One problem with Indian capital risk return matrix

One problem with Indian corporate and their regulation can be summed up in the chart below.

Ideally a simplistic capital risk return matrix looks like this (click picture for larger version). In the best of places it comes close to this. Note that this is a simplistic depiction.

Ideal Capital Risk-return matrix

In India, it looks like this:

Indian Capital Risk return matrix

This is law enforcement issue as well as information issue. There is lack of regulation on conflict of interest between promoters and investors (small and big), there are many issues related to corporate governance. There is paucity of information to ratings agencies and these days the rating rigour is under a cloud with intense competition.

The chart also tells us why India does not have a deep bond market. Since my days in CRISIL, we have been harping on the improving the depth of bond markets. But so long as the risk-return profile continues there are no incentives for it.

The dispute resolution mechanism is abysmal. It is particularly unwieldy, long winding, costly and infructuous in the end. This has hurt investment in the country. Once this is fixed India will have unprecedented growth in equity and bond investments.

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