What is common between Koda and the maoists

Two recent developments - seemingly unrelated - have been hogging the headlines.

The former Chief Minister of Jharkhand is being investigated for amassing wealth beyond known means. Apparently, this money was earned through handing out mining rights. The interesting question to ask is - since mining has not started in most places, how was the money made - clearly, through the "sale" of the mining rights. Who paid? Surely those that benefited most - those who received these rights! Is it not strange that none of these companies are being investigated? Now you know why Indian Steel companies claim to be among the lowest-cost producers of steel in the world.

Almost simultaneously, the Central Government has started an aggressive campaign against the maoists. Maoist activity is undoubtedly a big problem in India - and has been for several decades. So why the thrust NOW? Has it anything to do with the fact that corporate India's new mines are in maoist infested areas? There was need to make these areas safe for mining. Hence the appointment of the redoubtable Mr. Chidambaram (formerly a director on the Board of Sterlite - one of the largest resources companies in India) as Home Minister, and the drive against Maoists under his leadership.

India's problem now wears corporate hues.

Aspartame

We have been working on a report about a company that markets a variant of Aspartame. In the process, I came across a series of articles on how Aspartame was approved by the US FDA. Here is one such. Don Rumsfield seems to have more than the blood of Afghans and Iraqis on his hand. Also, a gentle reminder that when it comes to corruption, Indians are not an exception, we follow the rest !

Read more here.  Corporates have their own agenda - look at the support the horrible Nuclear policy has generated in India - and often the agenda is inimical to the interest of the country.

A similar case is what is happening with Madhu Koda... read the next post.

Cell size and scale - awesome

Genetics and Size - click HERE

Indian gold reserves

Indian Central Bank gold reserves stood at 350 tonnes at the end of 2008. With the recent purchase from IMF, it would now be in the region of 550 tonnes - taking it to 9th place after Japan. However, India has been and remains the largest importer of gold - with annual imports ranging from 300 tonnes to 600 odd tonnes for private consumption. Barring the time from 1962-1992 when gold imports were barred, India has constantly imported from 1933 to now. Estimates of private holding range from 16000 tonnes to 40,000 tonnes.

In this regard, this, is a very interesting blog post on gold and its history with regard to India. Though long, the post is worth reading to the end.

Gold vs some currencies

The movement of gold vs the Chinese currency and the Indian currency is interesting. China has pegged its currency to the dollar over the past few months, and India too seems to be doing the same. The world continues to want to subsidies US excesses. Why should the US consumer ever change? Incidentally gold has been a great investment since 2007 for Indian investors - our not-so-hip country cousins who continue to buy gold at all opportunities will be feeling fairly smart after all. 

Some lessons to remember

Watch the rest here

Jim Chanos: 10 Lessons From The Financial Crisis That Investors Have Already Forgotten

Tracking US dollars in country reserves

Jeffrey Frankel is James W. Harpel Professor of Capital Formation and Growth at Harvard. He was appointed to the Council of Economic Advisers by President Clinton in 1996, and subsequently confirmed by the Senate.

His recent blog post on Dollar share in FX reserves of Central Banks is worth a read.

I am including the graph he puts in his article in this note. The US dollar (and the country) achieved international hegemony post World war II. A strong economy made a strong country and dollar became the "reserve currency". The world has come a full cycle. Arguments about - TINA - there is no alternative, will eventually have to face up to reality. When an alternative becomes a desperate enough need, it emerges.

US Consumers

An article in the New York Times today has this amazing chart. (If only we could track Indian data with this level of detail.) An interesting point that seems to emerge is that the American consumer has not REALLY stopped spending - just seemed to move from retail to wholesale! and despite record levels of unemployment, continues to eat and drink outside the home.

Clearly, old habits die hard. A bankrupt America, with high-spending consumers - and a government that continues to fight battles around the world. Prepare for a decade of political upheavals as America seeks to cling to its earlier pole position in the world, while the world starts to reject that role - the move from G8 to G20 is more than just a re-ordering of economic order.

Confused Economists

Krugman continues to blog on the inadequacy of the US fiscal stimulus. Alan Greenspan appears to see unemployment going to 10%, but does not "support another stimulus package". So what are we to make of this debate.

Greenspan's policies now stand discredited and the popular view is that his refusal to take the punch bowl away at an appropriate time was largely responsible for the mess the US and the world finds itself in. But what are we to make of Krugman's insistence that a higher fiscal deficit is the answer to the US problem. All that we learned of economics - especially in the context of India, seems now to have been turned on its head. It was always argued that small government is important - so are the rules different for the US and for other economies? Intuitively, if the answer to a problem caused by excess liquidity is to infuse more liquidity, I'm afraid I find this completely unsatisfying. But Krugman is a nobel prize winner, so must know his stuff.

In my defense, I offer three arguments
(1) If the economists really had the world modeled correctly, why are we in the mess we are in?
(2) I quote Fischer Black (1986)

In the end, a theory is accepted not because it is confirmed by conventional empirical tests, but because researchers persuade one another that the theory is correct and relevant.

(3)Emanuel Derman, in a presentation on quant finance in 2002 - had this to say on financial modeling

There is no fundamental theory in finance. There are no laws.
That s why many of the textbooks are so mathematically rigorous.

I recommend that we stick to the tried and tested - if the model does not seem to be sensible, stick to the sense and chuck the model.

Strike by professors of IIT and IIM

The Professors of IIT and IIM are planning a hunger strike in a few days to protest the fresh pay structure awarded to them in the pay commission. One grouse is that the teachers at these "premier institutes" are now to be paid at par with those of the other UGC supported institutes (actually the differential is being reduced). The consulting income that these professors make (in part because they are professors at these institutes instead of any run-of-the-mill university) is ofcourse not part of the debate.

The irony is that the IIM chaps think that they deserve more than even the IIT profs. Given that the debate is based on the grounds that these institutes are "premier" I thought it would be worthwhile to check the kind of academic work they do. IIMA's website is quite informative when it comes to the kind of programs they offer. However, click here - on the research and publications weblink - and you will be greeted by a blank page. The research page ofcourse claims that IIM A produces a third of all the management research done in India. I wonder if they mean that they are responsible for a third of nothing !

As Ram Tzu says (refer previous post)

You stand at the edge
Ready to throw yourself in.

What a shock to discover

There is nowhere to go
And no one to throw

Go figure

"No Way" by Ram Tzu

Landmark's book sale always throws up a few surprises. This time it was on a subject I would not normally go near - but I happened to pick up the book (mentioned in the title) and then could not put it down.

A quick internet search revealed that Ram Tzu was the pen-name of Wayne Liquorman - a teacher of Advaita. His writing is, however, deliciously irreligious and iconoclastic. At the risk of infringing some copyright, I quote

Ram Tzu hears it all the time...

You had a profound, revealing,
Deeply moving spiritual experience.
Now you're hooked.
Now you want more.
Now you're a seeker.

No junkie has ever
Been more dedicated
Or more continually disappointed
Or more miserable.

Once you might
Have been satisfied
With a new car
Or a loving mate

Now you will settle
For nothing less
Than union with God

Ram Tzu knows this...

You're fucked.

For those whose interest is piqued some more poems are available at here or here . Have fun

Rising oil price - differing reasons - but no peak

Oil prices are rising again - up 65% in the current year. Reasons differ - Opec oil production cuts, data indicating economic recovery, political tension in Nigeria - take your pick. However, two recent newspaper articles written in different continents have rubbished the existence of Hubbert's Peak. This one in New York Times exhorts readers to rally against government attempt to conserve oil:

we can’t let the false threat of disappearing oil lead the government to throw money away on harebrained renewable energy schemes or impose unnecessary and expensive conservation measures on a public already struggling through tough economic times.

The other just blames OPEC. Don't forget to read the comments on this one - highly entertaining and informative.

So should one worry about oil and oil prices or not? Go figure

Forgettable few weeks

The past few weeks have been rather sad for the country. Increasingly, it is being realised that we cannot safely let our Prime Minister speak on foreign policy. Apologists will continue to cover up for India's inability to influence our neighbours and protect ourselves. Any serious defense analyst would realise how we are perilously weakening our position in the world and viewing ourselves from the US worldview. As Chellaney mentions in his column for Singh:

to say India cannot emerge as a great power without making peace with Pakistan. “It is in our vital interest, therefore, to try again to make peace with Pakistan.” By linking India’s global rise to the placation of Pakistan, Singh has hyphenated India with that country even more strikingly than any international actor

Chellaney's columm on China is another case in point.

