Monday, December 28, 2009

What are we upto?

Even the least patriotic among us would shed tears when we think about the present state of our nation. Gubernatorial gaffes, arbitrary exercise of political and police powers, practice of debased politics, reckless handling of international sports events, ministerial twittering contradicting government's policy and puisne judge's lament on CJI's powerlessness are but an expression of national depravity. Where are we heading? We do not know the destination. But we are sure we are heading in the wrong direction.

How can a Governor convert the hallowed Raj Bhavan into a place for sexcapades? The 86-year old Governor could not have been alone in this act of debauchery. How did this unsavoury development come to light? A procurer who was promised a mining licence was not delivered on the promise ! Many delivered promises which cause incalculable loss to the state exchequer and hence to the public remain secret.

A senior police officer molests a minor girl and ia awarded a suspended 6-month imprisonment after 19 years. In the meantime, he gets promoted as DGP and honourably retires! He and his goons in the government harass the family of the girl, cause her suicide after she is expelled from her school under police pressure and finally the judge becomes sympathetic to the age and agony of the police officer who faces the court proceedings for 19 years. Travesty of justice cannot be more bizarre.

It is true that there are no permanent enemies in politics. How does one respond to a national party coalescing with a regional party headed by a leader notorious for his corrupt ways and against whom there are / were charges of murder and other crimes? Pragmatism in politics cannot be limitless.

How can a cricket match be held on a pitch with rogue bounce threatening the life of players? What if someone had actually succumbed to injuries? This happens not in a distant town, but in the capital of the country!

When the Home ministry has decided to tighten the visa norms, does any minister in the same cabinet have a right to air his reservations in public? Ministers cannot enjoy such compulsive / addictive twittering while making a mockery of cabinet responsibility.

We can only sympathise with a High Court judge who rightly laments that the Chief Justice of India is only a serpent without fangs who has no authority to control wayward judges of higher judiciary.

Sunday, December 27, 2009

Compulsive Shopping

Vice-President (Finance) of Koss Corp, makers of head phones and similar accessories has misdirected company's funds to the extent of nearly 20 million dollars to her personal account with American Express. The company was tipped off by the alert American Express about unusually large transfers coming to her account from the company. Sujata "Sue" Sachdeva has confessed. Her husband is a paediatrician and the family's finances were ample.

This is not a run of the mill white collar misappropriation. She is supposed to be a victim of 'oniomania' or 'compulsive shopping syndrome' aka shopaholism. She spent the money on jewellery and apparel. She was very active in social activities and had been working with Koss Corp since 1992. Would American judiciary find her unpunishable because she is a victim of an apparently uncontrollable psychological disorder? This is also an interesting case from the perspective of operational risk management.


Mega-savant (the politically corrected version of 'idiot savant') is a person with prodigious capacity in one aspect of life, but miserably bereft in other aspects. Kim Peek who passed away recently was one such. He could read the left page of a book with the left eye and the right page with his right eye simultaneously. He would read say a 200-page book in double-quick time and remember every word in order. If you had misplaced the telephone directory, you could check his memory.

Scientists say that the left and right hemispheres of his brain were distinct and without any connection between the two. Contents of his brain differed from a common one. When he was an infant, a neurologist was supposed to have given up on him as non-social. The doctor was certain that the infant would pass away as infant. Kim Peek went on to live for 54 years and was an inspiration for the film 'Rain Man'.

Stephen Hawking is another wonder of nature (not a mega-savant though) who was given up by doctors long ago and who continues to amaze us with his brilliance. Such freaks of nature remind us that there are no limts to nature's variety. There ought to be limits to 'scientific hubris'.

Friday, December 25, 2009

Climate change politics

Rajendra K.Pachauri who is the chairperson of IPCC (Intergovernmental Panel on Climate Change) set up jointly by World Meteorological Organisation and United Nations Environment Programme has recently been rubbished by The Sunday Telegraph, a widely read newspaper in the U.K. He has been accused of being in conflict of interest in view of his being the Director General of TERI (The Energy and Resources Institute) which is receiving payments from many corporates which are utilising IPCC's services. TERI has demanded an unconditional apology from the newspaper for publishing a defamatory report.

Is it only muckraking or is The Telegraph trying to arrest a scam? The newspaper has also accused the Tata Group of benefitting from its association with TERI. The Telegraph report also makes a reference to the likely closure of a plant of Jaguar LandRover in England by the Tata Group.

If the conflict of interest is proven, IPCC will certainly disassociate itself from Dr.Pachauri. If this comes to pass, it will be a major blow to Indians' sense of governance. The climate change platform is already vertically split into the denialists and protagonists. The spectrum ranges from deniers, sceptics, warners to calamitists. Global warming or not, this issue is generating a lot of heat.

Sunday, December 20, 2009

Justice Dinakaran

This is in continuation of posts dated 15th and 25th September. It is unfortunate that the issue lingers on with no immediate solution in sight. There have ofcourse been a few twists and turns pockmarking the Indian judiciary a little more.

Justice Dinakaran has decided not to sit on the judicial Bench. It is not known whether this is his own decision or imposed perhaps from the Supreme Court. However, he continues to attend to his administrative functions. This appears a bit incongruous. Justice D.V.Shylendra Kumar (if a little odd humour is not out of place, he is by no means 'shy' as his actions mentioned here evidence) was disturbed by this and advised the Registrar General of the High Court to announce a meeting of all brother judges to debate the propriety. The Registrar General placed this advice to the Chief Justice Dinakaran for his disposal. Justice Dinakaran suo moto dropped the matter then and there.

Justice DVS Kumar wondered how the Chief Justice could decide on an issue involving himself. He has made public his disapproval and has added for good measure "grace, propriety and good conduct are definitely not the strong points of our Chief Justice". Since Justice Kumar had indicated the time for the meeting to all judges, the meeting did take place. Only 5 judges out of 37 attended the meeting. It is not yet known what transpired during the discussions.

An impeachment motion against Justice Dinakaran has been admitted in the Rajya Sabha. It is likely to be defeated since some political parties will abstain. There are demands that Justice Dinakaran must be given an opportunity to defend himself. One does not know why he is not defending himself apart from making a general statement that events will prove his innocence.

The whole episode shows that the Supreme Court is directionless. If Dinakaran is innocent, who will compensate him for all the mud thrown at him? If he is guilty, is there any hope for the system that allows such people to thrive? Will we ever know the truth?

The Copenhagen Discord

COP15 has at last come to an end. COP stands for Conference of Parties and not Copenhagen. This is the 15th UN Climate Change Conference. According to estimates proferred jointly by the UN and Deloitte, this event (or non-event?) generated 46200 tonnes of carbon-di-oxide. This is what about 0.6 million Ethiopians produce in a year! What did this meet achieve?

There is a non-binding statement of non-quantified intentions. President Obama has again proved that he is more articulate than George Bush. Following comments which have appeared in the media express deep disappointment:

Tuvalu's chief negotiator Ian Fry :"It looks like we are being offered 30 pieces of silver to betray our people and sell our future". (Tuvalu is the third least populated sovereign state in the world. It is a collection of islands in the Pacific ocean. Global warming and consequent rise in sea level will sink this nation without a trace.)

Greenpeace says,"The deal is not ambitious, not legally binding and likely to put the world on a path to atleast a 3 degree Celsius temperature rise. The Indian government's attitude to climate change this year showed that it is willing to shoulder responsibility and be a global player on climate action. The prime minister had gone to Copenhagen from a position of strength only to squander it to a near-farcical accord and a weak outcome. He failed India and the world when he let the U.S. and developed countries off the hook." Very strong words indeed.

Tuesday, December 15, 2009

HUL's new year gift to its parent company

Hindustan Unilever's Board approved on 15th December a trademark license agreement with its parent the Unilever which provides for payment of trademark royalty at the rate of 1% of net sales on specific brands, where Unilever owns the trademark and HUL is the license user. This is effective from 1st January, 2010, verily a new year gift to Unilever. HUL Board goes on to record that this is within the Government of India guidelines for payment of royalty. This assertion is superfluous since the company has no right to violate GOI guidelines anyway.

The company's Board is perhaps within its rights in approving this arrangement. But there is no clarity on what will be its impact on HUL's financials. Only one thing is clear. Return on sales will drop by 1%
This agreement is a related-party transaction and therefore merits full disclosure on its details and implications. HUL's Board has a fiduciary duty to protect HUL's interest. Lack of transparency casts doubt on the Board's discharge of this duty. Even if law does not require reference to shareholders on a crucial item like this, one expects "well-governed" companies like HUL to take the permission of its shareholders for paying royalty to its parent company.

Sunday, December 13, 2009

American bank-lending follows India's

The economic meltdown has effected a sea-change in the way American banks look at home refinancing. Prior to 2007, refinancing of home loans was a routine annual ritual. Borrowers gained in the form of additional loan amounts and sometimes by way of reduction in interest rates also. All this has changed now and American banks are now a chastened lot. Have a glance at the New York Times article given below. Indian banks have traditionally been cagey about takeover of accounts from other banks, which is what refinancing is all about. Only now the US banks have become alive to the risks in refinancing.

Wednesday, December 02, 2009

The CAT snafu

Maladministration of the ongoing Common Admission Test for entry into IIMs and other business schools is a big blow to the reputation of IIMs, particularly IIM Ahmedabad. One may argue that the computer-based test is administered by Prometric assisted by NIIT and therefore IIMs are not to blame. But it is not so. After all, Prometric and NIIT are only acting as agents of IIMs and therefore the blame for serious hiccups falls on IIMs.

One may empathise with IIMA in response to the CAT convener, Prof.Deodhar's repeated use of the word 'empathy' for the CAT applicants. However, playing ducks and drakes with an exam that is taken seriously by more than 2 lac students is unpardonable. It is now manifest that the test is being conducted without proper prior preparations. Rescheduling the test for the disappointed applicants does not salvage the situation in full. It is incomprehensible how IIMA decided to conduct only computer-based test when it could not have been fully convinced about availability of foolproof hardware and software.

Who is accountable for this fiasco? Obviously it is IIM. What should it do now? At a minimum, it must conduct a written CAT for all the applicants at its cost. Otherwise, the weightage in the computer-based mishandled test would be language-10%, quant-10%, logic-10% and LUCK-70% This incident proves that just one mishap is enough to tear to shreds the reputation built over years.

Monday, November 30, 2009

Do people become corrupt overnight?

