Saturday, November 26, 2011

The Succession Charade

Ratan Tata has announced that Cyrus Mistry, the son of  Pallonji Shapoorji Mistry and the brother of Noel Tata's wife, will succeed him as the chief of the Tata group. As reports go, Cyrus Mistry is a cultured gentleman who espouses humility and respect for governance. Prima facie, the choice is apt. Though only 43, Cyrus Mistry is well experienced in construction business and apparently receptive to advice from well-wishers.

Ratan Tata had earlier observed that his half-brother, Noel Tata, is not experienced enough to succeed him. The question that arises now is: Is Cyrus Mistry more experienced than Noel Tata? The answer may not be reassuring. Ratan Tata also made a mysterious remark, perhaps more philosophical than pragmatic, that Noel Tata's lack of readiness to head the Tata empire was partly his own making. This enigmatic statement gave the game-plan away.

Earlier, a 5-member committee was formed with a great deal of fanfare to do a "global search" for the successor. A world-wide search was made for more than a year only to discover that the target was in Tata's backyard. This brouhaha was, in retrospect, a deceptive ploy. Shapoorji Pallonji's family owns about 18% of Tata Sons. This family seems to have asserted its rights to manage the business empire. This is what happens in many business groups and there is nothing ethically wrong about this development.

However, what is disconcerting is the elaborate drama that was enacted to make us believe that the group was professional and mature enough to delink ownership and management completely. The search committee owes it to the Tata shareholders to inform them the rationale for the ultimate selection. There is no doubt (based on what information is available in the public domain) that Cyrus Mistry is a good choice. It is doubtful however if the committee could not have found a better choice.

Saturday, November 19, 2011

Fair value Accounting of own debt

Fair value accounting requires that assets and liabilities are valued not at historical cost but at current market prices. This extends to revaluation of one's own debt also. It has been revealed that 5 major banks in the U S namely the Citigroup, B of A ML, JP Morgan, Morgan Stanley and Goldman Sachs together have taken credit for more than 80% of their net profit totalling $16 bn for the quarter ended 30th Sep 2011 from this nefarious but permitted practice of revaluing one's own debt. Standard Chartered Bank desists from this practice. This practice is not unlawful though it is funny. In effect, a company or a bank in difficult straits says, "I am in difficulty. So those who have lent money to me may not recover the full amount from me as of now. This is reflected in the high spread on my Credit Default Swap. Accordingly, I revalue what I owe to others and cock a snook at my creditors. My profits are therefore bloated but this is strictly in terms of the concept of Fair Value Accounting." Ofcourse, the profits will get reversed when fortunes improve. This is a blatant anomaly that needs to be set right.

Saturday, November 12, 2011

Deregulation of Savings Bank interest rates

RBI is known for its well-calibrated moves. It was sounding the banks for more than a year regarding the pros and cons of empowering the banks to fix their rates of interest on savings bank accounts. It is likely that many banks were already assessing the implications to their respective selves if deregulation happened.

Therefore it is quite surprising that public sector banks are now unable to decide on their strategies even a month after deregulation was announced. Yes Bank justified its name by taking a prompt decision. A few private sector banks reluctantly followed. The private sector behemoths, namely ICICI Bank and HDFC Bank, are still ruminating.

Public sector banks continue to have a preference for administered pricing. RBI on its part could have been more clarificatory. For instance, can the banks provide interest on daily balances or minimum monthly balances or some other criterion of their choice? RBI has stipulated that multiplicity of rates is permitted only for balances above Rs.1 lac. What happens to those accounts which have balances above and below Rs. 1 lac alternately?

Kingfisher Airlines on the rocks

Vijay Mallya's Kingfisher Airlines is deep in the red. "Kingfisher Red" has become a self-fulfilling name. This aviation company anxiously awaits the emergence of some kind of a saviour. It is anybody's guess whether there will be corporate amputation or a corporate takeover. Mallya has started identifying external excuses for his self-inflicted misery. He has raised issues like "Should a business be forced to carry on despite loss?" (i.e. does not an airline have the right to cancel flights?) and "Does it make sense for the government to insist on catering to ungainly routes?"

He is a firm believer in "privatising profits and socialising losses". Hence the Civil Aviation minister was requested to come to his succour. Vayalar Ravi in turn sought help from the Finance Minister who turned to the Petroleum Minister. Not one to put up with the game of passing the misplaced buck, Mallya turned to the Prime Minister. The latter wants the ministries concerned to look into the matter. What else can a Prime Minister without authority do? Has it not occurred to Mallya that only the UPA Chairperson can ease him out of the quagmire?

Why is Kingfisher in this predicament? Unlike his father, Vijay Mallya keeps chasing glamour. This strategy does not always make business sense. There is a story (apocryphal?) of the Chairman of a bank who decided after travelling once by Kingfisher Airlines that a company that delights its customers so well cannot fail and thereafter started lending to the Airlines. He had overlooked the caution that excellent customer service is only a necessary, but not sufficient, condition for corporate success.

It will be unwise on the part of the government to pressurise the banks or the oil companies to extend a favourable treatment to an ailing company. That will amount to penalising the tax payers. Mallya should actively look for a buyer. Ego should not stand in the way of common sense.

Auditors' misdemeanour

We are coming across cases of delinquency among auditors with distressing and depressing regularity. The latest to hit the public domain relates to one of the "Big Four", Deloitte Touche Tohmatsu.

P.N.Sudarshan, a Senior Director of this reputed audit firm has recently admitted in a Hyderabad Court that they had succumbed to pressure in inflating the value of Jagati Publications, a media firm owned by Jagan Mohan Reddy, son of a former Chief Minister of Andhra Pradesh.

