Sin and bear it: Why preventing the ITC stake sale is a bad idea
There’s no denying that the addictive nature of the businesses makes companies in this space very attractive investments. Irrespective of the economic conditions, ‘sin’ businesses make great investment bets.
'Gambling is a sin, bet you can’t give it up'. The first part of that witticism could apply to alcohol and smoking; the second part could equally pertain to investing in such ‘sin’ stocks.
There's no denying that the addictive nature of the businesses makes companies in this space very attractive investments. Irrespective of the economic conditions, 'sin' businesses make great investment bets.
Most of the companies generate free cash flows, and have created a very strong brand image which acts as an entry barrier. They have high operating margins and are liberal with their dividend payouts. For any fund manager or investor, what’s not to like?
Over the years these companies have become so big that they are included in the broader indices, thus making it all the more difficult for big fund houses and insurance companies to avoid them. For a fund manager, shunning companies with good financials on 'moral' grounds is difficult, especially since his performance will be benchmarked with other fund managers and indices. The fund manager is answerable to his investors.
This is one of the reasons why the public interest litigation (PIL) filed against insurance regulator and state-run insurers for investing in tobacco company ITC does not hold water.
Seven members including some trustees of the Tata Trust in their personal capacities filed this PIL in the Bombay High Court against the Union government, the IRDAI and five state-run life insurance companies for investing in tobacco companies. The petition is to prevent LIC, the largest insurer in the country, from buying into the government’s stake sale in ITC. Ironically, the Tata trustee members who have filed a PIL do not seem bothered by the fact that most of the schemes of Tata Mutual Funds own ITC.
First of all, ITC was already held by the government through its ownership of SUUTI, and this is not technically a new purchase by the government or its agencies. If LIC buys out ITC’s 2 percent holding from the government, the stake is merely shifting from one pocket to another.
However, the petitioners argue that the investment is contradictory to the government’s measures to tackle tobacco-related health problems. They, however, forget that government earns a lot of taxes from these companies. Almost in every Budget it is the ‘sin tax’ that is increased – incidentally, hurting farmers who farm tobacco.
One needs to remember that the present sale by government is a secondary market sale. Thus, the company concerned (ITC) will not benefit in any way from the sale. Little purpose will be served in blocking the transaction. It will be the government who will be able to meet its divestment target and use the funds for the country’s development or for one of its social schemes.
This is not the first time that such claims are made against companies that are either ‘sinful’ in their business activities or are causing environmental damage. Many international NGOs are asking funds to stop investing in coal-related business because they are causing environmental harm.
But such activism rarely pays off especially if the business is allowed in the country in one form or the other. If one set of investors discover their conscience and do not buy, there will be many more who will replace them.
Ultimately, even for the fund manager it is a choice between two sins, greed and addiction, especially difficult when choosing both together has yielded gratifying returns and big bonuses.
A London Business School study done by professors Elroy Dimson, Paul Marsh and Mike Staunton shows that sin stocks beat the market. The Vice Fund whose name was later changed to Barrier Fund and which specialises in investing in 'immoral' companies, was found to beat the socially responsible Vanguard Fund every year since 2002.
There is also the question of setting a precedent if state agencies are restricted from buying ITC. We could have other vigilantes objecting to investing in defence companies or some health-conscious group making a case for stopping investment in sugar companies or other companies which produce ‘unhealthy’ food.The recent case of banning liquor sales on highways shows the danger of unintended consequences of such ‘righteous’ moves. Job losses on account of closure of vendors, impact on tourism and loss of taxes have led to many states bending the rules in favour of vice against virtue.