The latest in the unending stream of news about corruption is the involvement of top-ranking military officials, as high as Lt.Generals, in a scam relating to sale of land. Some commentators have wondered how people with doubtful integrity have ascended to such levels in the first place. These commentators have made two assumptions. a) Promotion system in the defense services is fair enough to weed out corrupt elements and b) People do not become venal overnight or in other words a person's tendency to be corrupt is a chronic degenerating ailment and cannot be a spontaneous response to a tempting opportunity.

Both assumptions are debatable. Regarding the first assumption, is it not a bit far-fetched to suppose that the defense services can be an oasis of virtue in the desert of Indian corruption? A system's integrity is contingent on the bonafides of the people running it. So even if the promotion system contains objective rules and regulations, it is highly likely that they are subverted more often than not.

The other assumption is a matter for study by HR experts. This assumption has far-reaching implications. If this assumption is proved to be valid, vigilance should be more towards newer employees in an organisation. Risk management experts will find their job becoming easier if they are told that the human element in operational risk exists only in the case of employees new to the organisation. Such a scenario appears too good to be true.

Saturday, November 28, 2009

Air accidents

Postings of 4th and 24th October on "Air India's novel in-flight entertainment" and "Sequel to IC 884" narrated two bizarre flight incidents. Given below is the link to an article by Capt. A.Ranganathan on aviation regulation in India and the US that covers both these mishaps.

Thursday, November 26, 2009

Uninvited guests at State Dinner

President Obama hosted the much vaunted first state dinner of his presidency to Indian prime minister this week. An uninvited couple gate-crashed into this dinner party as reported in the report given below. We are used to be cynical about security measures in India. Isn't this security snafu disturbing?

Tuesday, November 24, 2009

Corruption in India (continued)

This is further to the posting dated 17th November. The Acting Chairman of Company Law Board, R.Vasudevan was arrested yesterday by CBI while accepting a bribe for Rs.7 lac. As Chief of CLB, he was overseeing the investigations in Satyam scam. There is a proverb in Tamil that sometimes the fence starts devouring the crop.
The following link provides a comparison of corruption levels in various countries:

Tuesday, November 17, 2009

Conflict of interest for judges

Further to the posting dated 4th Nov. on "Supreme Court: Conflict of interest - a farcical alibi?", the observations made by Justice Antonin Scalia of the US Supreme Court in a case where he refused to recuse himself simply because one of the official parties to the dispute was Dick Cheney, the then Vice President with whom the judge had gone on duck hunting, are interesting. He said, "Since I do not believe my impartiality can reasonably be questioned, I do not think it would be proper for me to recuse ... The people must have confidence in the integrity of the judge and that cannot exist in a system that assumes them to be corrupt by the slightest friendship or interest in an atmosphere which the press will be eager to find foot-faults. If it is reasonable to think that a Supreme Court justice can be bought so cheap, the nation is in deeper trouble than I had imagined." Very wise words indeed.

Corruption in India

It is well known that corruption levels are high in India. A study quoted by Transparency International reveals the grim possibility that India as a nation may unravel in 10 years if the menace continues at the present virulent form. CPI (Corruption Perceptions Index) of India continues to be at 3.4 in 2009 (the same as in 2008) on 0 (most corrupt) to 10 (least corrupt) scale. Among 180 countries analysed, India is the 96th most corrupt nation. To know more about this sorry state of affairs, link up to the following:

Saturday, November 14, 2009

Banker's dream or dilemma?

How would you respond , if you are the Chairman or Branch Manager of a bank, when a person gives you a deposit of around Rs.1000 crore ? If you are like a typical banker, you would be too excited to say "no" or to exercise caution. This is not an imaginary situation. This recently happened in the case of Union Bank of India.
Associates / benamis of Madhu Koda, a former chief minister of Jharkand deposited Rs.991 crore in the Zaveri Bazar branch in the auspicious name of "Balaji Bullion Bazar". Of this amount, Rs.500 crore was deposited in cash. So the likelihood of the money being unaccounted was nearly 100% Why did the bank take this risk?
The branch manager would have thought that his further promotion in the bank must take lesser time because of this "achievement". The chairman would have hoped to cock a snook at competing banks and to leapfrog in the bank rankings by business figures. Both might have thought it was a godsend to become cock of the walk.
Of course, there are exceptions. There are bankers (and their number is growing for better or worse) who sense something amiss in every transaction. Madhu Kodas and their ilk have the knack to avoid them.

Thursday, November 12, 2009

Escrow for salary payments

Of late, there are many instances of delayed salary payments to employees. Delays as long as 3 or 6 months are occurring especially in the airline industry. Even the public sector Air India has got into this notorious list.
There is no doubt that some industries are very adversely affected by recession and cash flow problems are becoming increasingly intractable. Demand for product / service is decreasing; cash sales are even less and credit sales become unavoidable. Collections from debtors are taking more time and bad debts are rising. Consequently, payments to suppliers and employees are getting postponed. The vicious cycle is turning more vicious over time. This in short is the justification provided for delayed salary payments.
Unmistakably there is a need for prioritisation among various payments. This may vary from situation to situation. In most cases, however, it makes more economic sense to give priority to salary payments. Long term health of any business depends crucially on the satisfaction and loyalty of its employees. Delaying payments to employees is a short term pragmatism that is costly in the long run. Enlightened managements need to create an escrow account for salary payments that will act as a systemic regulator against short-termism.

Saturday, November 07, 2009

Yeddy vs Reddy : Malgovernance at its worst

It is a tragedy that the floods-ravaged Karnataka is now witnessing an unprecedented political tamasha and flood-relief measures have taken a back seat. It is perhaps true that the chief minister, Yeddiurappa has been turning in a mediocre performance so far and corruption levels ,by Karnataka standards, were not on the rise. The Reddy brothers have now pushed the chief minister to drop whom he calls efficient minister and officials. Should the chief minister succumb to such pressure and then turn disconsolate in public?

The Reddy brothers are evidently using their money power to get a chief minister and officials of their choice. It is a blatant mockery of democratic system. The central leadership of the party, BJP is in deep disarray. In the ongoing drama, leaders of BJP have been reduced to a bunch of nincompoops. The party with a difference has ceased to be a political party and has become a circus of buffoons.

In an unpalatable situation like this, when governance is at a standstill, the governor should not remain a silent spectator. He must caution the cabinet to behave or else ---

Unravelling of international education industry

Global Campus Management is a leading business group that facilitates admission for international students in Australia (Sydney and Melbourne), Newzealand and to some extent in the USA. It owns or operates or partners with educational institutions catering to mainly hotel, hospitality and vocational industries. According to its website,
"GCM USA seeks to introduce GCM owned and/or managed curriculum into its partnerships and acquisitions, and offer a range of vocational courses to domestic and international students in hotel, resort and hospitality management, design including the specialist cognate areas of animation, communication, games, graphics, interior and product design, as well as business, IT, secondary school and English language courses."

GCM is suddenly in the news now because it has decided to go into "voluntary administration" possibly meaning it has gone bankrupt. Such a development obviously leaves in the lurch many students who have solely depended on it to begin or further their career. This is a risk that no one would have visualised even in wildest nightmares.
Organisations like GCM enabled interface between educational institutions and students all over the globe. GCM has/had offices in India (Gurgaon) and China (Beijing) also. The Indian office was catering to 80 cities in the Indian subcontinent, Middle East and Africa. China being the largest source of international students, the Chinese office had no need to look beyond the Great Wall.

It is not clear why GCM had to wind up. Has its business model failed? Or is economic recession impacting international education industry also? Or, less hopefully, are some unscrupulous elements responsible for this failure?

Wednesday, November 04, 2009

Supreme Court: Conflict of interest - a farcical alibi ?

General Assembly of the United Nations was once described as a "theatre of the absurd" by Daniel Patrick Moynihan, a former U.S. ambassador to India. The appellation may now better fit our Supreme Court.
A three member Bench of the honourable court had been hearing the arguments of Harish Salve in the ticklish litigation between RIL and RNRL (proxies for Mukesh Ambani and Anil Ambani) for six long days when Justice R.V.Raveendran deemed it fit to declare that justice should not only be done but seem to be done (it is difficult to come across a more hackneyed expression). He also felt sorry that six days of valuable time of the court had been wasted. So far, so good. What he went on to say is breathtaking. He lamented,"I wish that somebody should have brought to our notice earlier about my daughter's association with the firm." "I am recusing myself from hearing this matter since I came to know only yesterday that my daughter, Sunitha Rajesh, is associated with a solicitors' firm -AZB Partners- in Bangalore, which is advising one of the parties - RIL - in other matters relating to projects of global acquisitions."
Nothing prevents a judge from becoming casuistic in the middle of a hearing. What is intriguing is why did the judge expect others to tell him about his daughter's job which might have caused the conflict of interest. Further why was the daughter not cautioning him earlier ?

Justice Markandey Katju's withdrawal from RIL vs BPCL is even more bothersome. This is a six year old case the hearing for which closed on September 1st. The judgement was reserved. Justice Katju was heading the Division Bench hearing the case. He has now recused himself pleading that his wife is a shareholder in RIL. His declaration of assets which is posted in the supreme court website does not refer to any shares in RIL. There is only a reference to investment of Rs.2 lacs in the Reliance mutual fund by his wife. This mutual fund belongs to Anil Ambani's group and not to Mukesh Ambani's. (Justice Katju is so meticulous in his declaration that he has also mentioned that some shares mentioned in the list are not traceable. Apparently, depository participants have not marketed demat accounts efficiently !

So what is happening? Justice Raveendran and Justice Katju are both sticklers for judicial probity. Their bonafides are beyond doubt. This raises the possibility that they are not recusing themselves, but are rescuing themselves from possible pressure being exerted by corporate bigwigs.

Are Indore Bank shareholders short-changed?

State Bank of India has proposed to acquire its hitherto subsidiary, State Bank of Indore popularly known as the Indore Bank. The proposal envisages allotment of 34 shares of SBI (State Bank of India) for every 100 shares of the Indore Bank. Is the proposal equitable?

Public shareholding in the Indore Bank is only about 1.95% The shares are not being traded and therefore there is no market price as such. Hence the theoretical value of the share needs to be calculated. Typically share value is calculated based on Earnings per share, Dividend per share and Book value of share. Let us see how these work out for the Indore Bank vis a vis SBI.

