Flightless Birds, Chronicles of Deccan and Other Flights of Fancy

I recently read about the ‘Emu business’ that had apparently led to ‘investors’ losing major capital in the four Indian Southern states over the past few years. (More here)

The story was this: the Emu is the next big thing after Chicken in the Poultry business. And it was much more profitable. There was major world-wide demand for Emu meat, Emu eggs, Emu leather, Emu feathers and everything that was Emu. It was simple to make money from Emu farming – you simply paid the deposit to get the Emu eggs, and they even partly funded the Emu rearing till the birds are ready to sell, and even bought the Emus from you.

Apparently, the primary perpetrator even started restaurants that served ‘Emu delicacies’ and promised to buy Emu eggs and meat from the farmers. Now, this was quite outrageously ambitious from even a Ponzi scheme viewpoint.

I had ‘invested’ many years back in a similar teak plantation scheme in which they promised to pay me back with mango and teak trees, and even buying back the wood from me in case I was not interested in the ‘post dated cheques’. Eventually, I was left with some debentures which were not even worth the paper they were printed on.

Likewise, the ‘Emu investors’ are now left with some 15000 Emus in total with no idea what to do with them. And predictably, it is not clear under which regulator’s ambit this falls, and hence, who is supposed to take the blame for allowing the Emu scam to reach such epic proportions. Seemed funny when I read it, but not funny for the people who lost their money in the ‘Emu business.’

Lots of such ‘Emu businesses from the start’ or ‘businesses that become Emu businesses’ exist in the capital markets, despite well-defined regulation.

I started buying Deccan Chronicle Holdings in 2010 when it was priced below its then book value. Since then it has given me approximately -92% returns. Which is to say that basically I have lost that money. It used to be part of the mid cap 50 and I think even the Junior Nifty at some point – so not a small stock by any means. And at least the publishing business was a reasonably successful one in the south. Deccan Chargers was supposed to ‘unlock value’ in my analysis. Of course, in hindsight, it was a ‘Emu business’. Now it is clear that the promoter was a ‘Emu businessman’ too. And add to that inaction by regulators.

Minority shareholders of Kingfisher Airlines find themselves in a similar situation. But unlike Deccan Chronicle which had a profitable publishing business, Kingfisher has always been a ‘Emu business’ from the start – a pure flight of fancy.

There is a difference between a business and an indulgence. Deccan was a business before the promoters changed their minds about how to treat minority shareholders. Kingfisher was an indulgence from the start.

One common factor beyond the nature of business has been debt. Debt is a tricky thing.  Till a point, the borrower bears the risk, and beyond that point, it gets shifted to the lender. Then, the lender starts begging and the borrower shoos him away and decides the terms of the relationship. ‘Take this or you won’t get even this’ he says. In such cases, which turn out to be ‘Emu businesses’ it becomes increasingly unclear who is at whose mercy.

Who can help a minority shareholder in such a case? It has to be the regulator. Of course, help need not mean ‘repay me the money I lost’. That’s an investing mistake that the investor must pay for – specially if he invests in ‘Emu businesses’. But help can mean the assurance that ‘I will ensure that if someone takes you for a ride, he goes to jail or at least faces charges.’ Absence of that means an absence of a system that works.

A friend gave me an interesting insight yesterday. He said that while evaluating companies, he classifies them into 3 types. The first group is ‘White’ – those who do not require laws and regulation to do the right thing. The second group is ‘Black’ – those who misuse laws whatever you do. And the third group is ‘Shades of Grey’ – those who are fine if systems work or when things are fine, but when things go wrong, are quick to step over the line.

The Whites and Blacks are easy to identify, but it is the Grey where the majority lies, and are tough to identify. It is the Grey where the regulator must be most active. Even the most astute individuals and institutions may find it tough to recognize the Grey.

Investing in ‘Emu businesses’ will continue to happen as long as there is greed and fear. But allowing ‘Emu businessmen’ to get away is criminal. Till that happens, these Flightless Birds will continue to take investors on Flights of Fancy.

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