The Dark Side of Finance

IAIP organized its first speaker event in Ahmedabad on July 8^th 2013, wherein Utpal Bhattacharya, Associate Professor of Finance, Kelley School of Business, Indiana University, gave members a perspective on The Dark Side of Finance. The event was very well received by the members in the city.

Professor divided his presentation into four broad areas:

(1)    Trust – the oxygen of capitalism

The root of capitalism is “trust”. The oxygen of capitalism is “trust”.  An entrepreneur with a good business idea, who can create jobs as well as add value to society, is constrained with capital. Though he or she can use own money or borrow from family and friends, these are limited sources of capital. Hence he/she looks for money from investors who are also looking for good entrepreneurs and opportunities. All big investments in the world have used, use, and will continue to use other people’s money. This is all possible because of private contracts, commercial laws, public regulation, enforcement, trust, honor and moral. Without trust,  morals, good law etc a stranger would not lend money & capitalism would collapse.

(2)    Breach of Trust – A personal perspective

Professor talked about breach of trust from a very personal perspective, where he in his country (India) was asked to bribe to get his own scholarship. He cited example of a Ponzi schemes in ex-communist country where protests broke out after a fraudulent pyramid investment scheme failed stripping many Albanians of their life savings. In a study in Mexico, when corporations made news during the years 1994-97 nothing happened to their share prices pointing to rampant insider trading. Increasing number of countries have established insider trading laws. However, the difficult part is enforcement of these laws. Very few countries like USA have been able to do them. Likewise firms in all countries fudge their accounting numbers due to loopholes in the treatment of economic profits and accounting profits. Likewise there was breach of trust in fund management & financial advisory businesses with some mutual fund families cross-subsidizing distressed funds and advisors thinking about their commissions instead of client interests. He also added that even people/investors do not follow honest advice!

(3)    Pricing of Trust

So is Trust priced? To a certain yes say Bhattacharya. For the developing countries his research showed that the cost of borrowing is higher if a law is enacted but not enforced, than if the law does not exist. Likewise earnings opacity raises the cost of borrowings and reduces liquidity. Transparency in financial reports is rewarded in the marketplace.

(4)    The Dark Side of Finance

Professor concluded the session with Dark side of finance. As finance is about using other people’s money, opportunities to breach fiduciary responsibilities are strong, easy and cannot all be eliminated by law. All stakeholders should be aware of their responsibilities and morals and be alert.

The presentation was followed by few questions from the audience and brief note about IAIP by Biharilal Deora, CFA.

Contributed by: Aakash Pandya, Harshal Shah and Parag Toli

Photographs by: IAIP Volunteers

The presentation could be accessed at http://www.cfasociety.org/india/Pages/ContinuingEducation-Presentations.aspx