EPS for the Indore Bank is Rs.159.40 and for SBI Rs.143.77, both for the year ended 31.03.2009. Dividend per share for the year is Rs.15 and Rs.29 respectively. Book value of share is Rs.893.75 and Rs.912.73. Of these values, dividend per share is the least favourable for the Indore Bank shareholder. If we consider this as the basis for share exchange we are taking the most disadvantageous basis for the Indore Bank shareholders. Even by this unfavourable yardstick, the exchange ratio must be 51.72 shares of SBI for every 100 shares of the Indore Bank. (15/29 of 100).

Let us now consider another ratio that is important for banks. Return on Average Assets is 0.88% for the Indore Bank and 1.04% for SBI. This can be taken as a proxy for Brand value. It is expected that funds will be cheaper for a better branded bank and therefore its return on average assets will be better. Discounting the exchange ratio of 51.72 for 100 keeping in view this factor, we arrive at 43.76 shares for 100. (51.72*0.88/1.04)
Thus even by the most pessimistic estimate, 43.76 shares of SBI for every 100 shares of Indore Bank is what the shareholder of the Indore Bank must get. Offering only 34 shares of SBI means there is a further unfair discount of 22.30% (100*9.76/43.76)

I am not a shareholder in State Bank of Indore; therefore, I do not have a vested interest in the calculations.

Tuesday, November 03, 2009

Declaration of assets by Supreme Court judges

So, assets and liabilities of judges of Supreme Court of India except Justice H.S.Bedi are now in public domain. There are of course some limitations like value of properties is not given in many cases. Since these gentlemen (surprisingly among the 22 judges , there is no lady at present) must have had a flourishing legal practice before adorning the Bench, we should not be surprised by the extent of their wealth.
Now what do we do with the public disclosure? We are bound to be affected by the "barking dog's syndrome" and be at a loss as to what to do next. Some dogs keep barking at moving vehicles and run after them apparently wanting the vehicle to stop. Once the vehicle comes to a halt, the dogs would not know what to do and would silently walk away.

Sunday, November 01, 2009

IIM-A's claim on 'the brightest minds'

A PTI report that appears in newspapers today (2nd Nov.) quotes a press release by the Indian Institute of Management, Ahmedabad as saying, inter alia, :"The brightest minds of this country would once again be vying for internships at firms from all over the world". This refers to summer placement of IIMA students.
Is IIMA complying with generally acceptedv marketing principles in making this claim? Notice the hubris in claiming monopoly over the brightest minds. The release does not say "Some of the brightest minds---"
If an FMCG or a consumer durable company makes a similar claim regarding its product, the Advertising Standards Council of India (ASCI) would come down heavily on the company. (ASCI is a self-regulatory body of advertisers and ad agencies.)
For example, in JK Tyres vs MRF, ASCI acted against MRF for claiming in its advertisements, "Always the favourite choice of Indian truckers" and "Standard and quality unmatched in the world". ASCI has hauled up many companies including HUL, Brittania, Pepsico India and Eureka Forbes for making "unsubstantiated claims".
Such claims fall foul of chapter I.1 of The Code for Self-Regulation in Advertising of ASCI ( The relevant para reads as follows:
"Ads must be truthful. All descriptions , claims and comparisons which relate to matters of objectively ascertainable fact should be capable of substantiation. Advertisers are required to produce such substantiation as and when called upon to do so by ASCI."
If brightness of mind is not an objectively ascertainable fact, the claim must not have been made in the first place. If it is ascertainable, IIMA must produce a substantiation independent of CAT score.
However, IIMA may take refuge under para I.6 of the Code which permits an exemption. It says,"Obvious untruths or exaggerations intended to amuse or to catch the eye of the consumer are permissible provided that they are clearly to be seen as humorous or hyperbolic and not likely to be understood as making literal or misleading claims for the advertised product."
The PTI report also states that incidentally the IIMA has recently featured in the top 100 ranking of the world renowned magazine Economist, a survey conducted across major business schools including Harvard, INSEAD, London Business School and Stern. What is not mentioned is IIMA is ranked 99th.

Common lesson from Satyam and Madoff scandals

In the Indian city of Hyderabad, the promoter of Satyam Computers, Ramalinga Raju, was delivering enviable business results year after year. He kept talking about the importance of corporate governance in every forum and at every opportunity. He was also getting prestigious awards for ensuring highest governance standards. The corporate Board of Satyam was studded with stalwarts in academics, consultancy and industry.
Thousands of miles away, a financial wizard Bernard L.Madoff was assuring and ensuring higher than market returns consistently over more than ten years to his trusting customers. Many charitable institutions and university corpuses were his noteworthy customers.
Raju and Madoff in their heydays were deified by society. It was considered a rarified privilege to know them and seek their advice. Their advice was constant: "Maintain high standards of probity ; be true to yourself."
Their common tool to over-deliver on their promises was simple: cooking of accounts. The modus operandi was incredibly uncomplicated. Their guiding principle was to commit the simplest of frauds which the sharpest of minds would not even suspect.
Satyam was faking bank certificates. The auditors who had successfully investigated complicated infarctions of accounting and legal principles could not discover a simple sleight of hand. The thought of referring to the banks never crossed their mind. Would high-tech Satyam stoop so low as to indulge in a simple trickery? The auditors perished any such thought.
Bernard Madoff was performing a ponzi scheme. He was paying off the old investors from the ever growing newer investors. This is probably the only really global game. Blade companies were doing this in Kerala, plantation companies in Tamilnadu etc. Sophisticated investigators did not suspect how a fund could consistently outsmart the market. When complaints were made to SEC, the usually fastidious investigators could not find out the simple tactic adopted by Madoff. He was only feigning stock market transactions. Madoff has recently expressed his surprise that SEC could not unearth what he was doing for a long time. He has even wished that he was caught earlier so that the investors need not have lost more than 20 bn dollars. Who is more culpable, SEC or Madoff?
The lesson from Satyam and Madoff is this: "The probability of a fraud being unearthed is directly proportional to its complexity." Keep it simple, stupid.

Friday, October 30, 2009

Too good to last ?

The US economy witnessed something that is stranger than fiction during the July-Sep quarter. Three main asset classes namely stocks, gold and treasury bonds witnessed double digit growth. This phenomenon is supposed to have occured only twice earlier in the last 50 years.
Unidirectional movement in prices of these asset classes is exceptional because of their different charateristics. Gold price goes up when there is a 'flight to safety', i.e. when the market is risk-averse. Stocks turn bullish when the market becomes comfortable with perceived risk. Movement in government bonds is a function of many variables including money supply (which of course impacts the other asset classes also), market's confidence in the government etc. In the case of US government bonds, China plays a crucial role in view of its vast accumulation . Of late, China has been airing its increasing discomfort with its possession of such bonds.
One factor that has contributed to this rare phenomenon is quantitative easing which has released excess liquidity. It is only a matter of time before the liquidity tap gets less open .

Reserve Bank of Australia has already taken the lead in reversing the quantitative easing. While increasing the key policy rate by 25 basis points on 6th Oct., RBA's governor said,
"In late 2008 and early 2009, the cash rate was lowered quickly, to a very low level, in expectation of very weak economic conditions and a recognition that considerable downside risks existed. That basis for such a low interest rate setting has now passed, however. With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy. This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead." Is he clairvoyant or overly optimistic? It is too early to say.
American economy grew by 3.5% in the July-Sep quarter after receding in the previous four quarters. This trend reversal also might have contributed to simultaneous growth in different asset classes.
It is now evident that we escaped a global depression despite the massive failure of the US economic system only because of synchronisation of liberal monetary policies in many economies. Since we are not known for co-operative behaviour, it is a moot question whether such synchronisation was a concerted action or mere coincidence.

Tuesday, October 27, 2009

Scam, what scam?

The whole country may be talking about the telecom loot in which new licences were issued and spectrum allocated at throwaway prices duping the exchequer of Rs.22000 crore or Rs.60000 crore depending on whether you trust the CBI or the opposition parties. But Mr.A.Raja, the Communications and IT minister, is unfazed. He has rhetorically asked, "Where is the question of any scam? I ONLY FOLLOWED MY PREDECESSORS and carried out the entire process as per laid norms ------". I was wondering who the predecessor could be.

Former Communications minister, Sukh Ram was sentenced to 3 years of rigorous imprisonment and fined Rs.1 lac by a CBI special court in New Delhi on 5th July 2002 for indulging in corruption by favouring a private party at the cost of Rs.1.68 crore to the public exchequer. The judge said, "Being the head of the ministry, he was expected to act in public interest , but he betrayed the trust imposed upon him---If the minister himself abuses his position, it will hardly be possible for him to check abuse by the other public servants working under him."
Poor Sukh Ram! He was defrauding the nation by a paltry Rs.1.68 crore. He did not belong to a party that had enough leverage in the cabinet to claim as Mr.Raja has done,"All decisions were taken in consultation with the Prime Minister. Let the CBI investigate and if anyone is found guilty, law will take its own course." In other words, if the minister is guilty, so too is the prime minister! If the minister is to be arrested, the prime minister also should accompany him to the prison!
Should the minister resign since the CBI has raided his ministry? The minister has answered himself. "Where is the question of resignation? I have done no wrong." Touche!

Monday, October 26, 2009

Internal insecurity

Bizarre events occur if one is not internally secure. 'One' refers to both persons and places. A Ph.D. scholar in IIT,Delhi is found guilty of murdering a young girl. Doctors say he is psychologically totally 'impaired'. (Oddly enough, this diagnosis by doctors may save him from the gallows since he is not in control of himself.) In other words, he is not internally secure.
Internal insecurity of countries creates huge and perhaps interminable problems. Kashmir issue and Naxalite menace in India are standard examples. Many attempts have been made over a long period of time to solve these two chronic problems, but they continue to fester because some sections feel insecure and alienated. This is not to deny that there are players who fish in troubled waters.
On a global level, America has its own problem of insecurity while dealing with China. Recently, when the Dalai Lama was in America, Obama preferred not to meet him in contrast to the tradition set up by his predecessors. It was strange that one peace Nobelist avoided meeting another. In a way, the less deserving avoided meeting the more deserving. But the question is why Obama forsook the opportunity to talk to the Dalai Lama. He feels insecure as to how China would respond. An insecure person allows himself to be governed by others.

Sunday, October 25, 2009

Countering corruption

Commissioner of Income Tax, Nagpur, one Ajay Kumar Singh was nabbed yesterday by CBI on charges of possessing assets disproportionate to his income. His wife also has been arrested. This is hardly any news because we have become inured to cases of corruption everywhere, whether it be in CBI, police, judiciary or AICTE.