The BJP too has lost its ability to appeal to the "liberal" right-of-centre. The removal of Jaswant Singh from the membership of the party and the banning of his book in Gujarat has to rank among the most intolerant and graceless acts that the party has committed in recent years. As an admirer of Atal Bihari Vajpayee and his vision of India, I had assumed that his ideals were also those of the party. Clearly that is far from the truth. I look, with just a tinge of anxiety, for a new alternative to the Congress that more closely seeks to build a strong, self-reliant and liberal India. That such an alternative offers itself quickly, has to be my prayer for this year as we celebrate the 62nd year of independent India.

Smart Managers for Smart Cards

Swaminathan Aiyar's article in the Times of India today on Nandan Nilekani's appointment in the government is worth a read. One can only wish Nandan Nilekani good luck and hope, for all our sakes, that his term is successful.

Correcting our Education system

Kapil Sibal, the new Education Minister recently unveiled his 100 day plan for "reforming" the education system in India. A proposal that seems, surprisingly, to have met with almost universal enthusiasm, has been that of abolishing examinations at the 10th grade. Speaking of education, he said

"We need to de-traumatise it and reduce the burden on parents and children. We could, for instance, think of abolishing the class 10 board exam. Why does a child need to appear for a board exam in class 10 if he/she is continuing in the same school?"

There a many things wrong in our education system - but eliminating competition in the name of "de-traumatising" is a huge mistake. In recent years, the world has woken up to the fact that India produces one of the largest numbers of technologists - scientists, engineers et al. In a U.S. Senate Committee Hearing on "Strengthening American Competitiveness", Bill Gates reportedly said:

"Unless we transform the American high school, we'll limit the economic opportunities for millions of Americans...we need to adopt more rigorous standards and set clear expectations. We must collect data that will enable students, parents and teachers to improve performance.And if we are going to demand more from our students, we'll need to expect more from teachers."

Those in India who hold the US education system as epitomizing the best should keep in mind the statement by Senator Enzi made at the same hearing :

"A year ago I was in India. We were trying to find out why they graduate so many scientists and engineers. I did have one person that I thought had some great insight. They said that they didn't have any professional sports teams. (Laughter.) So the highest pay and the most prestige that they could get was being a scientist or an engineer or a doctor, something in that kind of field."

Though almost farcical, there is a glimmer of truth in the statment that the votaries of "no stress" need to bear in mind.

The world does not seem to think there is much wrong with the Indian system. Japan has, seemingly, a cult following for "Indian" Maths.
A special reporter accompanying a business delegation from Japan in 2008 remarked

"After making a deep assessment of educational systems all over the world, particularly the developed countries, a majority of our educators have concluded that the teaching system in the Indian subcontinent can do wonders for Japan."

A story erroneously attributed to Bill Gates is none the less correct in the extreme. Charles Sykes when writing an op-ed on dumbing down of school education commented:

Your school may have done away with winners and losers. Life hasn't. In some schools, they'll give you as many times as you want to get the right answer. Failing grades have been abolished and class valedictorians scrapped, lest anyone's feelings be hurt. Effort is as important as results. This, of course, bears not the slightest resemblance to anything in real life.

Is anyone listening?

The Budget Agenda – making India competitive

As the first budget of the new government, the market is looking for the government to set the agenda for the next few years. High fiscal deficit will restrict maneuverability with regard to tax reduction. The popular mandate, as interpreted by the ruling party, is one of continuity of fiscal policy with a bend to offering direct assistance to farmers and the fiscally weak. This limits the ability to reduce expenditure.

The agenda therefore has to focus on improvement in efficiency of expenditure and better tax collection. Besides, steps are needed to reduce of size of government, and bureaucracy to speed growth. Some steps I would look for are:

1. Financial Reporting – remove the obfuscation. The Fiscal Responsibility and Budget Management (FRBM) Act was expected to form the blue print for India to the path of fiscal prudence. Instead, it has led to the government resorting to a policy of smoke and mirrors to hide its inability to manage the budget. Obvious ones include the non-inclusion of fuel subsidy in the budget deficit. The more pernicious ones are reduction of state transfers – with states being asked to approach the market. While this reduces the apparent expenditure of the Central government, it does not actually reflect better fiscal management. What is needed is to:
a) Move to a system of accrual accounting instead of cash accounting. This will help focus policy debate on not only the immediate term issues, but the longer term ones of ballooning pension liabilities, and debt servicing.
b) Reflect all governmental revenues and liabilities through the budget – all non-budgetary items to be avoided – to prepare a true and fair picture of the state of government finances
c) Prepare accounts that are consolidated – which represent the accounts of the state governments as well as the centre
d) A key area of reform has to be to measure all salaries paid by the government and its agencies and by public sector companies on a cost-to-company basis. This will likely throw up interesting information especially when measured against productive output!

2. Establishment of efficiency parameters – for the most part, the budgetary focus is on revenue and expenditure and not on measuring the efficiency of use of the money spent. Most government departments do have review mechanisms. However, these are not transparent – a case in point is the inability of the Ministry of Human Resources to explain where the money collected (as a cess) for secondary education actually goes. Besides, rarely is the measurement of delivery of efficient service a goal. As part of smaller government, the government needs to move out of providing services itself and instead set up monitoring agencies that set out goals and monitor results while using private enterprise to deliver.

3. Privatization – not disinvestment – This debate seems to have been set-back by the present government. While it continues to desire selling off bits of public owned companies, the approach is essentially episodic in nature. Efficiency of operations can only increase if there is a change of ownership that leads to a change of management style. Arguing that 51% stake would allow better performance is not demonstrable. On the contrary, the use of oil marketing company balance sheets to offer fuel subsidy, that of banks to write off loans and the “donation” by Gujarat state owned companies (where the government is in a minority) suggest that government ownership in any amount detracts from the commercial nature of business.

4. Economic friction in the form of ill conceived taxes (FBT, dividend tax, cash withdrawal) and the discretionary nature of multiple tax rates have crept in the taxation system over the past few years. While the nineties had established a clear road map of tax reforms, the previous UPA tenure marked the reversal of the trend towards simplification and instead returned ad hocism in tax matters. This needs immediate rectification. Another key area remains the implementation of GST – where the time frame of implementation does not seem feasible given the lack of preparedness of the government. Another key area of friction is the restriction on capital flows. The present FII registration requirements serve little purpose. In fact, with limited control over foreign institutions, government has less knowledge of who is the final investor than if it were to allow the normal “know your client” requirements of brokers to work in the case of foreign clients. We need to now drop “I” from “FII”

5. Land and labour reform remain glaring unfinished agenda for faster economic growth. While labour reforms are contentious, land reforms need not be so. Clarity in land titles, and land use planning are two areas that, if sorted out, can reduce corruption significantly.

The Judicial sector needs serious attention. The pile up of unresolved legal cases renders the system incapable of being used. While this is not an agenda for the budget, this has to be one of the key areas of focus for the government if they are serious about increasing the economic growth of India on a sustainable basis.

I'm Ok, the markets are NOT

After a gap of over a year, I decided to accept CNBC's offer to be a speaker at an investor camp in Agra. The city of the Taj and the opportunity it offered to visit the beautiful monument played no small a part in my decision. Another reason for accepting was the opportunity it provides to interact with retail investors.

Once again, I was struck by the picture that most retail investors have of the stock markets. It seems, most think of the markets as the playground of manipulators - with no "logic" applying to it. This, despite the fact that the Indian equity markets are one of the best regulated and technologically most advanced in the world. The preponderant impression is that since the investor has lost money (or atleast failed to make money despite a huge rally), the problem must lie with the markets since the investor cannot be irrational. In other words, I'm ok. you're not.

As any market participant knows, the markets are far from perfect. There are sharks, and manipulators operating in the market. However, these form the minority. Further, the market operates with a logic of its own, that investors can understand and make money off. That requires effort and patience, and like every other art, a lot of practice - something most investors are loathe to do. Instead, it is much easier to blame the system.

