The Great Indian Monopoly Illusion

The Great Indian Monopoly Illusion

Discussions on investing in highly regulated monopolies in India go the same way as explaining a meme to your grandma. She feels it’s funny but does not know exactly why,  just like everyone feels confident about investing in these monopolies but very few can clearly explain why. The conversation usually ends with, “Safe hai yaar. Monopoly business hai.”

But safe for what exactly?

Because in Indian markets, regulated monopolies are often safe businesses, but not always great investments. Understanding that distinction is where clarity begins.

The typical investor shortcut looks like this: monopoly plus regulation equals guaranteed profits. We relax, nod knowingly, and forward the stock name in the family WhatsApp group with “long term hai” written like a legal disclaimer. Someone replies with a thumbs-up, and research officially ends.

What gets missed is that regulation doesn’t just remove competition, but also limits how much shareholders are allowed to win.

Sector Dynamics in Regulated Monopolies

In free markets, strong businesses decide prices, protect margins, and compound capital on their own terms. In regulated markets, whatever the degree of regulation, even the strongest business can’t act independently and every big decision comes with a quick “Regulator kya bolega?” moment. Which is why experienced investors don’t stop at asking, “How strong is the company?” they follow up by asking, “Is it an election year?”

A quick contrast makes this clearer. Think of AI hardware stocks in the USA in the current capex boom, like NVIDIA. Demand is strong, prices are increasing, and margins have expanded. No press conference is called, no approval is sought, and no one asks whether customers are emotionally prepared for a price hike.

Now in India, take airlines. IndiGo controls roughly 60–62% of India’s domestic aviation market, a dominance number for which most global airlines would sell their loyalty programmes. Operationally, it’s one of the best-run airlines in the world. Financially, however, the sector’s net profit margins rarely stay above mid-single digits for long.

Aviation turbine fuel prices can swing 30–40% in a year, the rupee can quietly weaken, and costs move in real time. But the moment ticket prices rise faster than public patience, pricing stops being a business decision and becomes a prime-time debate.

Dominance improves survival, not margin expansion. For investors, that difference matters.

Telecom takes this lesson a step further. After years of brutal price wars, consolidation finally reduced the industry from over ten operators to essentially three private players. Investors believed the worst was over. Pricing discipline returned and balance sheets began healing.

Then came the AGR (Adjusted Gross Revenue) dues, over ?1 lakh crore in retrospective claims. This was a textbook case of what economists call an obsolescing bargain: once massive capital is sunk and assets become immobile, the balance of power shifts. Whether it happens or not, it would be unwise to disregard the risk involved.

Original terms quietly lose relevance and revised interpretations appear, often for political or electoral reasons. The business didn’t suddenly become bad, but the bargain changed after the money was already invested. For shareholders, that meant delayed returns and a hard reminder that regulation in India isn’t just law “it’s law with memory”.

Power and utilities sit somewhere in between. On paper, they look perfect: monopoly distribution, predictable demand, and “assured” returns. In reality, costs like coal prices, salaries, pensions and interest costs only go up but tariffs require approvals that move at the speed of a sarkari file on a long chai break. The business survives and the lights stay on, but shareholder returns move forward slowly, with patience doing most of the heavy lifting.

But regulation is not all bad…

Banking, interestingly, is where regulation actually works in the investor’s favour, as long as expectations are realistic. Banks like HDFC or ICICI are tightly regulated to prevent fireworks, not create them. Returns here are steady rather than spectacular.

Blow-ups are rare, but upside is capped. These are compounding machines built for discipline, not excitement, and that’s exactly the point.

This also became amply clear with the government warning FMCG companies about passing on the benefits of lowered GST or risking regulatory action.

The Fine Print Investors Need to Internalise

All this leads to the final constraint investors must internalise: regulators don’t hate profits, they hate excess profitability. Most regulated monopolies are quietly guided toward “reasonable” returns, typically low to mid-teens ROE. Sustainably crossing that line invites intervention.

Tariffs get reviewed, efficiency gains are redirected to consumers, and investment obligations expand. This is capitalism, but with parental controls switched on. Returns are allowed but   outperformance is supervised.

So should investors own regulated monopolies? Yes, but with eyes open. These businesses offer stability, visibility, and survival across cycles. What they don’t offer is unlimited upside.

The real moat here isn’t brand or innovation, it’s regulation itself, licences and exclusivity that prevent collapse but also cap ambition. So unlike monopolies where higher prices and valuation ratios can make sense, regulated monopolies must be bought at reasonable prices to earn good returns.

Often, the best time to buy them is when they are mispriced, ignored or punished by the market. These companies will quietly revert to “acceptable” levels of performance and profitability, pay steady dividends, and trade back to normal valuation ratios. Returns come from patience and valuation normalisation, not explosive growth.

Invest in regulated monopolies if you must. Just don’t confuse monopoly with pricing freedom, or stability with superior returns.

In India, even Rajinikanth needs permission.

Written By : Mehak Shah & Nameesh Bhatt