Psychology of corruption is interesting. As the saying goes, an open door invites a saint. There are attractions aplenty in departments like the Income Tax. If one's ethical edifice is not strong, becoming corrupt is only a matter of time. There are only two bulwarks against corruption. First ethical standards must be strengthened and secondly the deviants should be punished severely and without delay. Unfortunately, we are failing on both counts.

Tardiness in dealing with charges of corruption vitiates the society. It is sad that tardiness is our national trait. Some of us may remember the case of Justice Ramasamy who became a Supreme Court judge on elevation from Punjab High Court. When corruption charges were brought up against him, Chief Justice of India made him go on leave. Since the only way of forcing a Supreme Court judge out of office before he/she turns 65 is through parliamentary impeachment, such proceedings were initiated in the Lok Sabha. The then prime minister, P.V.Narasimha Rao to whom politics was nothing but pragmatism (an euphemism for amorality) ensured defeat of the impeachment motion by advising his part members to abstain. Putting up with corruption amounts to encouraging corruption.

This time around, the Supreme Court also has become 'pragmatic'. It continues to dilly- dally when charges and counter-charges are having a field day in the case of Justice P.D.Dinakaran. Every case of alleged corruption that is mishandled only further fertilises corruption .

Impact of CEO change on financial results

In many banks in India, it has been customary for profits to plummet in the immediate aftermath of a new CEO taking over. The latest example is Karnataka Bank Ltd. This is a well-run private sector bank headquartered in Mangalore. Mr.Ananthakrishna was its Chairman cum MD for nine long years till July 2009. Under RBI's prompting, the post was split into two and Mr.P.Jayarama Bhat took over as Managing Director in July. Earlier he was the Chief General Manager. Mr.Ananthakrishna continues as Chairman. Both are respected professionals in banking.
The quarter ended 30th Sept 2009 is seeing many banks declare healthy results. Year on year, Karnataka Bank has shown good progress in deposits, advances and low cost deposits. One would have expected profits also to fall in line (unintended pun conveying contradictory meanings). But that was not to be.
Profit after tax fell from Rs.73.60 crore for the quarter ended 30th Sept 2008 to Rs.16.35 crore for the quarter ended 30th Sept 2009. The figure for the latter period includes a tax credit of Rs.14.97 crore. So profit before tax was an abysmal Rs.1.38 crore.
Therefore what went wrong? Gross NPA has increased from 3.39% to 3.88% But this alone does not account for dismal results. It appears that the tendency of any new CEO to play safe in the first year is having its impact. (Credit-Deposit ratio has fallen steeply from from 62.6% to 57.8% perhaps indicating the preliminary cautionary approach of the new incumbent). The brighter side of this tendency is that Balance Sheets get cleaned whenever a new person becomes MD. There is a flip side also. Financial results cease to be consistent. Share prices become volatile.
Is there a remedy for this periodic event-based discontinuity? It will be worthwhile experimenting with having two CEOs (both outgoing and incoming) atleast for two quarters so that the outgoing CEO will get an opportunity to explain to the newcomer why he has done what he has done. Otherwise the new CEO may overplay the adverse impact of old CEO's managerial style. If we institutionalise the simultaneous presence of two CEOs for say two quarters, CEOs will become more accountable and it will also give a fair chance to the leaving CEO to justify his legacy. During the co-existence period the company will experience a salutary friction between the departing CEO's eagerness to post robust results and the incoming CEO's anxiety to avoid any window-dressing.

Saturday, October 24, 2009

Sequel to IC 884

Remember IC 884 the Airbus 320 flight from Sharjah to Delhi creating history by pioneering in-flight scuffle among the crew (Blog dt.Oct.4) ? Now there is an interesting sequel to this show of irresponsibility by air crew.
Again this is an Airbus 320. The flight is again a double octave : it is numbered 188 (Northwest flight). On October 23, the flight took off from San Diego and overshot the destination, Minneapolis - St.Paul by 240 km before air traffic control succeeded in reminding the pilot about the destination. The pilots have pleaded that they were seriously discussing the airline policy and overlooked where to land. Cool. Another report says that the pilots were working on their PCs and therefore overlooked their descent duties. Northwest Airlines had not prohibited use of PC by pilots, unlike Delta.
The pilots are from Northwest which was taken over by Delta last year. Air India also recently saw the merger of Indian Airlines with itself. Are the flight crew suffering from post-merger syndrome that distracts them from their duty while on air? Is Airbus 320 equipped with a distractor that enables the pilots to unwind during crucial times?

Thursday, October 22, 2009

Vatican's offer to Anglicans : A nuanced buyout?

Theologically Anglicans and Roman Catholics are as different as chalk and cheese. So it was very surprising when Pope Benedict XVI recently offered an option to Anglicans worldwide to flock to Roman Catholicism while still maintaining part of their spiritual heritage. This offer is open to both clergy and the laity. Some people describe this as the most significant event in Christendom from the days of the Reformation.
This religious putsch is as sensational as any business takeover. But this is not revolutionary because even earlier many Anglicans, individually of course, have been allowed to convert to Catholicism. (There was one stray case of an Anglican diocese collectively converting to Catholicism, namely the Amritsar diocese in the year 1975.) The Pope who was a professor in a German University earlier is executing a nuanced merger of sorts with considerable elan and elegance. Many puritanical Anglicans have been cheesed off in the recent past by the growing number of female priests and openly-gay clergy. The Vatican is taking advantage of this growing discontent in the 'opposite camp' and making an open offer with carrots. The Church of England which governs the Anglicans permits married persons to become priests and bishops. Though the Vatican is not in favour of married clergy, as a special case it is permitting the married Anglican priests to convert and continue as priests after re-ordainment. This offer is extended to vicars and not to bishops.
Many business mergers fail due to cultural incompatibility between the merging parties. Management of heterogenous cultures within the same business unit is a challenge that has overthrown many otherwise capable leaders. Presence of married priests in an organisation that values celibacy as a prerequisite for its clergy is bound to create disaffection and discord. Theological differences between Roman Catholics and followers of Reformation cannot be easily papered over. Irrespective of whether this bold initiative of the Pope succeeds or fails, it will have lasting lessons for management experts who are for ever puzzled by their own inability to arrive at a set of dos and don'ts to facilitate a smooth merger.

Wednesday, October 21, 2009

Galleon hedge fund

The alleged insider trading by Raj Rajaratnam, the promoter of $7 bn hedge fund is big news because the sum involved in insider trading $20 mn is the largest of such cases so far. Proving charges of insider trading are notoriously difficult, but in this case it appears that FBI has wiretapped the needed evidence.
Anil Kumar, a co-founder of Indian School of Business who is a director in McKinsey is also allegedly involved having passed on some crucial information that he had as a consultant.
What to make of this alleged fraud? Galleon was apparently trading on information. Information is a double-edged sword. Privileged information when obtained illegally with a view to leverage it lands the informed in deep trouble. Information is power. It intoxicates and snares its possessor into an abyss unless it is carefully handled.
Galleon has an office in Mumbai also although its investments in India are marginal.

Tuesday, October 20, 2009

Jairam Ramesh's suggestions

Media reports indicate that Jairam Ramesh has written 'confidentially' to the prime minister seeking a change in our policy on climate change. He says that critics are distorting the contents of his letter. As the full text of his letter is not yet available, it is difficult to comment on distortions, if any. However, certain suggestions which have been revealed are interesting. The minister is supposed to have written, "India's interests and India's interests alone should drive our negotiations.India must be seen as pragmatic and constructive, not argumentative and political. -------- India must listen more and speak less in negotiations, or else be treated with disfavour and derision by the developing countries." Very sane advice indeed. One may add,"As a country we need to be more articulate and less argumentative, more bold and less belligerent, more candid and less cacophonous and more disciplined and less dogmatic."

Monday, October 19, 2009

Ghaziabad Provident Fund Scam

In a tragic and unconscionable case of misappropriation of funds, about Rs.23 crore was diverted over a period of 8 years from the PF and Pension funds of class IV employees deposited with Ghaziabad District Court Treasury. The funds were misutilised by the scamsters who were able to withdraw the funds with the permission of judges. A part of the misapplied funds was spent on personal comforts of the judges. It is alleged that one judge of the Supreme Court and twelve judges of the Allahabad High Court are among those involved in this nefarious deal.
Though the names of High Court judges who are implicated are in public domain, the name of the Supreme Court judge is not disclosed. But certain details are available. For example, he has a house in Kolkatta. His son was provided with costly equipments by the scamsters. So we are led to imagine that the impugned judge is from Bengal and thus zero in on a couple of judges. Such lack of transparency is very unjust to the judges who may not be involved but are suspected by people in the absence of full information.
In the interest of judicial governance, it is expected that the Chief Justice of India would make all relevant details accessible to the public. A key accused person who had started spilling the beans has now died while in a Ghaziabad prison. It is suspected as a case of murder. Would we ever know the truth?

Sunday, October 18, 2009


Economist Steven Levitt of the University of Chicago and journalist Stephen Dubner have 'freaked out' again and their new book 'Superfreakonomics' will be released tomorrow (20th Oct.). Levitt who was mentored by the Nobel laureate Gary Becker is an economist with a difference. He revels in raising "questions that are too embarrassing and degrading for other economists to find interesting". The world will be richer if we have such experts in every field.
Despite the apparent triviality and quirkiness of issues proffered by the authors, their method is rigorous. Levitt says he applies data in an unemotional way to emotional issues. The authors' earlier bestseller 'Freakonomics' is credited with having sold more than 4 million copies.

Saturday, October 17, 2009

Non-commercial considerations in business

Recently the Citigroup sold its commodities trading unit, Phibro to Occidental Petroleum for a paltry sum of $250 mn. This sum is certainly paltry vis-a-vis Phibro's average annual profit of $371 mn. in the last 5 years. How did this transaction take place and how did Citigroup's CEO, Vikram Pandit justify this to his Board?
Phibro's talented (or plain lucky?) trader Andrew Hall was entitled to a bonus of $100 mn. for his last year's performance. Citigroup could not renege on its agreement nor could it give away the bonus without displeasing its 34% owner i.e. the US Treasury. "Risk mitigation" is the ostensible reason given for divestment of Phibro.
Such skewed transactions are an unintended consequence of state funding for private banks in the aftermath of financial crisis.