An analogy comes to mind. Most non-swimmers would not jump into a rapidly flowing river without help or proper equipment. They would also not blame the tides, rapids, or whirlpools that they may encounter along the way on malicious forces. Instead, they would blame themselves for not making the effort to learn how to negotiate these. To me, the markets are like the river. You either figure out how to swim, take a boat, or use the bridge. You don't jump in if you cannot swim. I wish schools would make personal financial management courses mandatory early in life.

Till then, we as market participants, are doomed to be looked upon with suspicion and opprobrium albeit tinged with a bit of envy

Building Perspective among journalists

India boasts perhaps the largest number of news channels and newspapers in the world. However, for all that, the news that is delivered is surprisingly uni dimensional and lacking in perspective. Most journalists think that being shrill replaces being analytic.

A case in point is the recent coverage of the "swine flu". A popular english news channel would have you believe that India is "battling" the Pandemic, and not too successfully - as all of 22 cases have been reported across India. Without advocating a lackadaisical attitude on the part of the medical authorities, one wonders whether this is headline making news at prime time. To put it in perspective, India has 20% of the world's 37 million estimated blind - and another study suggests that 15% are curable - this makes it a case of 1 million untreated patients. People suffering from Malaria and Tuberculosis make up similar orders of magnitude. When is the last you have witnessed a mention, much less a discussion on these diseases. I guess this too is a function of the prevailing "fashion". Perhaps one of the negatives of having a oh-so-young population. Serious issues are passe, sensational is in

Outsourcing India's interest to the USA

The Prime Minister wants to re-start the Indo-Pak dialogue in anticipation of Washington's advise to do so. Since the Mumbai attacks, the government has been claiming success of India's diplomatic initiatives to exert international pressure on Pakistan to cease and desist from its support to jihadists and other terrorists in India. The reality is exactly the reverse. India seems to have lost the plot completely.

M J Akbar's article in the Times describes the problem of US perception and its own imperatives. As outlined by Brahma Chellaney , Pakistan attempts to portray itself as a failing state and extract international ransom has been hugely successful. By falling in line with the US demands, India continues to do itself a disfavour. This weakness is now apparent in the economic policy sphere as well - where USA is able to "persuade" Indian companies to toe its line in international markets.

If only we had a leadership that REALLY had a vision for a strong Indian state.

Politics as a profession

Many years ago, a friend in school remarked, at the end of a heated discussion on the future of Indian democracy, that no youngster in India from a "good" background aspired to the position of Prime Minister - when planning his/her career. The implication was that Indian democracy would remain the playground of the opportunists.

I was reminded of this conversation from my own childhood while watching an interview on NDTV recently.The anchor was interviewing a topper of one of the board exams. When asked about what he aspired to do in his career, the young boy remarked that he desired to enter politics as it was a way of serving society. If this indeed reflects the desire of more of India's educated youth, we can only be more sanguine of the future of Indian democracy.

India’s relations with US – Missing the Left

The Left front is no longer a force to reckon within the Indian Parliament for the next five years at the least. After supporting the previous UPA government for four and a half years, the Left and Congress fell out over relations with the US – and India started the process of getting closer to the USA.

I have argued elsewhere that aligning with the US was a mistake that India was making. That India should either have done it sixty years ago, or failing that, stayed in the shadows for another decade, when a declining economic clout of the USA and a rising graph for India would enable India to negotiate from a position of strength. Some early signs of the differences that exist in the world views of the USA and India are now visible.

While the PM was expressing his love for George Bush, or requesting the autograph of the new president, the USA was, rhetoric to the contrary notwithstanding, busy downgrading its relations with India. One of the best articulation of this is in the speech that Robert Blackwill, the former US ambassador to India delivered on May 5, 2009 at the CII conference at New Delhi

The Indian viewpoint is well articulated by Brahma Chellany

In International relationships, what matters is not what is said, but what is done. And what has been done by the US is to relegate India to the third hyphen in the troika of Afghanistan-Pakistan-India. That the government of the day seems to have managed to sell this to the Indian public as a winner of a relationship is itself an acknowledgement of the Congress’s ability at Spin – the opposition has a lot to learn in this regard

The dance of democracy – the next chapter begins

The greatest election mankind has ever witnessed has come to an end. The administrative machinery has performed a great job in collecting and delivering the verdict. That India can deliver a vote count of more than 300mn votes with a high degree of accuracy and within five hours or so of the start of counting (the trends were clear by then) is something we can all be proud off – the election commission can take a bow.

Now, it is time for analysis. In many senses, this election marks a turning point in the fortunes of our country. Though Dr. M Singh will start as the PM, it is highly likely that he will not end the five years as one. Rahul Gandhi is more than likely to take over somewhere along the way. This election will then mark the ascent to power of the first PM of India who has been born in Independent India. One of the advantages this may have is that we will be able to approach relations with our neighbours with none of the color that leaders of the earlier generation did – since there is no emotion involved.

A disquieting factor however is the likely continuing decrease in the quality of political debate. It may be postulated that politicians of post independent India maintained some (often very high) level of personal regard for those in opposing ideological camps. Even within the same political parties, differences of opinion were sorted out with some civility. Witness the case of Jawaharlal Nehru and Sardar Patel. Often the two stalwarts would not see eye to eye, but managed to work within the boundaries of decency. Presumably, this was in part because of the shared ideal of building an independent India, and the realization that others had, in their own ways, contributed too. I see this now disappearing – though surprisingly, this is visible in the quality of the PM’s response to the opposition campaign against him and his rule.

The quality of the political debate will also suffer because of the absence of the left front as a force in Parliament. Whether you agree with them or not, the Left did throw up a view point that was based on a certain ideology, and stuck with it. Those who revile them would do well to consider the effects of dilution of government ownership in banks – in the context of the global banking crisis, and the effective nationalization of most banks around the world. The stock market (not known for being very sagacious or far-sighted,) will, of course, celebrate the dilution of ownership and control that is now inevitable. This is only one example.

The Congress has much to celebrate. The Family is now firmly back, with a new heir apparent – who has bought in a sense of self-confidence to the party. While one could differ on the causes of the outcome, there is no taking away from the fact that Rahul Gandhi’s gamble of going it alone in the state of UP will be considered a success. With this result, the Congress ruling Family is back to its winning ways. Expect to see the party gain in strength from here on for some years.

A LESSON IN 'SPIN'

A story doing the rounds on the internet goes:
Judy Wallman, a professional genealogical researcher, discovered that Hillary Clinton's great-great uncle, Remus Rodham, was hanged for horse stealing and train robbery in Montana in 1889.

The only known photograph of Remus shows him standing on the gallows. On the back of the picture is this inscription: 'Remus Rodham; horse thief, sent to Montana Territorial Prison 1885, escaped 1887, robbed the Montana Flyer six times. Caught by Pinkerton detectives, convicted and hanged in 1889.'

Judy e-mailed Hillary Clinton for information about her great-great uncle. Hillary's staff sent back the following biographical sketch: 'Remus Rodham was a famous cowboy in the Montana Territory. His business empire grew to include acquisition of valuable equestrian assets and intimate dealings with the Montana railroad. Beginning in 1883, he devoted several years of his life to government service, finally taking leave to resume his dealings with the railroad. In 1887, he was a key player in a vital investigation run by the renowned Pinkerton Detective Agency. In 1889, Remus passed away during an important civic function held in his honor when the platform upon which he was standing collapsed.'

The story is false. But, it does serve to illustrate the role of spin doctors – something the Indian political parties desperately need. Most key parties in India are struggling to re-invent themselves, and in the process, creating a web of lies to entice new, first time, voters. Mid month will reveal who succeeds. Till then, we have to remember Churchill’s definition of a parliamentary candidate “He is asked to stand, he wants to sit, he is expected to lie”

Unlearn the old

“Change is inevitable - except from a vending machine.” – Robert Gallagher

Usually, Geographic texts remain the same across generations. You would not expect your child to learn about one less continent, or one more Sun. But in these changing times, even this is not true. Since 2006, we are now missing a planet. Our solar system now has 8 planets and not nine as we were taught. Something fundamental has changed here.

