What is Cost of Equity? – Meaning, Concept and Formula
February 12, 2025
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Recently, in India, the RBI or the Reserve Bank of India and its former governor, Urjit Patel, were in the news for their resistance to encroachment on their powers by the Government of India.
Separately, the RBI and Patel were also facing flak from the private sector for its efforts to clean up the bad loans or the NPAs or the Non Performing Assets on the Balance Sheets of the public sector banks.
Indeed, the tussle between the preeminent regulator of Indian Finance and the custodian of the country’s money and the Finance Ministry and the Private Sector was so intense that it ultimately led to the resignation of Urjit Patel.
Leaving aside the other specifics and details of this saga, what this case highlights is the constant see-saw battle between corporates and regulators that is the characteristic of any Free Market Capitalist Economy.
While in the advanced countries of the West, the corporate regulator tussle plays out in various ways, in India and other Asian countries that are emerging, it is usually the private sector that has the Upper Hand.
It is the contention of many experts and economists that the Creative Tension between corporates and regulators is a sign of the maturity of an economy and as long as the contest between them is healthy and fosters more responsibilities on either, such aspects bode well for an economy.
The reason for this is that Capitalism is usually marked by a periodic Boom and Bust cycle that is inherent to the very fabric of free market systems.
This is because capitalism works by creative destruction wherein there is a manic boom followed by a depressing downturn where the poor performers are weeded out due to the Hidden Hand that drives markets.
In such cases, the job of the regulators is to ensure that the ordinary people do not get hit either during the boom when they can be suckered into Ponzi investments or during the busts when there is a real possibility of their hard earned money and their savings becoming the casualties of bank failures and stock market crashes.
Indeed, this is the reason why governments worldwide usually give more Teeth to the regulators since by definition; both of these stakeholders are in place to protect the interests of the common men and women.
Having said that, it is not only during crises that the regulators and the corporates are engaged in battles.
Even during relatively calm and sound economic conditions, it is the job of the regulators to oversee the launch of new products, the methods, and the marketing strategies adopted by the corporates, and monitoring the quality and the safety of the products that are being used by consumers.
Indeed, in the United States, there are as many numbers of regulators such as the FDA or the Food and Drugs Agency that keeps a close watch on the medicines and the other associated food and drugs that are being launched and used.
The mandate of the FDA is to ensure that Big Pharma corporates do not launch substandard products or push unsafe drugs into the market.
Indeed, the FDA has become known worldwide for its stubborn insistence on multiple layers of checks on the type and the quality of the food and drugs that are being launched into het market.
Further, the EPA or the Environmental Protection Agency is another regulatory body that oversees environmental issues wherein it monitors the activities of the Big Oil firms and the other manufacturing firms to ensure that their business operations are not unduly harming the environment.
What the preceding discussion shows is that, capitalism needs both corporates and regulators to keep the momentum going and hence, the state of balance between them determines the extent to which the economy is working for all and not for a few.
Having said that, it is a matter of concern for all stakeholder and especially the consumers that in recent years, the pendulum has swung to the side of the corporates who are now facing little or no constraints on their activities which in turn, is making the poor and the underprivileged suffer.
As can be seen from the actions of the regulators in the build up to the Global Financial Crisis of 2008, the regulators have been criticized for not doing much both in the years preceding the crisis as well as during the aftermath.
They have been likened to the Dog That Did Not Bark when the Thieves were Looting the Economy.
This is indeed a cause for concern to anyone who has a stake in the future. What is more galling is that under President Trump, the powers of the regulators are being Whittled Down to an alarming extent which can only lead to peril in the future.
Lastly, while Urjit Patel may have resigned to protect his reputation as well as to soothe and assuage his conscience, it is sad that we are not drawing the right lessons from this avoidable mess.
Indeed, this is more the reason for the present and the upcoming generations of youth and the future voters to take a stand against the Predatory Practices of Corporates so that their futures are bright.
To conclude, the fine balance and the healthy tussle between corporates and regulators is needed and whenever, it skews off balance, it is the job of the governments to right the asymmetry and more importantly, it is the duty and responsibility of the voters to demand such interventions.
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