Problems in France Telecom

If Reliance Communications is beset with special audit problems, France Telecom is in throes of a much graver crisis. The Economist says that there is an "epidemic of unhappiness" in FT. The company is worried that it is very inefficient in the human side of management. It has recently hired the services of a consultancy firm, Technologia, to grapple with the shocking rate of suicide among its employees. 24 Employees committed suicide since early 2008. ( The 25th suicide occured on 15th Oct.)Existential angst and consequent despair with life is said to be widely prevalent in other French companies like Renault, Peugeot and EDF.
This is very surprising. The French are not Japanese. The French work shorter week hours, have longer weekends and have a leader in Sarkozy who advocates adoption of Gross Happiness Index in preference to GDP. Is global recession taking its toll? In a survey conducted in 2008, France Telecom found that 67% of its workers felt 'stressed out' and 16% reported being in 'distress'. It is worth noting that this company till recently was owned by the state. Is the transition from public sector a matter of concern for its employees? The spate of suicides has engendered calls for resignation of the company's CEO, Mr.Didier Lombard who has responded saying that he as a captain will not quit the ship in a storm.
Centre for Work-Life Policy has found that in the period from mid-2007 to end-2008, the proportion of employees who professed loyalty to their employers fell from 95% to 39% and the proportion of employees suspicious of their employers rose from 21% to 78% in America. Quite revealing statistics ! Thankfully, recession seems to be nearing its end.

Friday, October 16, 2009

Reliance Communications : Satyam plus ?

Reliance Communications Ltd was recently subjected to a special audit by Dept. of Telecommunications. Other telecom companies also were specially audited. Special audit of RCom has resulted in a lot of fireworks and histrionics. The audit is supposed to have unearthed over-reporting of revenue by Rs.3000o million and underpayment of license fee by Rs.3000 million. The report is not yet officially released, but Mr.Anil Ambani's fulminations and barrage of invectives suggest that the report indeed contains such findings.
Mr.Ambani has contested the findings saying they were not discussed by the auditor with the company. The auditors (Parekh & Co) have confirmed that they had duly discussed with the company. Either the company or the auditor is economical with the truth. If the alleged findings are true, the company has outdone even Satyam. Satyam overstated revenues but did not evade any payment to the government. In the interest of governance and fairplay, DoT should release the special audit report in the public domain forthwith.

Thursday, October 15, 2009

Battle between brothers (the Ambanis)

There seems to be no end to the war of words between the Ambani brothers. Is it just sibling rivalry as psychologists would say or is it an epic war as between the cousin brothers, the Pandavas and the Kauravas as Gurcharan Das elucidates? If the latter, which brother would qualify as the just and which other as the unjust? One would also opine that it is unjust to elevate this drama to the glory of Mahabharata. Is Anil Ambani suffering from 'status anxiety' and fixated on proving to the world that though he is younger, he is not in anyway less representative of their father, Dhirubhai Ambani?
Whatever be the cause, the rivalry has to be assessed in terms of its impact on corporate governance, shareholder wealth etc. If the passion of brothers is sublimated to produce better corporate results, the economy would benefit immensely. But this is not what is happening. Anil Ambani, typical of his persona, is more in the news. He continues to blow hot and cold. One day he extends the olive branch. The next day he viciously attacks the 'corporate rival'. Mukesh Ambani is less demonstrative in public.
Do shareholders of either group deserve to have their companies devalued by public portrayal of personal meanmindedness? It is ironic that the minds of corporate barons are narrowing at a time when the market valuations of their companies could be poised for a quantum jump. Do the brothers, however wealthy they are, have a right to utilise the public space to settle their private scores? Or as some cynics believe, are they enacting a sham battle to fool the public and take governance for a ride?

Wednesday, October 14, 2009

Smartness Risk

We have been witnessing recession in the global economy from October 2007. While there were initial fears that the world was fast sinking into the Greater Depression a la the Great Depression of early thirties of the last century, simultaneous 'quantitative easing' (the technical phrase for liquidity splurge) by all important economies including the US and China ensured that at worst we would suffer a Great Recession only.
What caused the economic mayhem? Global economic imbalances (mainly American deficits and Chinese balance of payment surplus), rapid erosion in home equity in America, over-financialisation of the economy, large-scale securitisation, misselling of derivative products and inevitable ups and downs in global economy have all been blamed for the crisis.
Who caused the crisis? Here the answer seems to be less divided. Brilliant engineers who entered the Wall Street via the business schools were smart enough to invent complex derivatives, clever enough to market them, intelligent enough to alchemise BBB investments into AAA but not wise enough to understand the implications for the economy. They were driven by the toxic combination of intellectual hubris and hedonistic greed. These value-destroyers set off smart bombs which exploded and destroyed economies while preserving and multiplying their own private riches.
What is the lesson for us in this calamitous drama? We should not crave for complexity. Simple Finance should remain as it is. It should not be converted into a rocket science which it certainly is not.

Sunday, October 11, 2009

An educative blog

Gary Becker, a Nobel laureate in economics and Richard Posner, a legal luminary are hosting a joint blog from December, 2004. This is perhaps one of the longest continuous associations between any two brilliant minds !
Every Sunday, they pose and discuss a different issue that is of general interest and importance. is a delight to those perennially interested in sharpening their thinking process.

CEO remuneration

Economic Times says that a rough and ready calculation shows that top managers get remunerated to the extent of Rs.1.5 lac for every year of experience. This is an average measure and does not betray the stratospheric salaries earned by (or more precisely showered on ) some CEOs. The newspaper also reports that top management compensation grew in FY 09 much faster than corporate sales or profits. Recessionary trends were perhaps responsible for this.
The minister for company affairs recently asked CEOs to avoid 'vulgar' levels of (self-)remuneration. Corporate bigwigs rallied immediately against government dictates. The minister softened his stand. The prime minister has now said that the decision is with the companies. Last year the prime minister exhorted the CEOs to be more careful regarding their pay.
It is suggested in some quarters that shareholders ought to become more active in approving the compensation to top management. Well, compensation committees are very much in place in many companies though it is very doubtful if they are taking their role seriously. What do the shareholders do when the compensation details are placed for approval? They unanimously pass such resolutions.
Shareholder activism simply does not exist in our country. Recently, in the AGM of one Chennai-based company, one shareholder expressed his view that a particular director who was too busy to attend any of the committee meetings and AGM of the company should not be re-elected. This opinion was supported by two other shareholders. When the resolution for re-electing the said director was taken up, one of the latter two shareholders duly proposed the resolution and the other one seconded the proposal. So much for shareholder activism !

Saturday, October 10, 2009

Nobel for Obama

President Obama has reacted with grace to the award of Nobel peace prize for him. "I don't deserve it, but I accept it as a call to action". No one needs to teach Obama what to say. If there ia a prize for articulation, he would win hands down.
Does he really deserve the Nobel so soon and that too before he hopefully starts delivering on his words? Opinions may differ, but there is unanimity on one thing. It is that he owes the prize to George W.Bush. His predecessor has made his job very simple. He has only to undo whatever Mr.Bush did and do whatever the latter had left undone. I wonder if Obama has conveyed his thanks to George W.
The Nobel Committee has acted smartly in incentivising the American president to continue to abstain from bellicosity that the world has come to associate with Uncle Sam.

Friday, October 09, 2009

The China puzzle

Stephen Roach, a well known economist, in his new book "The Next Asia" quotes none other than the Chinese premier Wen Jiabao as saying, "The Chinese economy is becoming increasingly unbalanced, unstable, uncoordinated and unsustainable". Very strong words indeed especially from a prime minister. The words were uttered in March 2007 and are now famously called as "four uns". He could as well have added that the Chinese statistics are unreliable, unsound, untrue and unscientific.
Combination of unbalanced economy and unreliable data is a potent mislead that will belie all our predictions and unsettle all our plans. Therefore the hype regarding this century becoming the Chinese century or even the Asian century is far-fetched.
American economy is a learning economy. It is also innovative. The lessons of ongoing economic crisis will enable the American economy to correct its extravagance, pull up its socks and reinvigorate itself. As time passes by, the Chinese threat to US economy will recede further.

Wednesday, October 07, 2009

Nobelist Venkatraman Ramakrishnan

A joint winner of this year's Chemistry Nobel prize , Venkatraman Ramakrishnan (Venky to his friends and colleagues) has worked on the importance of ribosomes. Apart from this, his journey from theoretical physics to chemistry via biology proves the seamless nature of theoretical sciences. He studied B.Sc. (Physics) in Baroda university in India before doing research in Ohio University.

Dollar in doldrums

There is a news report in The Independent that the Gulf countries, Russia, China, France, Japan and Brazil (there is a reference to India also) have recently decided to start quoting for oil in non-US Dollar currencies. The oil price will be linked to a basket of currencies including Yen, Yuan, euro, a new unified currency planned for nations in the Gulf Cooperation Council including Saudi Arabia, Abu Dhabi, Kuwait and Qatar and gold.
The authenticity of the report is not yet established. If true, it is a momentous event heralding a revolutionary change. If apocryphal which is more likely, it means that China and perhaps Japan are floating a balloon to test the waters. These two countries will feel the maximum impact of any change in the status of US Dollar. If the dollar is dethroned as the oil currency, it is likely to suffer a precipitous fall in value vis-a-vis other major currencies. Correspondingly, the values of forex holdings of China and Japan will fall by the wayside.
Dollar's status is linked to the puissance of the US as a global power. American GDP is around 14 trillion dollars and China's only 4 trillion. Those who are bearish on dollar argue that China is growing by 10% p.a. as against America's 2% growth and therefore China will catch up with America in economic size. This argument overlooks the imponderables afflicting China including its totalitarian political system and lack of credibility of its statistics and product quality in general. We may not be at an economic crossroads as yet.

Sunday, October 04, 2009

Air India's novel in-flight entertainment

100-odd passengers of IC 884 , Air India's Sharjah - Lucknow -Delhi flight were treated to a special entertainment yesterday when the flight was in Pakistan air space. Pilots and steward(ess) exchanged blows in front of all passengers. Passengers were unnecessarily startled sivce they did not realise that it was a new marketing ploy of Air India. Unexpected entertainment is more entertaining than scheduled ones.
Reasons for the slugfest ('scuffle' according to Air India) are too crass to be mentioned here. When this unprecedented entertainment was on, the cockpit remained unmanned ! Aviation experts say that the air travel was least risky during the time the cockpit was not manned.
The pilot had threatened to land in Pakistan. This threat brought the entertainment to an abrupt end. Had the aircraft landed in Pakistan, the co-pilot would have been subjected to Sharia jurisprudence and would have been castrated straightaway.
P.S.: The fare for IC 884 is being doubled forthwith.