The same seems to be happening to the rules of investing. For the past many decades – almost since the concept of “fiat money” came into existence, it has always been assumed that earnings determine stock prices – atleast over an unspecified “long term”. Millions of trees have been sacrificed to propagate this thesis, and many investment gurus have made their reputations based on this “style” of investment – not least the great Warren Buffet.

It appears we are now in the midst of a change of tectonic proportions – much like the removal of “Pluto” for the count of planets – where we will take away cash flows and earnings as the primary sources of stock performance and replace them by regulatory and government action.

Two proposals merit attention. The first, originating in the USA, is a proposal by the Financial Accounting Standards Board (FASB), to allow creative accounting (obviously couched in more acceptable language). This will now be discussed and put to vote on April 2. Girdle up for “Ostrich Accounting” from here on – defined as “if I refuse to see it, it ain’t there”. If you assume that most companies already use some variant of this – this report mentions that GE Capital Corp. uses mark-to-market on only 2% of its assets – you understand why most brokerage reports use the words “we believe” so liberally. Whoever claimed that that an analyst was paid to analyse, not believe!

The other report is from our own shores. In an obvious attempt to keep up with the Joneses, in India, the National Advisory Committee on Accounting Standard (NACAS) has recommended a deferment of AS-11. While there is a flicker of hope that this will be rejected – the Ministry of Corporate Affairs has not yet accepted the recommendations, it seems highly unlikely. India will therefore pad along the footsteps of the “most advanced” market in the world.

Key changes – looking at accounting books of companies for clues of financial performance will soon become like reading fairy tales – it already is in many cases – but will now become entrenched policy – not meant for grown-ups. Equity markets will now behave much like debt markets. Debt traders are trained to look at the key market rigger (the Central Bank) for direction on how to trade. Equity traders soon have to look in the same direction – if the Bank prints more green-backs, buy equity, if it prints more bonds, sell equity. Did anyone mention earnings here?

To paraphrase a quote “Every time I find the meaning of investing, they change it”

Regulating the regulators

Imagine a school with a strict teacher in every class. In one such class, are a bunch of kids playing with fire. While the teacher watches, the kids set fire to the window curtains. The fire spreads, and engulfs the school and burns down most of the infrastructure. It then spreads to the neighbourhood and affects the nearby buildings. While trying to bring the fire under control, and examining the cause of the fire, the school principle suggests that one way to prevent another such occurrence would be to appoint the errant teacher as the fire warden for the neighbourhood.

Sounds like a fantasy out of Alice in Wonderland? Welcome to the real world – this is how the financial system of the world operates cica 2009. Gordon Brown, in preparation of the G20 summit on the financial crisis, exported to the world by the USA and UK, writes

“I have learned from this financial crisis that the disciplines we expect of markets cannot be guaranteed without strengthened supervision. “

Uh? Let’s see which part of the financial system that caused the breakdown was unsupervised. The most maligned are the hedge funds. Did these loathed vehicles need a bail-out – not really – for the most part, they just quietly wound down and exited. However, we have had multi-billion (totaling trillions of dollars) of bailout for supervised entities - banks, insurance companies, and investment banks. So don’t you see, the solution to the problem must be more supervision!

Having efficiently “supervised” an excellent problem situation, the regulators in the US have now suggested a Geithner plan to fix it. The plan involves a “put” to investors of banks and distressed asset funds, while transferring the entire risk to the tax payers. As Paul Krugman writes,

"Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard."

Mark Twain could have been speaking about regulators when he wrote

"All you need in this life is ignorance and confidence then success is sure"

especially if success is measured by negating the principles of free markets, and forcible propping up defunct organizations.

What’s with this “political uncertainty”?

Most market commentators. when asked about the possible direction of the market in the near term, hide behind the excuse that “political uncertainty” leading up to the general elections will lead to subdued market performance. Almost as if it was not the job of the market to deal with uncertainty and make decisions in the absence of perfect information.

In any case, it appears that we are headed for another government comprising several political parties. Should an investor worry?



A look at the graph above indicates that the Indian economy left its earlier slower growth trajectory and embarked on a higher growth path somewhere in the decade of the 1980’s. This coincided with a drop in the vote share of the Congress – till then the single largest party with a dominant share of Parliamentary seats. The 1977 experiment at coalition was a miserable failure and led to a resurgence of the Congress. But only for a few years. For the last almost two decades, we have had minority governments ruling India. Over the same period, we have sustained a new and higher growth trajectory.





In fact, it would almost suggest, that the emergence of regional parties helped to increase the growth rate for the nation. A research paper on the “Politics of Infrastructure Spending” by Wilkinson 2006 mentions the following

“Experience since the late 1980s has shown that coalition governments are formed and held together by the judicious spreading around of loans, grants and subsidies, which obviously limits the resources available to be spent on other projects. .. For example from 1999-2002 Andhra Pradesh got $763 million in “additional central assistance for externally aided projects in state plans” because of the influence of its governing Telegu Desam Party, the single most important coalition partner in the national NDA coalition government in new Delhi. The opposition controlled state of Bihar got only a tenth as much, despite a greater population and much worst absolute levels of poverty. However when a Congress-coalition replaced the NDA in 2004, it was Bihar’s turn to benefit from electing large numbers of MPs to a key coalition party, the RJD”

What does this mean for the investor? Clearly, the election process cannot be blamed for uncertainty (it is certain that we will have a coalition government), nor for lower growth. The moot point though is whether growth is in itself needed for stock market performance. A paper by Prof Prabirjit Sarkar of Jadavpur University titled “Stock Market Development, Capital Accumulation and Growth in India since 1950” has this as its abstract:

“This study examines whether there exists a long-term relationship between Indian share price movements and growth through capital accumulation over more than half a century period since 1951. Using the Autoregressive Distributive Lag (ARDL) approach to cointegration developed by Pesaran and Shin, our study shows that no long-term relationship exists between the gross-fixed capital formation (total as well as private) as percentage of GDP and nominal or real share price. There is also no relationship between the growth rate and share prices (both nominal and real). There is also no relationship if we consider the growth rates in share price.”

Now that is a different existential question we need to confront!

Reality check for executive factories

The IIM’s have long justified the rapid and unchecked increase in their fees on the grounds that students are assured of a good placement. Consequently, the institute and its dependents (the teaching staff) should charge “appropriately” to deliver “quality” education. In the case of IIM A, fees have increased from approximately Rs 1.5lakhs in 2004, to Rs 6lakhs in 2009 (CAGR of an astounding 32%). The unstated position appears to be that rather than being non-profit institutes of research and education, IIM’s should now be viewed as glorified placement agencies and finishing schools for graduate students. Incidentally, IIM’s make in excess of Rs2crs per year from placement fees alone.

The recently concluded placement session has been a much needed reality check for the IIM’s. Placement was slow, and students witnessed a salary drop averaging 30% across most IIM’s.

Maybe this will lead to some serious, and much needed soul searching. If the argument is that rising salaries are in some ways related to the “value add” that the institute delivers – then, one has to conclude, that the institute has actually added lower value to the current crop of students. I wonder if the students then entitled for a refund in fees!

The IIM’s seem to suffer from unbridled greed - that has been at the bottom of the current meltdown in the US. No justification can be offered for a 30% increase in fees year-on-year for over a decade (it started well before 2004). Linking fees to salaries ensures that students may need to take loans, and this restricts their ability to explore options of entrepreneurship and of working in socially relevant, but poorly paying jobs. This, when as a public institution, the IIM’s are adequately supported by the State (they have existed for over four decades, and have built their reputations over 3 decades of public support). Operating independence for a public institution cannot be divorced from responsibility to the public and its government. Rather than competing on increasing salaries and costs, it would be more appropriate if the IIM’s focused on creating a management education paradigm suited for the needs of a diverse and uneven economy as India.

The key success factor for the IIM’s has been their ability to draw within their fold, the cream of aspirants – and government ownership, a merit based entrance and low fees have each played a significant role in this. Change one, and the IIM’s will not be the same again. I hope the IIM’s are listening.

Equity Investing – the image of Ganesh

Investing in joint stock companies has a come a long way since a bunch of disparate investors in London, agreed to partake in the risk and return of establishing a permanent settlement in the “New World” and formed “The Virginia Company”. Risk was involved not only in financing a venture that could potentially fail, but also in recovering the upside in case of one.

