In response to an op-ed published on the Daily Star recommending companies investing their capital into the share market.


Counterpoint – Investing in share market as a corporate financial strategy
I refer to the article titled “Investing in share market as a corporate financial strategy” published on the Point Counterpoint section of the Daily Star of December 18, 2009 (http://www.thedailystar.net/newDesign/news-details.php?nid=118115). The writer recommends that businesses invest their capital in the securities market as part of their investment strategy. I could really do with clarification on certain points. First, is the writer suggesting this strategy for companies or individually/family owned businesses? If it is the latter, then it does not matter if the owner deploys funds in the capital markets in his own name or in the name of the business. Second, if this is suggested for companies, is this a strategy for management of temporary excess cash? Global corporations resort to the capital markets often for such a purpose, but there are special vehicles for this purpose such as commercial papers. In the absence of such vehicles, it is just more convenient to use the treasury management services of banks. Third, if this is more of a permanent investment strategy, what is the optimum level of capital that may be taken away from the core business of the company to invest in the capital markets? If shareholders of such a company desired to invest in the capital market, would not they already have done so instead of forming the company? I am not too sure if the writer is suggesting investment in the capital market as a remedy for everyday business challenges such as “collection hassles”. If the rate of return from such a business, despite the various hassles, is more than other alternatives, then diverting capital from the core business of a company to invest in the capital market appears to be a blatant violation of corporate governance. If the company is not profitable in its core business or if prospect for its growth is bleak, then the company should return all its capital to the shareholders by a special dividend and cease existing. There is no reason to foray into the capital markets other than for management of short-term excess cash.
The writer suggests that a corporation’s investment in the capital market creates jobs, increases financial activities in the system and thus contributes directly to the economy. That begs the question; does a corporation not achieve the same results even more efficiently by focusing on its core businesses, such as manufacturing, food-processing, running logistics, importing-exporting goods, or providing essential services? If all that our corporations do is to engage in the capital market, then who is going to conduct such essential businesses? Also, what would these companies invest in; other companies that in turn invest in them? That would create an economy whereby no one produces anything but only trades each other’s shares in the proverbial “nation of traders and shopkeepers”. This also seems a recipe for asset-price inflation, which always ends in a burst of the bubble. The ideas stated in that article are half-baked at the best and misleading at the worst. The writer, who appears to be a senior executive at a capital market institution, should have known better.