Saturday, October 03, 2009

Dealing with governance issues

That we have an unhealthy way of dealing with issues of governance is made obvious almost every day.
1) A single judge of the Delhi High Court had earlier held that information on assets declared by Supreme Court judges in the possession of the Chief Justice of India comes within the ambit of the Right to Information Act. This decision was universally applauded. Now the Supreme Court Information Officer will file an appeal before a Division Bench of the High Court against this prudent decision.
2) Central Bureau of Investigation has filed an application in a trial court seeking permission to withdraw prosecution against the Italian businessman , Quattrocchi. CBI has once again come under political compulsion.
3) The unedifying corruption allegations against Justice Dinakaran are allowed to fester by Supreme Court's delay in taking a decision. In the meantime, the Forum for Judicial Accountability has sent its third petition to the CJI giving details of the alleged purchase of property by the judge in different parts of Tamil Nadu.

Sunday, September 27, 2009

Strikes galore

And now it is the turn of Air India pilots to go on strike. Any strike causes some dislocation in daily life atleast to some sections of society. Therefore, our tendency to blame the people going on strike is natural, though sometimes misplaced. There is a common link among the recent three strikes namely of the pilots of Jet Airways, IIT teahing staff and Air India pilots.

The reason why these strikes materialised is the inept handling by the managements and HRD Ministry. In Jet Airways, some pilots were unceremoniously and summarily sacked without conducting any enquiry and apparently for unlawful reasons. The HRD Ministry failed to respond to repeated requests of the teaching staff for discussions. Mr.Kapil Sibal's public pronouncements of his readiness to discuss coupled with his (deliberate ?) failure to get in touch with the faculty only added insult to injury. It was totally ham-handed. The management of Air India unilaterally effected reductions in allowances payable to pilots. There was no discussion with the pilots before imposing salary cuts.

In all these three instances, principles of natural justice were given the go-by. If only these situations had been handled with tact and reasonableness by the managements and the HRD Ministry, strikes would have become unnecessary. Arrogance is a human failing; it cannot be a business strategy.

Friday, September 25, 2009

Justice P.D.Dinakaran : The communal card

The Supreme Court Collegium is still in the process of taking a decision on the allegations levelled against the the Chief Justice of the Karnataka High Court. Time is a benevolent healer that solves some problems. But in a case where allegations of corruption are made, delay in decision-making leads to a murkier milieu. This is exactly what is happening in the present case.
Initially, Shanti Bhushan made the preposterous claim that the Chief Justice of India was supporting Justice Dinakaran because the latter also was a Dalit. It is surprising that no action has been taken against this inflammatory remark. Now comes an equally absurd canard from Mr.Buta Singh, the Chairman of The National Commission for Scheduled Castes who alleges that the campaign against Justice Dinakaran is motivated because he is a Dalit.
Playing the communal card is a dangerous game. It obfuscates the issue and poisons the atmosphere. Meaningful debate becomes the casualty. Justice gets sidelined.

Minister's rantings

It is unfortunate that Mr.Kapil Sibal continues his outbursts against the IIT faculty. He says that autonomy is only a smokescreen and that they are agitating only for more money. He continues that their agitation is not consistent with the dignity expected of them.
IITs already have a notoriety (perhaps undeserved) of being 'elitist'. Though many would dismiss this criticism as sour-grapism, the fact is that this view does exist. The minister's strident denunciations will only aggravate anti-IIT feelings. Ministers like Kapil Sibal and Shashi Tharoor who are blessed with gift of the gab will do the nation a great favour if they control their utterances and tweets.
One is reminded of a popular couplet from Thirukkural which says, " Even if one does not control any other faculty, one should keep one's tongue in check. Else, one will come to grief through this lapse". It is high time that the minister initiates discussions with the faculty instead of allowing the situation to deteriorate further. Such loquacious ministers need to develop 'soft skills'.

Wednesday, September 23, 2009

Grievances of IIT faculty : Kapil Sibal's misplaced sarcasm

Teaching staff at IITs are on a war path. They are seeking more autonomy and better pay. Justification or otherwise for these demands depends on the eye of the beholder.
HRD Minister, Mr.Kapil Sibal has made two observations which are uncalled for. 1) We do not expect prospective Nobel laureates to go on hunger strike and 2) They get so much from consultancy that salary is only icing on the cake.

Observation 1 : Ridicule is implied in this statement. If the minister is convinced about the high academic standards of IIT faculty, he would not have made this comment. He also ought to know that the infrastructure made available in India can hardly enable anyone to get a Nobel prize. It was a miracle that Sir C.V.Raman could bag a Nobel. But those halcyon days are long past. If IIT faculty or for that matter any academician in India is not considered for Nobel prizes, it only reflects on the disabling environment provided by the government.
Hunger protest is a honourable practice sanctified by the Mahatma. Our minister would not have recommended Nobel peace prize for the Mahatma because he does not expect any honourable person to take to hunger protest.

Observation 2 : If IIT teachers are getting handsome income from consultancy, it is because they contribute. Does the minister propose that salary need not be paid to them for this reason? Also, not all IIT teachers are busy in consultancy. Those who do consult , become better teachers because of the experience they gain. Is the minister's statement a decent way of treating the faculty?

The demands of IIT faculty may or may not be met. But the faculty has a right to expect the HRD Minister to listen and respond without being sarcastic, insulting or patronising. An eminent lawyer need not continue his antagonistic approach after becoming a minister.

Tuesday, September 22, 2009

Air India's global search for COO

Air India (NACIL) has released a recruitment ad in The Economist dt.19th Sept for COO. This is perhaps the first time that an Indian public sector unit is casting its net worldwide. Coming so soon after the Finance Minister's fiat to travel cattle class, it is easy to guess the eligibility criteria 1) Cowherds and shepherds are encouraged to apply. 2) Inability to tweet is a prerequisite. 3) Posting is initially for 3 years. Extension may be considered subject to continued inability to tweet and Air India's negative networth. 4) Acquaintance with English is preferable. However, capacity to distinguish between right and left is essential.(Last year, a foreign pilot landed an aircraft at Tambaram instead of Chennai since he mistook directional guidance of control staff.) 5)Applicant is expected to have fire in the belly.If necessary, the applicant should be capable of transferring fire from the engine to one's belly.(Recently, an Air India Airbus had to abort takeoff when fire in the engine was noticed inadvertently! ) Is there a proposal to rechristen Air India subsequent to 'cattle class' solidarity? Yes. The names under consideration are Air Krishna and Air Jesus in solidarity with holy cows and disciplined sheep. To avoid a blatant blot on secularism, Air Chrishna is a more likely choice.____________ _________ _________ _________ _________ __

Saturday, September 19, 2009

Subtle Art of Dharma or the Art of Subtle Dharma ?

Mr.Gurcharan Das' lecture on The Dharma of Capitalism held in Mylapore on 18th Sept. was expectedly interesting. He continues to be an incorrigible capitalist. He has been researching the Mahabharata for more than five years now. He has recently authored a book titled "The difficulty of being good : on the subtle art of dharma".
The earlier best-seller written by him,"India Unbound", was an extremely optimistic account of India's future. The author claims that he did not factor in the absence of governance while releasing "India Unbound".(It is surprising because lack of governance is a defining feature of India.) Therefore his optimism has waned. Yet he remains addicted (sic) to Mahabharata. He emphasises that the epic is not a set of rules, but a treatise on moral dilemmas.
When he refers to the subtle art of dharma, the emphasis is on resolution of conflicting factors that create these dilemmas. Unfortunately, the problems faced by Indians are of a different nature. Dharma has been corrupted in ever so many unimaginable ways that we should talk about a distinct dharma or a subtle dharma.Therefore one may say it is the art of subtle dharma rather the subtle art of dharma.

Tuesday, September 15, 2009

Judges sans integrity

A shocking news item has appeared in The Hindu today (16th Sept). It is alleged that one of the judges (Justice P.D.Dinakaran presently Chief Justice of the Karnataka High Court) whose name has been recommended for elevation to the Supreme Court by a Supreme Court collegium consisting of 5 judges of the Supreme Court has amassed wealth disproportionate to his known sources of income. Senior lawyers Fali Nariman and Shanti Bhushan have represented to CJI on the basis of a detailed complaint from several lawyers based in Chennai. Justice Dinakaran has denied the allegations.

Mr.Dinakaran was appointed a permanent judge of the Madras High Court in December 1996 at the age of 46. He became Chief Justice of the Karnataka HC in August 2008. It is too early to say whether the allegations are correct or only motivated and devoid of truth. It is quite likely that his elevation to the Supreme Court will be in limbo for some time.

In case his integrity is suspect, some interesting issues arise. As Chief Justice of a High Court , his term will expire in 2012 only. Would he be asked to step down before that? In case he is asked to go, would he oblige? Would our impeachment mechanism work effectively? Is our judicial system incompetent enough to accommodate a judge of doubtful integrity for 13 long years? Are the Supreme Court judges so bereft of any intelligence mechanism that they are not aware of the state of integrity of the Chief Justice of a High Court? Or, are they succumbing to any pressure, political or otherwise? The nation cries for an answer.

Sunday, September 13, 2009

(False ?) Report on ICICI Bank

The Economic Times reported on Sunday, the 13th Sept. that ICICI Bank's Rs.10,000 crore bad home loans are under lens. The amount alleged is huge even by ICICI Bank standards. The report talks of sale of bad home loan assets worth over Rs.10,000 crore by the bank to ARCIL (Asset Reconstruction Company of India Limited) of which ICICI Bank is a co-promoter. ICAI
President was quoted as saying ," The regulator should re-audit assets sold to ARCIL". He is also supposed to have said,"In four cases , double loans were issued by ICICI Bank itself. This shows the inability of the bank's IT setup and its due diligence mechanism". Quite damning, if true.

