Till the 1990s, the problem for Indian equity investors was not so much that listed businesses didn’t generate enough wealth, but that promoters were generally unwilling to share that wealth with investors. Investors understood that a majority of promoters bled cash out of their companies and lined their pockets. This wasn’t difficult at all given the way the economy worked, especially at the much smaller scale that businesses had at the time.
In fact, investors and stock analysts explicitly factored this into the valuations of stocks, with companies from different business groups, different parts of the country or even promoted by different ethnicities being generally accepted as either more or less prone to this kind of loot. This was certainly part of the reason for multinationals commanding higher valuations.
And then the whole paradigm changed and this kind of practice reduced drastically. Many promoters realised that the way to generate personal wealth was to grow the business and generate value in the stock market. Certainly, the example set by the new kind of promoter played a role--Infosys’ being a major one.
But that phase may also be gone. It’s now been close to half a decade since market valuations brought any joy to promoters. More than a few investors are now wondering if this is one more aspect in which the clock is turning back to the 1970s and the 1980s. To be clear, these things are not quantifiable and given the way the auditing business operates, nor are they provable or punishable. But over a period of time, investors figure out what is what and start discounting share prices accordingly. There are whole sectors now which no one is willing to touch with a bargepole and this is part of the reason.