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.