Settlement risk in investing has, since, been considerably reduced, with counter-party risk significantly reduced through the introduction of clearing house for trades, backed by investor protection funds.

One thing that has not changed, however, is the uncertainty regarding how to approach an investment decision. Investors often are regarded as belonging to one of two (sometimes opposing) groups – one which swears by estimating the future cash flows of companies (fundamental analysis) and another that attempts to predict stock price from past stock price moves (Technical analysis). But these are by no means the only schools of thought. The theorist (capital asset pricing model) would have you believe that price movements are random, therefore unpredictable. Another set of theorist add to the chaos by trying to adopt “chaos theory” (yes – there is a theory for that too!) to the capital markets. A somewhat recent approach which has thrown its metaphorical hat in the ring – is behavioural finance.

Adherents of each school will often go to any lengths to disparage the claims of the other groups. But do any of the approaches single-handedly define the whole “truth” of the investment process? Is it not true that each approach only serves to describe the market only in part, and that over long periods, a particular approach may be unable to offer any significant insight into the investment process.
I have often been struck by the similarity this has to the story of the blind men and the elephant

It does suggest that like with most human attempts to understand the nature of “reality” – the deeper one delves, the more one realizes the limits to the knowledge acquired thus far. As Bertrand Russel stated “I think we ought always to entertain our opinions with some measure of doubt. I shouldn't wish people dogmatically to believe any philosophy, not even mine.”

In the end, I wonder if our ancients were indicating something to us, when they chose Ganesh – the elephant god, as the God who overcomes obstacles (and now the reigning deity of the stock markets) – perhaps reminding us not to behave as the “blind men”? Keep an open mind, and if you feel dogmatic about a particular idea, remember – the only dogma worth falling in love with is to be found in Asterix comics

Moral Relativism

Last evening I had occasion to meet a very senior finance sector executive from the US –now involved in equity investments. He invests serious amounts of money in India, his own as well as that of others –in private equity and public markets.

While commenting on investment opportunities in India, he mentioned that valuations in India do not mean much since corporate reporting is suspect. To use his words – “why should I pay for the expenses of the promoter”? The implication was that all companies “cook” books and therefore investors were seriously disadvantaged.

I mentioned that while it may be true that many company founders tended to take some money out of the business, it appeared to me that this was not significantly different from the behavior of professional managers, especially in the US, who paid themselves disproportionately. I mentioned that I would tend to rate the behavior of Mr. Vikram Pandit of Citicorp in the same category. In my book, taking $165m (out of an estimated $800m) for selling a lemon of a fund to Citi (subsequently shut down one year after it was taken over) and then offering to manage the company for a salary of $1 smacks of extreme cynicism. The response was that this was legal and above board – and more a mistake made by Mr. Prince the earlier CEO of Citi (who, incidentally, received $138m for his efforts at Citi over 4 years).

This is correct. However, the question I ask is – if something is legal is it necessarily morally acceptable? Should society not expect a higher level of ethical behavior from its leaders – political and corporate? In other words – is there a case for expecting moral absolutism rather than accepting behavior because “others do it too”. If the latter, why should society not make such behavior legal – thereby making it “acceptable”.

The shenanigans of corporate America are too well known to bear repeating. Enron through Madoff, the story continues. What is however, only now attracting comment, is the excesses that corporate America has resorted to – well within the law, but way over the top of what one should classify as acceptable behaviour. John Thain’s $35,000 commode is symptomatic. When the senior executives of the top 3 American car companies went to Congress for a bail-out package, they went by private luxury jets.

If Satyam’s Raju is accused (correctly) if siphoning of large sums of money, the story of Merrill is interesting in that it is legal! In a letter dated Feb 10, 2009, the Office of the Attorney General, State of New York, points out that Merrill, with the apparent complicity of Bank of America, paid out $3.6bn of performance bonus on Dec8, 2008 – well before the due date, and after having lost $15.31bn in the last quarter of the year alone. This necessitated a take-over by Bank of America, and a subsequent bail out by the US tax payer. Does the fact that this is legal make the shareholder’s risk lower? I think not!

It would be well to remember that it is not the case of “poor corporate governance in India” vs “rule of law” in the US. It is simply a case of human greed tilting the scales. At the current moment, it can be safely argued that the level of greed exhibited in the West far outstrips that in other other part of the world – perhaps in human history.

Does this mean that Indian corporate governance standards should not be raised? Or, investors should blindly trust the numbers that companies put out – either in India or anywhere else in the world? The answer, clearly, has to be in the negative. As investors, the cardinal rule has to be “buyer beware”. But this is true as much in India as any other part of the world.

The repeated failures of credit rating companies to predict credit defaults, and audit firms to collude with managements point to the acceptance of moral relativism that has, unfortunately, become a norm in corporate behavior.

John Bogle’s recent book “Enough” (an apt book for current times) quotes Henry Kaufman as saying –

“Trust is the cornerstone of most relationships in life. Financial institutions and markets must rest on a foundation of trust… Unfettered financial entrepreneurship can become excessive and damaging as well – leading to serious abuses and the trampling of basic laws and morals of the financial system. … Only by improving the balance between entrepreneurial innovation and more traditional values can we improve the ratio of benefits to costs in our economic system”

An “us vs them” debate at this stage is futile. We all need to look within to see that we act in a manner that can truly be called “professional”.

Jai Ho!

“Slumdog Millionaire” (SM) has created Oscar history. Those associated with the film have reason to celebrate. I join all in congratulating those whose talent has received recognition at the Academy awards – and wish them greater success.

When the din dies down, it will be worthwhile to examine what we are celebrating. First, this is NOT an Indian film – just one based on a story with and Indian milieu. The song, for which Rahman received the Oscar, is good, but undoubtedly not his best work. I am sure that Anil Kapoor, and to an extent Irfan Khan, cringed when the producer of SM went on stage and stated that when they started the project they had “no money, NO STARS” etc. So, while we share the happiness that winning an award would bring to the awardees, we must carefully look at the lessons learned.

The commercial success of this film internationally is a lesson in great marketing. While our movie stalwarts have tried hard (the leading Khan’s in particular) to “market” their products, the effortless, almost self effacing, ease with which Danny Boyle has “sold” the story is worth emulating. In interview after interview, Boyle comes across as a humble down-to-earth story teller who was so moved by the rags-to-riches story of the protagonist that he achieved “mission impossible”. Danny stresses the positives:

• Universal appeal - the story is of an under-dog who, in the face of adversity, makes a success of life
• The “spirit of Mumbai” – buoyancy and entrepreneurship in the face of abject poverty – is what he seeks to display through this film

But is that really the case? Scene after scene in the movie examines the dark underbelly of Mumbai’s underworld. We are introduced to the “business” of begging and prostitution, to police brutality and drug trafficking. I remember no incident in the movie that illustrates the spirit of striving, of entrepreneurship that Boyle speaks of. The protagonists’ appeal is not in his attempt to achieve more (a la “Satya”), but in a dog-like devotion to a child-hood crush he does not seem to overcome. His participation in the TV show is not motivated by trying to be a success, but a means to reach out to his lost love. And his winning is a function of the brutal life he has led, rather than any active effort on his part. What, in all this, is inspiring?

On the other hand, a recent Indian movie like “Taare zameen par”, has all the ingredients that Doyle speaks of, but are missing in SM. The story of a young lad struggling with a learning disorder is indeed a universal subject. The parental pressure, the child’s emotional response – are both finely crafted and brilliantly performed. None of the actors in SM reached anywhere close to the portrayal achieved by the young actor in Taare. The struggle and eventual success of the protagonist is definitely inspiring. Taare was a success, but not at Hollywood.

What does this tell us about the reasons why some movies make it at the Oscars, and others don’t? And should we care? After all, we are the biggest industry in the world, except in terms of the dollars collected. Judge for yourself.

Power Corrupts...

Maytas's Teja Raju is experiencing a "Deewar" moment - P C Gupta, Minister of Corporate Affairs, has decided that Satyam's Raju's son must suffer because "mera baap chor hai". The Government has decided to dismiss the board and take over the management of Maytas Infra. The reason offered :

"On the basis of information available, the government finds a strong possibility of the affairs of these two companies having been conducted by its current management with fraudulent intent, breach of trust to the stakeholders, and persistent neglect of the obligations and functions."