It must have been an aweful Sunday for the bank. The bank has released a prominent advertisement in many newspapers (including a front page ad in the ET) on 14th Sept. calling the impugned article 'baseless'. The advertisement says, inter alia "1. ICAI has clarified that the statements attributed to it are totally incorrect, wrong and completely baseless. 2. The article is grossly inaccurate. The aggregate sales of home loans by the bank to ARCIL since inception are less than Rs.1,500 crore. 3. The article seeks to magnify a Rs.1 crore fraud committed on the bank into a major issue." The ad concludes, " The news item appears to be a deliberate and malicious plant aimed at damaging the bank's reputation. The bank is taking up the matter with regulatory and law enforcement authorities."
It is obvious that the newspaper has gone overboard while publishing an obviously interesting matter. The Economic Times has not published any confirmation or retraction of the contentious report. A delayed response is still possible. In the meantime, the bank has been forced to shell out a lot of money to clarify the matter and has atleast temporarily suffered yet another knock to its reputation.There is an interesting matter of detail here. The report appeared on a Sunday and the bank had enough time to rebut before the stock market opened on Monday. What if the report had been published on a weekday and the bank had been forced to suffer a massive selloff of its shares before any denial could be disseminated?
The newspaper owes it to its readers to explain in detail how it erred or who is to be blamed for the faux-pas. The denial issued by ICAI contains the following difficult-to-understand detail,

"For the purpose of setting the records right, we may mention that the fact of the
mater (sic) has been that when few Mumbai-based chartered accountants approached
the ICAI President CA. Uttam Prakash Agarwal regarding the harassment being
meted out to them, despite they being genuine buyers of the flats in the society
referred to the news item, the latter had advised them to take up the matter with
the authorities in the Bank at their individual level. He had also assured them that if
their plea is genuine and on getting the feedback from them about the authorities’
response, he would take up the matter with the Bank and its regulator at the top
level, if need be".

Saturday, September 12, 2009

Justice Kannan's blog

It is unfortunate that Justice K.Kannan of the Punjab and Haryana High Court has decided to withdraw from blogosphere ( atleast for the present. He was championing transparency in an otherwise opaque legal system. He had taken up a hazardous job and had to walk on thin rope lest he became too judgemental. His blog became immensely popular among concerned citizenry after he openly espoused a sensible stand on disclosure of assets by judges. He explained the nitty-gritty of even convoluted judgements in a reader-friendly manner.

He has indicated that his decision was hastened by uncharitable comments made by some. His withdrawal is a loss to blog-readers.

Added on July 12, 2016: It is encouraging to know that Justice Kannan who recently retired has decided to resume blogging.

Tuesday, September 08, 2009

Ministerial ostentation

Ministers S.M.Krishna and Shashi Tharoor of the External Affairs ministry have been staying in the Presidential suite of The ITC Maurya and The Taj respectively for the past 3 months. Reason? The bungalows allotted to them are under renovation. They have confirmed that the government is not footing the hotel bills.
Is there any issue here? Tharoor thinks no. Krishna is not alive to the possibility of any public concern over this. Yet this conspicuous ostentation raises quite a few issues of public importance. Krishna's bill is around Rs.10 million and Tharoor's nearly Rs.4 million.Are they paying from their kitty or is there any sponsor a.k.a. vested interest?
Tharoor has referred to two existential reasons for his inability to stay in Bhavans which are guest houses of state governments located in the national capital. Gym and privacy are not available in state guest houses !
Politicians who are not embarrassed in eking out such extravagant living can never understand the plight of aam adhmi.
The Indian Express has exposed this prodigality. We do not know how many such instances remain unknown to the public. Performance of these two ministers so far has been far from exemplary.One can only sympathise with the Prime Minister.

Monday, September 07, 2009

Judicial Trinity

There are three judges who have covered themselves with glory in the recent controversy over disclosure of assets by judges. They are K.Kannan of the Punjab and Haryana High Court, D.V.Shylendra Kumar of the Karnataka High Court and K.Chandru of the Madras High Court. It is reported that all three are persons of impeccable integrity and are around 55 years of age which means they will continue to serve on the Bench for some more years and hopefully may get elevated to the Supreme Court also. Judges like these form an oasis in the venal justice system. One hopes that age and the overwhelming system will not tame them into submission to corrosive political influences.

Friday, September 04, 2009

Dr.Y.S.Rajasekhara Reddy

Dr.Y.S.Rajasekhara Reddy , Chief Minister of Andhra Pradesh who was killed in a helicopter crash on 2nd Sept. was of course a politician. His government was notoriously corrupt. However, certain facts about him stand out.

1) He had his schooling in the Besant Theosophical High School run by Kalakshetra Foundation. This should have had atleast some impact on his value system.

2) He was a broadminded Christian equally at home in Bethlehem and Tirumala, as noted by The Hindu.

3) He was a medical doctor and he always empathised with the poor.

We have lost an assertive and confident politician.

Wednesday, September 02, 2009

Public arguments

Public arguments among the well-known are becoming more frequent. For example, a sitting judge of the Karnataka High Court, Mr.Shailendra Kumar recently openly contested the authority of the Chief Justice of India to represent the views of all judges. CJI in turn snubbed him as publicity-crazy. Open discussions are welcome, but the bitterness evident in some arguments is eminently avoidable.
Now comes Mr.Homi Sethna's outburst against Mr.Kalam, former President who had earlier endorsed the success of Pokhran atomic test. This debate has been triggered by Mr.K.Santhanam, a former DRDO scientist who once again questioned the success of the test. While endorsing Mr.Santhanam's views, Mr.Sethna argued, "Mr.Kalam was not a scientist and Mr.Santhanam is a phycisist and he knew what he was talking. What does Mr.Kalam understand about physics? What did he know about extracting, making explosive grade? He did not know a thing. By being a President, he appeared to wear the stature. He relied on atomic energy to gain additional stature."
Mr.Sethna may be correct in his views regarding the atomic test. The tenor of arguments reminds us of what Krishna says in the Bagavad Gita, chapter 10, stanza 33. He says,"Among those who debate, I am Vaada i.e. the open-minded discussion for determining the truth." It is said that there are three types of debates -- jalpa, vitandaa and vaada. Jalpa is a kind of debate in which both parties seek to establish their own view point and ignore the merits of the counter-view. In vitandaa, one party understands his view is demolished and yet takes up extraneous arguments, draws red herrings and insults the counter-view. Vaada is open-minded discussion wherein the only objective of the participants is to grasp the truth. Vaada is welcome; the other two formats are dysfunctional.

Tuesday, September 01, 2009

Auditors' Report : Provogue ( India ) Limited

Auditors' Reports never cease to entertain. It is a pity that they are rarely read. Annexure to Auditors' Report of Provogue (India) Limited for the year 2008-09 says that " The Fixed Assets register was maintained by the company till the previous year. However during the year the same has been misplaced and the Company is in the process of compiling the new fixed assets register". The Annexure goes on to add, "There are adequate internal control systems commensurate with the size of the Company and the nature of its business with regard to purchase of inventories and FIXED ASSETS and for the sale of goods and services".

If the internal control systems are adequate, how come the Fixed Assets Register was lost? How long will it take to compile the new fixed assets register? Do you think that a company that takes a long time to compile a duplicate register will have a credible 'Disaster Recovery Plan'?

Monday, August 31, 2009

Auditors' Report : Cholamandalam DBS Finance Limited

The 2008-09 Annual Report of captioned company is quite glossy and invites reading. The Auditors' Report is pretty candid about the governance in the company. One interesting sentence reads "In our opinion and according to the information and explanations given to us, the company has GENERALLY not defaulted in the repayment of dues to banks and debenture holders." Does it not imply that there were sporadic defaults?
When this issue was raised in the acrimonious AGM held on 28th July, 2009, the company categorically stated that there was no default at all. This raises the question : Why did the directors not insist that the Auditors should avoid misleading words? Am I wrong in assuming that the directors go through the Auditors' Report?

Saturday, August 29, 2009

Folic Acid

The Economist dated 29th August reports that the recommended daily dose of 0.4 mg of folic acid is converted into folate in most people. The conversion to folate takes place in the liver. The liver has only a limited capacity to make this conversion. Unmetabolised folic acid is found in human blood and urine. Intake of folic acid of more than 1 mg a day increases the body's exposure to circulating unmetabolised folic acid. High doses of folic acid are suspected to exacerbate certain cancers.
In India the most recommended folic acid drug is FOLVITE . This tablet contains 5 mg folic acid ! The ministry of health should study the possible harmful effects of such abnormally high dosage of essential chemicals.

Friday, August 28, 2009

Supreme Court : Justice Kannan's blog

Justice K.Kannan of the Punjab and Haryana High Court recently shot into limelight for voluntarily disclosing his assets to the public though he also opined that demanding voluntary disclosure from judges is fraught with risk to independence of judiciary.

His blog is atypical of a judge. He expresses his views on various judgements, mostly in agreement. Recently he posted his views on a judgement from the Punjab and Haryana High Court on the right of a mentally retarded person to carry a child to term.The person was a serial victim of bestial behaviour of people. The High Court had decided that the victim did not have an inviolable right to deliver the baby in view of various disturbing circumstances. On appeal, the Supreme Court reversed the decision and said the victim cannot be forced to terminate the pregnancy.

I commented on the views expressed by Justice Kannan as follows:

" Your succinct reasoning reminds us that the Supreme Court is not supreme because it is infallible, but it is infallible because it is supreme". This is a quote from an American judge. I thought that this comment was innocuous, meaningful at best and irrelevant at worst. However, the comment was deleted by Justice Kannan.

I wonder what could be the reason for deletion. Perhaps judges do not want to be seen as even remotely enabling people to express even tangentially hurtful views on the majesty of the Supreme Court, however truthful they are.

Saturday, August 22, 2009

Banning books

Do governments have a right to proscribe books? This has become a matter of topical interest after the Gujarat state government banned Mr.Jaswant Singh's book on Mr.Jinnah. There obviously are ulterior motives in this instant case. Nevertheless, it is appropriate to study the legitimacy of such bans.
Freedom of expression is a sacred right. At the same time, nobody has the right to indulge in defamation. What is libellous is a matter of fact and sometimes difficult to judge. It ill behoves any government to take advantage of this judgemental dilemma and sinisterly silence an inconvenient view-point. In the present case, the Gujarat government has not covered itself with glory.

Wednesday, August 19, 2009

Corporate Governance : Absentee director etc.

Annual General Meeting of Indbank Merchant Banking Services Ltd was held today (19th August). Chairman of the company, Mr. Anup Sankar Bhattacharya , in his address said, "Your company has complied with the requirements prescribed with respect to code of corporate governance as per clause 49 of the Listing Agreement". This is in stark contrast to what is mentioned in the Certificate on Corporate Governance issued by the auditors in the Annual Report which remarks, "In the Audit Committee meetings held on 16.04.08, 29.07.08, 21.10.08 only one independent director has attended the meeting contrary to clause 49 II (B) stipulation of minimum two independent directors' attendance ".

Needless to say, Mr.M K Narayanan was reelected as a director !

