You would think that the markets—so sensitive and pro-active on the corporate governance—would also frown on the practice of cartelisation. Instead they have rewarded cement stocks for their exemplary action.

Gujarat Ambuja scrip's price for instance shot up from Rs 134 on November 1, 2000 to Rs 160 on Monday. More interestingly the price of ACC has shot up over 50 per cent from Rs 97 to Rs 161 on Monday.

Does this mean cartelisation pays? Does one thus infer that markets are not concerned about appropriate or best management practices? Or worse, do markets view cartelisation as being appropriate market response? A friend, who manages risk for a large Indian corporation, avers that "markets have always rewarded cartelisation. They see it as efficient economic management." Not just that. My friend also points out that markets across the world view it not as cartelisation but as a response to over-capacity. (I suppose if one stands economic theory on its head one could also reason that markets welcome mergers and acquisitions since one direct implication of M&A activity is tailoring of capacities rather than acquisition of market shares as it is normally viewed.)

Really. The response of markets couldn't be more irrational. The function of markets is primarily to reward performers and punish laggards. Now consider how illogically the system has operated in response to the cartelisation by cement producers. It is a recognised fact that Gujarat Ambuja is one of the more efficient producers of cement. That being the case, would it be fair if ACC too got as much—rather a larger benefit—as Gujarat Ambuja? Also is it the efficiency of markets that the ACC scrip gains more than Gujarat Ambuja?

Indeed, if I were the shareholder of Gujarat Ambuja I would question the very decision of the management to join hands with other, less efficient producers. It impacts on shareholder value as not only does the competition manage to hold on to market shares that would otherwise have accrued to the more efficiently priced producer but also derives benefits to the shareholders of a rival company.

Clearly cement producers and the Securities and Exchange Board of India need to look at the code of corporate governance more carefully, to understand the spirit and not just the letter. Dalal Street too needs to re-think its approach to cartelisation if it wants companies to take corporate governance seriously. Unless of course it concedes that Ahluwalia is right in his perception that markets are not entirely efficient and not always rational.

(V Shankar Aiyar is Associate Editor, INDIA TODAY. He is based in Mumbai.
Write to V. Shankar Aiyar.)

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