While it seems reasonable to assume that funds diverted from Satyam would have found its way to Maytas, the question that arises is - in what way is the current board performing its duties to the detriment of its shareholders. If it is, the government needs to explain how. If it is not, it appears that there is an arbitrary exercise of power by the government.

In fact, if the allegation that Maytas received funds owed to the shareholders of Satyam is taken to court, it is probable that the current Board will represent the interest of shareholders of Maytas better than a Government appointed board - that will take its instructions from Mr Gupta. This is the point I was seeking to make in my interview on CNBC on Friday.

The other allegation, made by EAS Sarma in the same interview, - that there was political patronage that helped Maytas in building its business - raised the hackles of Mr. Gulabchand. More so since I pointed out that there cannot be any company involved in the real-estate and infrastructure space that would not have been the beneficiary of political goodwill.

Most systemic clean-ups happen when there is a scam. The financial markets were cleaned up with the setting up of SEBI and the NSE - when the BSE had become dysfunctional and was working for brokers more than investors. One can only hope that the current scam leads to a clean up - not only in the bankruptcy laws of the country - but more importantly, in the clean up of the real estate markets and the appointment of a regulator for the sector. A well functioning real estate market has the potential to unleash huge economic potential while simultaneously bringing a large part of the unaccounted economy above gound.

What's wrong with pledged shares?

Post SEBI's directive requiring "promoters" to declare if the shares they own are pledged, markets are reacting unkindly to the disclosures. The disclosures itself suffer from serious limitations - most arising out of the definition of "promoter" groups. Since many sponsors continue to hold shares in the name of front companies that are not classified as "promoter" companies, it is entirely possible that the disclosures are inadequate at best and misleading at worst.

The more fundamental question, however, arises on whether the market is correct in selling off shares of companies where promoters have pledged shares, or, does this behaviour present a buying opportunity. In my view, the latter.

For the most part, companies in India are still largely owned by a family or by a first generation entrepreneur. Resources for investment are clearly limited. That being the case, if a new investment opportunity were to present itself, what is the man to do other than to pledge assets (in this case the shareholding) and raise funds. Why should that not be viewed as a case of being bullish on the prospects of the investment opportunity?

A possible reaction to this argument would be that this increases the risk in the business, since the equity is essentially debt in disguise. This may well be. However, is it substantially different if the equity of one venture is pledged to raise finances for another - say like in the case of the Tata Group. Isn't this too a case of overleverage, and prone to the same risks? Afterall, most "promoters" do not distinguish between companies that belong to the group - when it comes to crunch time, the cash flows of all companies are used to feed the weak - notwithstanding the presence of minority shareholders that may be and most likely are - different. That this practice is wide spread, and the market is aware of it and tolerates it itself points to the inconsistency of the current response.

An alternate to pledging shares would be that the "promoter" find ways to cheat the minority shareholder of his due share by extracting an unfair proportion of the cash in the business to fund his own investment needs. To me, a pledge is anyday more palatable. So, next time a share price falls sharply because of pledge disclosure, and the business does not look to be in trouble - go BUY.

Overestimating the effects of policy reform?

Mr. Vijay Kelkar, Chairman Finance Commission, recently delivered the convocation address at the Indira Gandhi Institute of Development Research. The speech largely addressed itself to the benefits that a Goods and Services Tax (GST) would bring to the economy. While the benefits of GST need no reiteration(the speech itself makes a cogent case), the figures that Mr. Kelkar puts out seem suspect. He argues that there can be a saving of 1.4% of GDP which translates to $15bn annually. He then proceeds to discount it at 3% to yield an NPV of $500bn.

The question to ask is why use a discount rate of 3%? Unless we argue that the nominal interest rates will average these levels over the next several decades, the case for using such a low interest rate is not clear. In fact, using a 5% rate reduces the implied benefits by more than 50%.

Another area where I find myself skeptical is the contention that more services will get taxed under GST. It appears to me that most services are already being taxed now - banking, telecom, brokerage, consulting etc. Large value services that do not get taxed are largely those that are provided by the government - say the railways. Even these can be viewed as being taxed, since railways are a department of the Central Govt and not a company. It appears that the net addition through taxation of services may not be significant - though I have no estimates, and may therefore be in error.

The downside of GST is often higher prices, lower private consumption. This too is a cost that needs to be kept in mind. As also, the fact that in ensuring that all states agree to the proposals, it is more than likely that GST will not be introduced in the true spirit, and States will continue to impose some form of Octroi or other local taxes. This will again kill the purpose of GST.

In all, the simplicity of the concept itself makes it worth implementing - despite the much lower than projected benefits that may arise.

Caesar's wife should be above suspicion - or perhaps not ?

The story so far - The election commissioner, Mr. Navin Chawla, attracted opposition from 205 members of Parliament when appointed. It was alleged that he could not be non-partisan. The Times of India carried a report:

A Times Now investigation has... found that two trusts floated by Navin Chawla, a member of the Election Commission, received funding of lakhs of rupees under MPLADS from various Congress MPs.

A petition, seeking his removal, addressed to the then President APJ Abdul Kalam, was not acted on. This led to the petitioners approaching the Supreme Court seeking a direction that the petition be forwarded to the CEC. This petition was subsequently withdrawn on the basis of an affidavit filed by the Chief Election Commissioner (CEC) in the Supreme Court. In the affidavit, the CEC claimed that he had authority to, suo moto, recommend the removal of the election commissioner. He quoted the unanimous decision of a Constitution Bench of the Supreme Court of 14th July 1995 (4 SCC 611) where the Judges stated :

That the Election Commissioners could be removed on the recommendation of the Chief Election Commissioner did not make them subordinate to him but only ensured their independence of the political Executive. The Chief Election Commissioner, in any case, could not recommend their removal out of whim or caprice and had to exercise his power with reason and responsibility.

At that time, the Additional Solicitor-General had objected to the statement of the CEC and contended that only the Centre could take action against the election commissioner. The Supreme court reserved judgement on the correctness of the CEC's position. A report on the events is here.

The CEC has, after due process, now recommended the removal of the election commissioner. The government has rejected the recommendation. This now leads to a constitutional impasse. Clearly, this needs to be referred to another Constitution Bench. This goes against the earlier order which seemed to indicate an interpretation favouring the reverse.

At a time like this, when serious efforts need to be made to protect the integrity of the constitutional intent, we have the leading English newspaper in the country worried about the "timing" of the action of the CEC. Ignoring its own coverage, and missing the point of constitutional impropriety - the editorial does not once refer to validity or otherwise of the arguments made by the CEC for the recommendations - the editorial laments the timing of the report in the light of the forthcoming elections.

It seems that a society gets not only the politicians it deserves, but also the newspapers it deserves.

Celebrating the Republic

On the 60th anniversary of our Republic Day, my greetings. On this occasion, it is worth spending a few minutes to review the structure of the State that is India - a federal democratic republic.

The word "Republic" originates from the Latin Res Publica meaning "thing" "appertaining to the people". It originally meant the equivalent of the term "commonwealth", but by the time of the late Roman Republics, had come to mean a state in which power was exercised in accordance with a constitution, and was divided among duly constituted offices of the state. Both these factors are important.

Political thinkers have long understood that democracy ("demos" - the people, "kratein" - to rule) by itself may not be able to do both - represent the will of the people, and do what is right. Democracy is meant to prevent concentration of power in the hands of one or a few, and ensure that "bad" government can be deposed peacefully. However, the potential threat of coercive power by a tyrannical majority remains - if a majority is in agreement, is it legitimate to harm the minority? This led Winston Churchill to remark "Democracy is the worst form of government except for all those others that have been tried".

The Founding Fathers of America were seized of this issue.

“When a majority is included in a faction, the form of popular government, on the other hand, enables it to sacrifice to its ruling passion or interest both the public good and the rights of other citizens. To secure the public good and private rights against the danger of such a faction, and at the same time to preserve the spirit and the form of popular government, is then the great object to which our inquiries are directed.”

They therefore constructed a "representative democracy", with a separation of power between organs of the state...

