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Rescuing Failed Entrepreneurs


I was idly watched ships gliding into Bombay harbour from my balcony  on a recent Sunday evening when  my phone started to ring insistently.  I felt too tranquil to pick it up , waiting for it to go into the answering machine. did. After a few minutes, the phone  resumed ringing again and once more I let it go to the answering machine.


When it rang the third time,  I reluctantly went to pick up the phone ready to curse whoever was the person calling us as a wrong number.


“I need to speak to you urgently,” said a vaguely familiar voice.


“What wrong, Vikram?”, I asked. “What’s so urgent on a Sunday evening that you should call me after so many years of not being in touch?”


“ The bank is auctioning my flat this week, I need money to pay them off immediately and you are the only one I could think of.”


Over the next few minutes, he recounted his story. I hadn’t met Vikram since the early nineties. When I had last heard from him, he was running a small manufacturing unit in a small town outside Bombay, making plastic  parts for a nationally famous luggage manufacturer. As the luggage manufacturer prospered so did Vikram. Not bad for an engineering graduate from a Tier 3 college, he used to boast. Vikram’s bar was always well stocked, he took his wife and daughter occasionally to Singapore and Phuket for shopping and holiday trips. Vikram worked long hours.

 

And then the economy got reformed. Instead of multiple suppliers of plastic raw material who Vikram could deftly play against each other and get cheap prices, his suppliers merged or were bought over by the dominant one who now dictated his  and demanded cash on deliveries. His main  customer who he had served so faithfully all these years, suddenly found a Chinese vendor whose landed prices  in Bombay were so low that Vikram’s proft margin’s became wafer thin. He was forced to extend more credit to his customers hoping to keep the business.  Strapped for cash, Vikram pledged his factory real estate and his residential flat to a nationalized bank for desperately needed funds for working capital. The spiral was slow but certain and finally the day dawned when the bank manager could no longer be “persuaded” to wait. His case was declared sick and sent to the Debt Recovery Tribunal who after a few hearings issued an order to recover the bank’s dues by auctioning off his assets. The only catch was that, by now, the amount he owed the bank was far in excess of the value of the assets he had pledged.

It was mid morning, the next day when I went to visit Vikram to see all this for myself. I found him with a glass of vodka at the kitchen table in his tiny flat, watching his wife cutting vegetables for lunch. He was only in his early fifties but looked like he was in his seventies.

“Why aren’t you at work?” I asked.

“The bank has out a padlock on my unit door, some months ago. They don’t let me operate till I pay back the dues.”

Later that morning I went around with him to the other units in that industrial estate. Many of them bore that seal of entrepreneurial death,  “This unit is pledged to…[bank name]” that allows a bank a risk free recourse to the entrepreneur’s assets in case anything goes wrong.

When we meet at conferences on entrepreneurship and venture capital, its not units and entrepreneurs like Vikram who we have in mind. We think of software or biotech companies started by bright young men with glittering degrees from the IITs and IIMs.  Yet, entrepreneurs like Vikram, running low tech businesses, employing a dozen or so workers constitute the vast  majority of Indian businesses.

What financial institutions and laws govern their fate?

While it is hard to argue that such units should be “protected” either through differential excise duties, or indirect or direct tax breaks, we need  to  study  how   other countries deal with  issues of this kind..


In the United States, where we normally assume the free market to behave in the most heartless manner, several states statutorily bar lien on the primary residence of entrepreneurs.


Fortunately, this story may have a happy ending . In the months  that it has taken  the courts to finish its hearings and get down to auction, property prices in Vikram’s area  have risen so sharply that what was once a factory asset worth well below the amount due to the bank, now almost covered the dues.  Vikram, may , with luck, and if the property prices keep rising, may pay back his dues and still have his apartment , at least for himself.


Now, a year or so from that first phone call I am back agin on my apartment balcony watching ships glide into Bombay harbour, trying to figure out what the moral of these events in Vikram’s life.


Is it that successful economies, like the US one, view business failure as a natural consequence of enterprise and set up institutional processes which encourage people to take risks by protecting them from the consequences of policy change? Is it that prejudice against businessmen, unless they are large or successful or graduate from elite institutions run so deep in our veins, as Indians, that these prejudices subtly are reflected in our institutional processes? Or is that so long as the economy grows at a rapid pace, things will take care of itself as it may in Vikram’s case?

 

  1. #1 by friendly ghost

    I connected deeply with this post, having tried my hand at many side businesses, and having had my taste of business failure. It”s a complex issue that you have raised here, and there are no easy answers. One can take a laissez-faire attitude, shrug and say, “So what? Some business models that succeeded in the pre-reforms environment were bound to fail post reforms… and presumably, the entrepreneur made his bundle while the going was good. Maybe he failed to save for the future, or reckon with the changing times. His fault — therefore let him suffer for it.” Alternatively, one may take a somewhat more socialistic/compassionate view and say that the fall of an entrepreneur should be cushioned in view of the vital role that he plays in society — employing many workers and so on. A huge discussion lurks here. Great post, Mr Balakrishnan! Warm Regards, Ghost

  2. #2 by Raj Gupta

    We generally tend to look at only software and biotech as potential investments, or focus on FDI in equities…Note to policymakers : investors may be more willing and able to ditch Indian equities than to scrap plans for a new factory in China.If India has to sustain growth then manufacturing units like Vikrams need to mushroom & bloom all over

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