Did anybody say Infrastructure?

In today's newsletter we talk about the unlikely heroes who might give infrastructure a boost and Yes Bank.

The Story

Since we posted our story yesterday many people have written to us offering suggestions about how you could improve the country's faltering economic prospects. One interesting suggestion was that we need big investments in infrastructure.

The argument is this.

Infrastructure is essential for economic growth. Good roads reduce commute time and enhance workers’ productivity, good schools help in shaping the future of the nation and good telecommunication networks lead to increased efficiency across the board. Infrastructure projects also generate jobs for labourers, and in turn, give them the spending power to collectively keep the consumption engine churning. Suffice to say, infrastructural investment is kind of important. Sadly, in India, it is woefully inadequate. This much is obvious. What is not obvious is who's going to make the big investments.

Private enterprises have been tentative over the past few years. The central government has been struggling with its debt burden. So who among us is likely to be the knight in the shining armour?

Our reader's suggestion — the state governments. Fundamentally this argument is sound. If state governments can ramp up investments in infrastructure maybe we wouldn't have to be dependent on private players and the Central Government all the time. However, there is a problem. Much like the centre, the finances of state governments aren't exactly what you would call pristine. Most state governments are struggling with large debt burdens of their own.

Think GST. Since the arrival of the new and improved tax system, state governments have had to cede a lot of control in deciding actual tax rates.. Granted the centre has promised to compensate for the losses accruing out of this new transition, but it's still affected their ability to generate significant revenue. And when they realise that their expectations aren’t met, they are often forced to borrow large sums of money to keep up with their spending promises. This is further compounded by the fact that most state governments continue to offer electricity and irrigation facilities at prices that are often unsustainable. Granted that these policies are rolled out in the larger interest of the public, but you can’t keep spending money that you don’t have. Add to this —  farm loan waivers, bad money management, some corruption in the mix and yeah, you've got yourself bigger problems. We are not saying all this. The RBI is.

So while in theory this sounds like an excellent proposition. Sorry fellow reader, its unlikely state governments are going to suddenly jump in to save the day.

The Mysterious Erwin Singh Braich and Citax Group

In other news, there was a lot of chatter about Yes Bank yesterday and of course we must delve into it. Now if you are new to the Yes Bank Saga, here’s a brief to get you up to speed.

Yes Bank loaned out money to large corporates in a pursuit to grow at breakneck speeds. Multiple corporates failed to pay back the bank in full. Yes Bank started running out of money and desperately needed somebody to put in the extra cash to keep it afloat and possibly help it script a turnaround. So there’s been a lot of speculation on the matter and it seems as if we finally have an answer, at least partially.

Yes bank has now revealed a list of 8 potential investors who seem to be interested in buying parts of the company. The group is willing to put in about $2 billion. That's good enough by all accounts. However, out of the $ 2 Billion, a whopping $1.7 Billion comes from the family offices of a certain Erwin Singh Braich of SPGP Holdings and Citax Holdings & Citax Investment Group.

The problem is nobody knows a lot about them. There are reports that Erwin Braich was declared bankrupt in the late 1990s, and since then has managed to stay out of the public eye. There’s not even a Wikipedia page to sing his praises. Then there is the Citax group. Another mysterious entity that has put out very little information about itself on the interweb. And even if one were to presume that both investors are solid, there is the regulatory problem. For any investor to own  >10% in a bank, they have to go through the RBI’s ‘fit and proper’ test, which does exactly what the name suggests. It looks into the investor’s background, focusing on their financial status and any investigations pending against them to see if they are fit to wield that kind of control, especially considering we are talking about a large private Indian bank.

And so despite the seemingly optimistic development here, there are definitely some concerns floating around. Maybe that’s why the share price tanked 6% yesterday. In any case, we don’t want to speculate on the matter much. So we will leave you here.

Until then...

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