“In a single republic all the power surrendered by the people is submitted to the administration of a single government; and the usurpations are guarded against by a division of the government into distinct and separate departments. In the compound republic of America, the power surrendered by the people is first divided between two distinct governments, and then the portion allotted to each subdivided among distinct and separate departments. Hence a double security arises to the rights of the people. The different governments will control each other, at the same time that each will be controlled by itself.”

India followed a similar system, with state and central governments' controlling different aspects of state policy. At each level, the control is further divided amongst the three pillars of government - the legislature, the executive and the judiciary.

It has become fashionable to condemn Indian democracy as divisive, with regional parties dominating at the state level and national parties at the Centre - often working at cross purposes. It is worthwhile to remember though that, as articulated above, the construct of our constitution was to create a mechanism of mutual restraint, with each arm of the government working together, yet watching over the other, in protecting the interests of the citizens.

If, after six decades of independence, we see regional aspirations dominating national debate, it is indeed a reflection of how deep-rooted our democratic institutions have become. This internal churn will undoubtedly throw up new leaders who appeal to a larger audience. Alternately, regional leaders have to take up issues that reflect the aspirations of more of the citizens of this country.

Better the jostling and conflict of a working republic than the neatness and placidity of a dead one.

Now its Larsen's turn - another case of corporate misgovernance?

The public relation exercise is in overdrive trying to justify the 12% stake that L&T has acquired in Satyam. However, it does not take much to cut through the smoke screen. Let's face it, there is absolutely no reason for anyone to buy a stake in Satyam, much less L&T. 

The revenues of Satyam are as yet unknown. As are the state of the finances - except to say that the company is scrambling to raise a loan to pay salaries for the month. Clients will bolt as soon as they can, as will employees. The class action suits, and the as yet, undecided case of Upaid, remains. Why buy more shares at this time? This is the question that the independent directors of Larsen must ask when they get together on the 3oth of this month to discuss the results for the quarter. Failure to do this would amount to dereliction of duty and should form a fit case for shareholder activism.  

L&T had, presumably, identified Satyam as a possible investment candidate at an earlier date. However, to suggest that this identification remains valid even as the skeletons have not finished rolling out of the cupboard, requires a huge leap of faith and a degree of nonchalance in the use of shareholder funds bordering on negligence. To risk a significant portion of the capital of the company in an unrelated "di-worsification" (to use a term from Peter Lynch's famous book) takes the cake.

The way the deal was executed too, leaves room for suspicion. The exchanges seem to record only one buyer of the size reported. Who is the seller? If there was a single seller, it should have been reported on the other side of the trade - after all it is a "bulk deal". This seems to lend credence to the rumour doing the rounds that L&T actually purchased all the Satyam shares on the day that Raju made his declaration, when the share were in a free fall. However, the rumour goes, once the company realised the magnitude of the fall, they requested the transacting broker to hold the position, with a promise to take it on their books at a later date. 

This rumour, even if untrue (and I sincerely hope it is - after all who could have funded such a large trade) needs to be suo moto investigated by SEBI. If true, it will mean that a large amount of money may still remain to be paid to some intermediary since the price difference is unlikely to have gotten fully adjusted - bad news indeed for Larsen shareholders. It will also open a whole new can of worms with regard to practices of corporate governance in India despite protestations to the contrary. 

Even if we were to take the deal at face value, shareholders need to ask the L&T management some tough questions:

- who authorised the purchase of such a large quantum of shares

- was there a shareholders or board approval taken for a "strategic" investment of this magnitude - after all, if no white knight appears, Larsen is now the main shareholder in Satyam

- Is there a plan on how to revive Satyam and put it back on track. Who has made it and how could it have been made without getting a full picture of the assets and liabilites of Satyam

- Will Larsen step in as a "promoter" to invest in Satyam? What will it do in the event the latter becomes insolvent

Assuming that the right questions are asked, we could see new leadership in Larsen. In any case, the shareholders of Larsen have every reason to feel fearful of the status of their investment. Yet another case of non-alignment of interest of management and shareholders - something I had commented on earlier. For the un-involved, the movie promises to be interesting.

Insider Trading or margin calls?

The Satyam episode offers an interesting case which could help define insider trading more sharply. To recap, the Maytas merger announcement led to a sharp drop in Satyam share price. Ostensibly, this triggered part sales of shares which were pledged by the Raju's and against which money had been raised. The events are chronicled here. Interestingly, Merrill Lynch, which was appointed as an investment banker too had extended loans to the Raju's and had shares pledged against this loan. These shares too, were sold at a time when the company was an investment banker, and consequently privy to the inside story. 

The moot point, as raised by my partner is an earlier venture, is - do these "margin calls" qualify as insider trades. After all, the effect of these trades, was to extinguish, atleast in part, liabilities of the Raju's, when their own subsequent actions ensured that the value would completely erode in a few days. Is this, therefore, a fit case for "disgorgement" of unfair profits made by the promoters. Particularly in the light of the precarious fiscal situation that Satyam finds itself in, should the shareholders - in particular those seeking to prosecute the class action suits - not make IL&FS and Merrill a party, and seek to extract the excess value they received as a result of sales made of promoter shares just a few days before the confession?

More legally oriented minds need to comment.

The price of courage and the cost of cowardice

A friend send me a link to a letter made more poignant because it was published posthumously. Lasantha Wickrematunge, the author, and editor of The Sunday Reader, was shot on his way to work on Jan 8, 2009 in Sri Lanka. It describes his resolve to express his opinion on the politics of Sri Lanka, while being aware of the risks to his life. His death, establishes once again the cost that "freedom" often demands from men - the supreme sacrifice. It is men like him that the rest of us have to thank for our freedom, the existence of which we often take for granted.

In contrast, our feckless prime minister and spineless bureaucracy have scored a self-goal with regard to the handling of the post-mumbai-attack situation. Pakistan has now won the game, set and match. From being on the run, they have turned the tables completely - with the latest "umpire" of India's choice (remember, we have chosen to outsource our defence to other countries) David Miliband, the British foreign secretary, hectoring our PM and foreign minister on the need to resolve the "core issues" of Kashmir - a connection which even the Pakistanis have not insisted on making with any degree of conviction. Two interesting view points emerge - one where the UK position is sought to be explained in terms of their own domestic compulsions  and another, which takes a more robust view of how India (mis) handles its strategic goals.

In any case, with the new US president having signalled his willingness to interecede in Kashmir, we can only hope that we have an early election. At least there will be a chance that the democratic process will result in giving the "old bones" some rest. 

Today, the color of hope is black

The crown was missing, but not much else. Pomp and ceremony surrounded the "crowning" of "emperor" Barack Hussein Obama as commander-in-chief of the most powerful army in the world. 

When the speaker introducing the new President emphasised the "peaceful transfer of power", I'm sure many wondered why it should be any different. However, we must not forget how rare it is even in this age in the world to have a leader of a powerful nation handing over power through the ballot rather than the bullet. More so, when the new leader represents a race, that less than eighty years ago, was the target of "white supremacy" groups like the Ku Klux Klan. 

Change induces hope, and the inauguration of the new President of the USA brings hope to more people in the world than can be counted - that the country which, till the previous administration, represented leadership of the "free, democratic" world, would live up to the ideals of freedom and democracy rather than inflict arbitrary suffering on the rest of the world. I join most such in wishing that such hope is not misplaced. Now, however is the time for optimism, not cynicism.

Post the recent attacks on Mumbai, many young Indians decried the Indian democracy, its politicians, and demanded martial law. I hope that this inauguration will inspire people to introspect about the miracle that is the Indian democratic system. A country as poor as India, as diverse as this nation is, regularly elects to the highest offices - people belonging to different minority segments - by religion, caste, and sex. The "inauguration" process does not include praying to the "gods" of one religion only. We can be truely proud of being a secular, democratic republic - the biggest and the best - make no mistake. Lets keep it that way

Jai hind.

Laugh lines

President Bush will be sorely missed in the next few weeks. I doubt his "Bushisms" would survive his stepping down as president. But you never know... it could be I "misunderestimated" him!

A complete list of his faux pas can be found here.

Manas Chakravarty's take on the Business Plan of Raju makes an interesting read.