Monday, August 17, 2009

Crisis and ethics

One student at IIM, Ahmedabad was stricken with swine flu. She took off to Delhi where her father is a doctor. In the process, how many people would have been infected is anybody's guess. The role of the institute is not known.
Is it correct on the part of the student to have travelled while being a carrier of the scary flu? When the person becomes hopefully a CEO, would her behaviour not be the same? It is indeed difficult to be ethical in a crisis, but that is when ethics is needed most.

Saturday, August 15, 2009

Detention of Shah Rukh Khan

SRK was detained (?) at Newark airport for 2 (?) hours. Was he detained or was he only frisked? Was it over a period of two hours or a much lesser duration? Is it also true that he was not allowed to make telephone calls?

SRK figured in the list of 50 most influential persons in the world published by Newsweek sometime last year. Assuming that the airport immigration officials were unaware of SRK's identity (which is quite possible), they could have easily verified through Google search or any other method they were comfortable with. Is it possible that SRK did not suggest anything like this?

SRK was in America ,inter alia, in connection with his soon-to-be released movie "My name is Khan" where he acts as a Muslim who is not a terrorist. There are cynics (?) who claim that the "detention" was arranged by 20th Century Fox as a trailer.

If he was detained only because his surname is 'Khan' and the immigration officials made no sensible attempts to satisfy themselves about SRK despite his attempts to prove his identity, the episode can only be termed as religious prejudice masquerading as 'security consciousness'.

Combating flu

Flu is a seasonal ritual. It gets christened differently each time. Thus we have bird flu, swine flu, Spanish flu etc. Diseases cannot be eradicated totally. However, impact of the disease can be managed both at societal level and individual level.

China says that though many have contracted swine flu, there was no death due to swine flu there. Is it possible? Given the state of authoritarianism, anything is possible in China. They doctor statistics as much as they doctor people. At the same time it is possible that China did indeed handle the swine flu threat exceptionally well.

What is happening in India is a matter of deep concern. People's hygiene levels and doctors' diagnostic capacity are crucial determinants of impact of flu. Sadly it is not uncommon to witness patients coughing on one another's face in a nursing home in the presence of medical professionals who blissfully turn a blind eye and a deaf ear to what is happening.

Personal hygiene with a concrete set of dos and don'ts should be taught at primary school levels. It is a mockery of our educational system if we need the outbreak of a pandemic in order to teach people how to cough and where to spit. Government should carry out educative campaigns wherever people gather to enable them to imbibe good hygiene.

Many doctors seem to have lost basic diagnostic skills. Instances are aplenty of prescription of antibiotics for viral cold and fever and of irrelevant antibiotics for bacterial infections. Diagnosis is poor and prescription is poorer. I wonder who can solve this problem.

Sunday, August 09, 2009

Absentee Director

Going through the annual report of Indbank Merchant Banking Services Ltd for the year 2008-09, one is surprised to find that one of the directors, Mr. M.K.Narayanan did not attend any of the four Board meetings held during the year. He is also a member of the Audit Committee. He could not attend any of its meetings also. The annual report says, " Shri M.K.Narayanan is the National Security Advisor, Government of India. He has vast experience and has been associated with the company since 1994."
I looked for the earlier annual reports. I could lay my hands on 2006-07 report only. During that year also, he was a director and a member of the audit committee. His attendance record was the same. The two reports also mention that he did not attend the earlier AGM of shareholders.
He is likely to be re-elected to the Board in the AGM to be held on 19th inst.
No doubt, the person is eminent. His work in Delhi is of national importance. But can he spare time for a small company and be a member of the audit committee? Auditor's certificate on corporate governance for the year 2008-09 says, inter alia, " In the audit committee meetings held on 16.04.08, 29.07.08 and 21.10.08 only one independent director has attended the meeting contrary to Clause 49 II (B) stipulation of minimum two independent directors' attendance."
Whither corporate governance?

Wednesday, August 05, 2009

Corporate Governance in Banks

The global economic crisis which started in the year 2007 has compelled political authorities in many countries to examine the role played by banks in causing the mayhem.Predictably, the main focus has been on limitations of corporate governance in banks and other financial institutions. In the UK, the Chancellor of the Exchequer appointed in February 2009 Sir David Walker, a former financial services regulator, to carry out a thorough review and to make recommendations for improving what should be the first line of defence against economic meltdown, namely corporate governance. The Chancellor lamented that standards of corporate governance were not healthy enough to check the reckless risk-chasing indulged in by bank executives.

Report and its significance : Sir David Walker released a Consultation Document titled "A review of Corporate Governance in UK banks and other financial industry entities" on 16 July 2009. This is a comprehensive report incorporating preliminary recommendations on various aspects of governance including 1) Board size, composition and qualification, 2) Functioning of the Board and evaluation of its performance, 3) the role of institutional shareholders, 4) Risk Governance and 5) Remuneration.

Expectedly, the report has already attracted criticism from various quarters. It is worthwhile studying the report with the twin objectives of knowing (a) whether recurrence of a similar crisis in future can be prevented and (b) relevance of the report to India. It is note-worthy that after meeting the chiefs of major banks in connection with First Quarter Review of Monetary Policy for the year 2009-10, the Governor of Reserve Bank of India issued a press statement wherein he emphasised the importance of governance in following words: "A big medium term challenge is to improve the investment climate and expand the absorptive capacity of the economy by giving a big thrust to Governance reforms , without which it is difficult to inspire the trust and confidence of potential investors". Earlier on 1st July 2009, RBI issued a master circular on corporate governance which inter-alia states," The need for good corporate governance has been gaining increased emphasis over the years. Globally, companies are adopting the best corporate practices to increase the investors' confidence as also that of other stakeholders". It is clear therefore that RBI is keen to benchmark governance standards of Indian banks with global best practices. Hence, studies on corporate governance in the UK and other countries are relevant for our country also.

Sir David Walker has observed that it is clear that governance failures contributed materially to excessive risk-taking in the lead up to the financial crisis. He is further of the opinion that weaknesses in risk management, Board quality and practices, control of remuneration and exercise of ownership rights need to be addressed in the UK and INTERNATIONALLY to minimise the risk of a recurrence. However, he acknowledges that better governance alone will not guarantee that there will be no repetition of the recent highly negative experience for the economy and for society as a whole but will make a rerun of these events materially less likely. In other words, corporate governance is a necessary but not sufficient condition for preventing global economic crises.

The report contains 39 recommendations ; the more significant among them are discussed below with relevance to India.
Role of non-executive directors : The report recommends that in order to ensure that NEDs (non-executive directors) have the knowledge and understanding of the business to enable them to contribute effectively, the Board should provide "thematic business awareness sessions" on a regular basis which may be reviewed by the chairman every year. Indian experience in this regard is different. Non-executive directors in our banks ( and other industries also) are generally well versed with the particular business. Unfortunately, they feel obligated to promoters or appointing authorities and this psychological nexus has prevented the non-executive directors from maximising their contribution. It speaks ill of corporate governance that banks' top managements take active interest in election of their favoured candidates as representatives of shareholders. Such "favoured" non-executive directors cannot be expected to be objective in their role. It is high time that RBI admonished banks suitably in this regard.

Chairman and the Board : The report expects the chairman to commit a substantial portion of his time, probably not less than two-thirds, to the business of the entity. In India, chairpersons of public sector banks are full time appointees. The governance problem here is that the same person wears two hats, one as an executive and the other as the chair of policy-making Board. RBI is advising private banks to split the post of Chairman-cum-Managing Director. This has already been done in some private sector banks. It is to be seen how much time is spared by non-executive chairman for affairs of the bank.

External assessment of Board's effectiveness : One salubrious recommendation proposes a formal and rigorous evaluation of Board's performance with external facilitation of the process. This is very much desirable for effective governance though the modus operandi may pose many challenges. In India, effectiveness of Boards of banks is assessed by RBI through AFI (Annual Financial Inspection). This is done mainly from regulatory viewpoint. In addition, banks may pro-actively subject themselves to assessment by professional bodies like National Institute of Bank Management. This becomes all the more desirable because corporate governance should not be treated merely as a regulatory requirement. It is useful for a bank as competitive strength to enlarge its business because depositors and borrowers trust a well-governed bank much more than a bank which is lackadaisical in governance.

Expectations from institutional investors : The report explicitly expects institutional investors to play a sustained role rather than act as traders in equity. Sir David wonders, "Should we make it easier for long-only institutions to exert influence by having different weighted voting shares? Should shareholders get more voting oomph if they have held stock for a year?" This is a suggestion worth studying in the Indian context also. Institutions should be encouraged to play a more dynamic role in ensuring corporate governance. RBI will need to take a second look at ceiling on voting rights which is acting as a dampener to more active participation by institutions.

Transparency promotes better governance. The report expects fund managers and institutions to disclose their voting record ; it is also suggested that policies in respect of voting should be disclosed on their websites. A similar initiative in our country will help institutions like the LIC to avoid getting into governance issues in investee companies.

Risk Management : Management of risk is an integral part of corporate governance.It is a matter of pride for RBI and commercial banks in India that proposals made by Sir David Walker are already practised here.For example, the report suggests establishment of a Board-level Risk Committee separate from Audit Committee. This has already taken firm roots among banks in India. It is to the credit of RBI that it recognised long time back that Risk Committees need to be forward -looking unlike Audit Committees which are essentially backward-looking and therefore it advised commercial banks to set up separate Risk Committees.

The report also recognises the need for a Chief Risk Officer (CRO) who should partivipate in the risk management and oversight process at the highest level on an enterprise-wide basis and have a status of total independence from individual business units. Removal of CRO from office would require Board's prior approval. The Risk Committee should have access to external inputs to its work as a means of taking full advantage of relevant experience elsewhere.

It merits observation that though risk management system is well in place in Indian banks, there is a need for better coordination among banks so that they can learn from one another's mistakes instead of being forced to "reinvent the wheel".

Importance of risk management in banks and financial institutions cannot be over-emphasised. Weakness in risk management in banks - both commercial and central banks - was a major causative factor for financial meltdown. Though banks in India have weathered the storm without much systemic impact, RBI should not let its guard down but instead should learn from the experience of other countries. In this exercise, reports of various committees in different countries which study the economic malaise provide us food for thought.

Conclusion: Sir David Walker's consultative document addresses a plethora of issues impacting corporate governance in banks. RBI can use this as a sounding board to initiate serious discussions on governance. Since our central bank has already taken many credible steps to bolster corporate governance in banks, Indian banking system can easily become a pioneer in promoting healthy corporate practices.