Commonwealth Gaming: Is India Ready for Prime Time?

The bungled organization of the Commonwealth Games in Delhi raises questions about India’s ability to efficiently build infrastructure.

Indian Commonwealth Games Construction Projects

Construction workers labor outside the Jawaharlal Nehru Stadium in New Delhi, India, on Tuesday, July 27, 2010. Preparations are underway for the 19th Commonwealth Games which will take place in Delhi in October of this year. Photographer: Brian Sokol/Bloomberg

Brian Sokol/Bloomberg

The bungled organization of the Commonwealth Games in Delhi raises questions about India’s ability to efficiently build infrastructure. It also raises questions about the wisdom of giving money to managers whose primary qualification is that they were out there first.

With a population of nearly 1.2 billion, GDP of $3.6 trillion and GDP growing at the rate of 7.4 percent, India continues to be an important economic investment possibility. But should you invest in India now and with the current crop of promoters?

As the massive accounting fraud at Satyam Computer, the poster child for Indian technological transformation, demonstrated, Indian companies continue to be controlled by insiders and investors suffer from the absence of transparency and disclosure.

Given the idiosyncrasies of India’s stock market, the nature of Indian securities laws and the related problems, can promoters unfamiliar with the terrain successfully negotiate it?

Ask a fund’s promoters what they bring to the table. Ask them about their own backgrounds. Have they run afoul of the SEC or been involved in programs that the courts have questioned?

Finally, talk about strategy. How unique is the strategy and how appropriate is it to India now? More important, how forthcoming will promoters be about their fees and compensation, especially those paid out in transactions?

The India buzz started when Goldman Sachs, in its now famous 2001 BRIC document, pronounced that Brazil Russia India and China were ready for prime time. On cue, some of the largest US private equity firms – Blackstone, The Carlyle Group, KKR, -- were quick to create programs to raise capital targeted for India. But so were many US-based Indians/South Asians who parlayed their “South Asian-ness” to raise money.

The pitch was supplied by Goldman Sachs. Infrastructure is the key to the BRIC development story, it noted. “As globalization deepens infrastructure will arguably become even more important for countries seeking a role in the just-in-time global economy, a Goldman Sachs report emphasized.

Investors jumped on the invest in Indian infrastructure bandwagon. But they did little due diligence on whether these promoters were capable of doing such deals or whether these deals made sense. Never mind that most of these promoters had little experience with India or with the areas they proposed investing in.

Perhaps the biggest beneficiary of the India-centric capital raising has been 49-year old Arshad Zakaria, former president of global markets and investment banking at Merrill Lynch. Zakaria is best known at Merrill Lynch for having sold tax-avoidance schemes to Allied Signal, American Home Products (now Wyeth), Colgate-Palmolive, and others in 1989 and 1990, schemes that were characterized by a federal appeals court as shelters and rejected. Zakaria was fired by Merrill Lynch in 2003. In 2004, Zakaria launched New Vernon Capital “to invest in the public equity and private equity markets across global emerging markets with a focus on India. New Vernon now manages assets in excess of $2.4 billion.

Other beneficiaries include Raj Rajaratnam, Rajat Gupta and Parag Saxena who in 2002 came together to launch a $2 billion fund called Taj Capital Half of the capital raised would be managed by Rajaratnam and his Galleon Group. The other half would be managed by Saxena, Gupta and others in emerging market deals in Asia.

Rajaratnam currently faces trial for alleged insider trading. Gupta and Saxena have severed their ties with Raj and now operate New Silk Route with assets in excess of $1.4 billion. Gupta reportedly has also been the subject of investigation by regulators.

Investing in India has is not without its successes. One of the earliest was the $250 million acquisition in 2006 of Office Tiger, a business process outsourcing company based in India, by R.R. Donnelley & Co. There was only one twist. Office Tiger was launched and managed by two American Ivy Leaguers. A more recent success was when New York banker Wilbur Ross sold his stake in SpiceJet, an Indian discount airlines carrier. Ross who had bought his stake in SpiceJet for $80 million in July 2008 sold the stake this August for $159 million.

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