Why shares market is preferred to Bank finance by operators?

In my article titled, “An international fraud in Banking” dated 30^th August I had promised to study “Why shares are preferred to Bank finance by operators.

In this article we shall study different strategies played by smart operators who open new ventures with private moneys. Bank money or money that comes from selling shares in the market is both classed as private moneys.

Before we proceed for that let me first explain one common mistake being done by all economists. There is a distinct difference in the two, public money and private moneys. Public money is that collected through contributions (donations) from people for a common cause and the ownership of that money is of the society from which the contribution is made. Incase of private moneys it belongs to different individuals and belongs to them distinctly; it is not given for any common purpose but invested (not donated) for the benefit of that particular individual. Banks collect private moneys from individuals against a guarantee that they shall pay interest on that money and that the interest shall belong to that individual. Similarly in share market private moneys are collected through sell of shares to finance that company from private individuals and the company promises to pay dividend if it makes profits. It clearly shows that government has no right on the private moneys and any attempt by any government by making fictitious laws to control the private moneys is amounting to a theft of that private moneys and so it becomes a crime. When Indira Gandhi nationalized Banks to use these private moneys it was a crime but unfortunately nobody challenged it and one explanation for that given to me is that the difference between public money and private money was not understood by the concerned authorities. Even people, who justified that criminal act of nationalization of private Banks, mistook and treated private moneys on par with public money. It is shame that such mistakes have been happening unwittingly and in many cases unscrupulously in many parts of the world even today. Recent behaviour of our Reserve Bank in giving orders to Banks on some matters clearly shows that even today our economists do not understand the difference between private moneys and public money and so it is a very serious matter. May be they are indulging in it knowingly and deceitfully. Present government and the Reserve Bank are doing the blunder Indira Gandhi and her government committed long time ago. Who shall educate these people? Sometimes I feel that our government is being run by petty clerks, posing as governors and CEOs, of no common sense much less of intelligence, how to correct them?

One explanation given to justify this outrageous activity on the part of both government and the Reserve Bank is that the total damage to the economy of this private moneys is divided on all the depositors and per depositor the share of damage is very small or in proportion to his/her share of deposits. As such it was construed by the authorities that they, the depositors, should bear it. The question here must be put to these irresponsible authorities that, what right, the government and also the Reserve Bank, have to take liberty with this private moneys at all. And on what grounds do they take things for granted the way they do? Some body should take the trouble to challenge the authority of the government and the Reserve Bank in this matter.

As we see that banks are actually custodians of the money vested with them. They are supposed to use the money in the manner most convenient to the Bank so that the Bank shall be able to fulfill the promise it has given to the account holder.

In early times when new ventures were launched in the market for production or for sell of commodities the sponsor or operator had only one option before him and that was of Bank finance. As mentioned earlier the Banks had responsibility to the account holders and they were very scrutinious about all the proposals coming to them for the loans. This scrutiny demanded viability and feasibility reports of the proposal. Problem with inventors of the new inventions, those were being made by ingenious people in the America, was that they were not in a position to provide those reports but they had visualizations about how the new invention could be of great profit and how the invention will be accepted by the customers. But that was not acceptable to the Bank authorities who were scrutinizing the proposals. Many really excellent inventions were languishing in the hands of the inventors. Finally, idea of mass partnership came into the minds of these ingenious people. That was different from ordinary partnership. In ordinary partnership a few fellows join hands to open a venture. In mass partnership the venture is opened by the promoter and he gets contribution in the form of share equities. This is how the concept of limited companies with share capital came in practice. One of the first such corporation was the great East India Company who conquered India and established the British colonial rule. In America when this concept became available to entrepreneurs, they preferred to go in for forming such limited companies in stead of begging to Banks for the Capital.

Let us see the advantages of this mode of investment to the promoters and also we shall see risk to the investors. Promoter is not forced to give all details of the prospects of the project; and whatever he presents in the brochure is such that is suitable to his interest. Investors usually do not go into the details of the material information furnished in the brochure and prefers to believe it; as a result the acquisition of the funds becomes very easy. In many cases investor invests at the promise of the broker in the shares market and so raising funds through the sells of the shares is a very easy process. In case of Bank investment the process is very cumbersome. Convincing the well trained officer of the prospects of any new invention is almost impossible and as a result all those who had to open a company to produce new invented product invariably preferred to shares market rather than Bank. There were a few exceptions to the usual experience of the inventors with the Banks; when the officer concerned was also a person with dynamic vision and could envisage the prospects of the new invention. In such few cases Banks did venture and were successful. But this was a stray incidence and almost always the shares were the preferred option. Since in the US during last century a large number of remarkable inventions were pouring in, and the shares market grew considerably. Today we are told that Banks do go in for so called venture capital but that is all a show; actually Banks dare not go in a real venture for obvious reasons. Theoretically Banks are not designed to finance ventures at all. To expect a Bank to finance a venture is amounting to risking private moneys vested in them by the depositors. If a government or reserve bank orders Banks to do it that amounts to asking the banks to do a theft of the private moneys at the instance of a government or the Reserve Bank.

In large number of inventions the companies floated with share were successful and so both the investor and the inventor-entrepreneur were now confident that this mode of investment is better than going to Banks. People preferred to put money in the shares market than in the Banks. So far everything was good until the speculators entered the scene. Speculators, is a clique of investors who want to make money by gambling on shares, increased in number and they were mainly the brokers of the shares who were the first speculators. Later on other gamblers entered the field and speculation became a regular affair. Small investors were forced to do as speculators did and the process continued. Today Reserve Bank of India is forcing Banks to indulge in this dangerous game of gambling with the funds of depositors!

We also see that this style of investment could cause many innocent investors loose just because the venture was not successful. Many unscrupulous operators floated bogus companies with the help of shrewd and crafty share brokers and all this is considered as a part of this type of investment. It shows that putting money in the shares is definitely more risky than putting it in a good Bank. However, this game is square when we see some unscrupulous operators floating a Bank and then making losses. All the same, defenders of Banks say that there is some protection to Bank investors by the Reserve Bank or such arrangement but in shares no such protection is possible since that investment is not ‘third party protected’, like Banks.

We shall study some other time how a good investor’s shares market was spoilt by these speculators; by involving government into it, and reducing it into a gambling den. As we know for a healthy economic development we need an investors’ shares market and not a gambler’s shares market. In that study we shall see how the whirlpool of speculation pulls in money from other sectors and how it destroys the economy of a nation in that process.

We also see that Dollar coming into the shares market and Dollar coming as investment in a regular industry are not the same as it is often considered. Dollar coming in the shares market for speculative activity doe not add to our foreign exchange strength but on the contrary pulls out our foreign exchange reserve when they take away the profits from the market. Whereas investment in a regular industry stays in the country and helps improve our foreign exchange position. This matter must be considered carefully while studying this mode of transactions. Unfortunately that is not being done today; both types of Dollar activity is taken as same! In view of this we must discourage foreign investments in our shares market to save or scarce foreign exchange position and encourage this foreign investment of Dollars in industry.

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