I think Bush could have used the picture below to understand the Auto (and other) Bail-out. Hope it helps.
And if all this drives you to seek refuge in "God", here is a great illustration of the delusion you are suffering from.

Have a great week ahead

Two minutes of silence

More than fifty thousand families directly, and perhaps almost as many indirectly (Maytas group, other persons involved in Hyderabad real-estate, head hunters and placement agencies) need that silence – as a requiem for their dreams – atleast temporarily. These are the real losers in the scam at Satyam.

For the non-institutional shareholders, my sympathies, for having being on-board at the time when the story blew-up. They are collateral damage. For the rest, institutional investors in particular, it’s an occupational hazard. Investing in companies that adopt dubious practices (exploiting governmental contacts being one among them) is a regular provider of the elusive “alpha”. Much “wealth” has been created at the hands of such dubious managements to provide any long-lasting aversion to such practices.

The Madoff case in the US is an example. A complainant to the SEC two years before the ponzi scheme finally crashed, pointed out several “red flags”. Some related to the behaviour of fund of funds – that are meant to conduct a proper due diligence on funds they invest in. Here are some excerpts

Red Flag #14: Madoff subsidizes down months! Hard to believe (and I don’t believe this) but I’ve heard two FOF’s tell me that they don’t believe Madoff can make money in big down months either. They tell me that Madoff “subsidizes” their investors in down months, so that they will be able to show a low volatility of returns. These types of stories are commonly found around Ponzi Schemes. These investors tell me that Madoff only books winning tickets in their accounts and “eats the losses” during months when the market sells off hard. The problem with this is that it’s securities fraud to misstate either returns or the volatility of those returns. These FOF professionals who heard BM tell them that he subsidizes losses were professionally negligent in not turning BM into the SEC, FSA and other regulators for securities fraud.

Red Flag #15: Why would a fund of funds investor believe any broker-dealer that commits fraud in a few important areas – such as misstating returns and misstating volatility of returns – yet believe him in other areas? I’d really like to believe in the tooth fairy, but I don’t after catching my mother putting a quarter underneath my pillow one night.

Can you spot the similarities?

Many business leaders have appeared on TV expressing surprise, dismay and shock. I wonder why. Indian companies have been consistently ranked amongst the most prone to bribery. “Public works” ranks on top as the area most corrupt. Satyam promoters had a background in construction. Can it be that companies that are willing to bribe others, are going to be the epitome of probity when it comes to their own operations? Surely, we cannot rank amongst the world's worst without large companies in the country being a party to this practice. This combined venting to consternation seems to me to smack of the same hubris – the search of which brought Satyam to its demise.

Instead of repeatedly denouncing Satyam, we need to do some soul searching here. Can society ever create the incentive structure that balances what is needed for survival against the greed for wealth. Till then, people in glass houses….

Independent directors - new incidents old problems

After the recent botched attempt by Satyam to merge with a company belonging to the "promoters", the role of independent directors on the boards of companies had been brought into focus. Now comes the news that the Andhra police are looking at ways to implicate Mr. Nimesh Kampani in a case which relates to defaults by Nagarjuna Finance.

In the case of Nagarjuna, it appears that Mr. Kampani was not on the board at the time when the company defaulted to depositors. Prima facie, it appears to be a case of harrasing a person for something over which he would have had little control, and perhaps no knowledge. This, once again, highlights the need to have a specialised law enforcement division within the police force that deals with white collar financial crime.

However, it also calls into question the role of and expectations from independent directors. If they are not to be held responsible for day-to-day executive decisions, and have not proven themselves capable of acting on behalf of minority shareholders when it comes to strategic decisions, why have them? And, when does one penalise inaction (at best) and malafide action (at worst) on the part of independent directors? Is loss of reputation a good enough penalty, or should there be a more serious penalty including possible financial liability and/or possibility of imprisonment. In all this, we should not forget that a company with a properly functional board would benefit from the experience and oversight of external members who monitor corporate performance and keep the management on their toes.  

Agency theory just got more complicated. 

Deja Vu.. more words, no action

As I write in the new year, I hoped to start on positive note, reflecting hope of a more secure India. Instead, realization strikes that a mere change in the calendar changes nothing. 

The home minister also pointed out that it was up to Pakistan to ensure that such terror acts were never repeated by its citizens against India. "The price they will pay if this is repeated will be enormous," he warned.

This was Mr. Chidambaram on NDTV last evening, but could easily have been any other incumbent over the past two decades. I can imagine the snickers of derision this would have invoked across the border. What, can I ask, has the "price" been for all the attacks inflicted on us. The attack on Mumbai came not six months after the Indian embassy in Kabul was attacked. We used the same words, the same empty promises of retribution, the same attempt at "building international opinion" against such attacks. Yet, Mumbai was attacked, as it seems now, with impunity. 

In the same interview, the home minister was asked about what India was looking for, and his response was - that India seeks a "guarantee from Pakistan" that such attacks will not be repeated. Haven't we been there before? What guarantees and from whom. Importantly WHAT will we do if such a guarantee is flouted. In fact, WHY are we NOT taking those steps TODAY?

In the past, all that the perpetrators of such crimes had to do was to wait for a change of political guard. In fact, with the present spineless dispensation, the attackers do not even have to bother for a change. Mumbai alone has been targetted twice in the past 2 years, and other Indian cities have been brought into the fold of such attacks with impunity.

We are admonished that "war is not a solution". The question is - are we not already at war for the past two decades? What will it require to call India at war - an attack on parliament ... er.. that already happened. What about an attack on India's key economic structures, the stock exchanges, the business districts in metros et al .... er... tick that off too. Well, I guess an attack on Indian property overseas would be an act of war... that too! I guess, since we have geriatrics ruling the country, the only definition of war would be an invasion across the border - but you know what - that happened too...

I recommend that we disband the Indian Army. After all what we need is a National Relief Force - that will take care of people in the event of a natural disaster (currently the most active use of the Indian National Army). As for guarding the borders, or taking on hostile neighbours, we have already exported that task to the "international community". I wonder if there is anyone who can put out a set of condition under which the Indian armed forces will be called upon to act - I doubt it will ever happen despite the need and the provocation. What, therefore I ask, is the need to incur the cost to maintain such a huge force - much better to divert the resources into policing and other activities which we can do within our borders.

The cold war did not ignite into a nuclear war simply because of the doctrine of MAD (mutually assured destruction). The simple construct behind that was the willingness and ability to use WMD's if required. Once one party to a conflict knows that the other is not willing to escalate it no matter what the provocation, simple game theory will suggest that there is no protection against attack. India has repeatedly shown itself unwilling to escalate. Therefore, the enemy can chose its time, place and method of attack, and we have to defend (if that) from a position of weakness. The fact that this simple principle is ignored by the powers-that-be smacks of complete pussilanimity at best and treachery at worst. 

"Fear has its use, but cowardice has none. ... The trouble is that we often die many times before death overtakes us." - Mahatma Gandhi

A recent article from Brahma Chellany in the Hindustan Times, makes some interesting points. 

As our home minister jets to the US to seek to provide "proof" of the source of attacks, some questions come to mind - 

1) What if the US continues to do what it has done so far (provided the ISI funding for creating taliban, ignore the proliferation of AQ Khan, and even now - paid to Pak over $10bn under G W Bush) - which is, to look at it the "evidence" from its own perspective and tell India to go sit at a negotiating table. 

2) Assume that for a change, we have US support - what if the Pakis do not respond to US "pressure"? As soon as pressure built up post the Mumbai attack, transport vehicles headed for Afghanistan from the US were burnt up - underlining US dependence on Pakistan for logistics support. What is the next step if they just ignore US pressure?

3) What if China (who we are now approaching, much like we are the US) assures support, but tacitly continues to provide succour to the Pakis

Finally, some of the prescriptions to India are already in - this article by a UK professor tells its own story...

Finally, India should also reach out to ... work with the US to provide assurance to Pakistan which can undercut the paranoia of the Pakistan Army and ISI, not least with respect to India’s role in Afghanistan. 

So now, we are to assuage the feelings of the ISI too.

In the meanwhile, the Israeli attack on Hamas continues, and, as the US puts it, Hamas should behave itself.

Have a great 2009

Amen