Sudarshan clarifies that the company's value was overstated to Rs.3500 cr whereas the value was assessed as Rs.2500 cr. He was also under pressure to show the date of his report as Nov 2007 though the assessment was done in April 2008. He was influenced by Jagati's former auditor, Vijay Sai Reddy. The latter is now vice-chairman of Jagati Publications.

It is unfortunate that the reputation of esteemed auditors is really up for sale.

Monday, November 07, 2011

Srijan Pal Singh

Srijan Pal Singh is an atypical alumnus of IIMA. He passed out in 2009 as a gold medallist and declined a job offer from Boston Consulting Group. He is now working with APJ Abdul Kalam. APJ and SPS have recently commended the Kudankulam nuclear power plant. They envision bright days for India when thorium replaces uranium as the fuel of choice for a power plant. Here is a 2009 report on SP Singh: (courtesy: Business Standard)

"IIM-A student chooses politics over placements

Vinay Umarji / Ahmedabad March 7, 2009, 0:19 IST

Opts out of placements to apply to national political parties.
If Krishna Chepuri, an alumnus of Indian Institute of Management, Ahmedabad (IIM-A), made history by interning with the Communist Party of India (Marxist) politburo member Sitaram Yechury, another IIM-A student has now chosen politics over placements. Final year post graduate programme (PGP) student Srijan Pal Singh has opted out of placements to pursue his dream of joining politics.

The 25-year-old has applied to a couple of national political parties including Congress party and is awaiting reply.

“I had always wanted to work with political parties and be actively involved in politics. So far even as a student I had been trying my hand at politics in several ways. Now, I wish to get fully involved in politics which is why I opted out of placements this year in spite of having couple of offers in hand. I personally wish to work for Congress general secretary Rahul Gandhi," said Singh, who, after applying on the political party's website, is now lobbying in the political corridors of Delhi to fulfill his dream.
Singh's interests in politics can be linked his involvement in the Public Policy Group (PPG) course, for which a team of seven students were assisted by Members of Parliament (MPs) like Sitaram Yechury, Madhusudan Mistry and Harin Pathak to formulate a framework for constituency management programme, last year.

Under the PPG course, Singh, and his batchmates, also developed an information and communication technology (ICT) system under which citizens in several constituencies could register their complaints with their respective MPs through an interactive voice response system (IVRS) and avail prompt response from respective departments.

Singh, who has worked with several NGOs and Boston Consulting Group (BCG), also has an offer from the global agency in hand. Before pursuing a PGP degree from IIM-A, Singh graduated in mechanical engineering from the Government Engineering College at Lucknow.
This year, around seven students have opted out of final placements at IIM-A including Srijan. Another final year PGP student, V Krishnakanth, 24, has decided to set up his own career consulting firm to coach eng0ineering undergraduates for post graduate entrance exams. "Coaching is a very fragmented market and I observed that students rarely get all kinds of coaching at one place. Using my education at IIM-A, I will be coaching them on how to crack several entrance exams. While currently I will be focusing on engineering undergraduates, later on I will also train Std. XII students for SAT," said Krishnakanth"

SP Singh deserves best of luck.

Sunday, November 06, 2011

Judicial intervention

What is accused as "judicial activism" by some may also be interpreted as " inevitable judicial intervention " . If the legislature and the executive abdicate their respective responsblity, the courts are obliged to intervene lest the system should implode. Ths may be kept n vew while reading the following report:

 Kerala HC judges ask people to protest against price rise

ET Bureau Nov 5, 2011, 05.47am ISTTags:prise rise
Kerala High Court bench

NEW DELHI/KOCHI: As occupy protests spread like wild fire in foreign capitals, a Kerala High Court bench has nudged people to come out against the policies of the government responsible for distress.

In an observation of the spiralling prices of commodities, a Kerala HC bench comprising Justices CN Ramachandran Nair and PS Gopinathan said the people of the country should react against the frequent rise of prices by the government.

"Price rise is equivalent to slow death. People of the country should come to the fore rather than political parties," the court said. The observation came during the hearing on a PIL against the latest hike in petrol prices. The oil companies had effected yet another hike in petrol price, by Rs 1.80 per litre with effect from Thursday.

Wednesday, November 02, 2011

Political bloviation and judicial ire

The saga of 2G scam meanders along keeping courts and CBI awefully busy. The Law minister Salman Khurshid unlawfully advises Advani not to speak about the scam as the matter is "sub judice" and as his utterances may influence the courts! What a poor opinion about the capacity of the courts!

The Supreme Court also has fallen a prey to political red-herrings and has started warning the media to abstain from misrepresenting the court proceedings. Markanday Katju, a recently retired judge of the Supreme Court who is now heading the Press Council repeatedly cautions the press not to give too much coverage to matters like cricket, astrology, actors etc. He wants the Press Council to be empowered to suspend publication of newspapers that do not ' behave'. He desires that visual media should also be monitored by the Press Council. He has already given vent to his ire against preponderant sections of the visual media which are screening programmes not to his taste. How democratic! One also wonders how ethical it is for judges to accept post-retirement jobs.

Added on 6th Nov: Saubhik Chakrabarti has quoted Marshall McLuhan in the Economic Times today: "A point of view can be a dangerous luxury when substituted for insight and understanding." I hope Justice Katju reads this.

Tuesday, November 01, 2011

Lessons from Rajat Gupta

Rajat Gupta is obviously going through tough times. Charges against him are formidable and proving them will require enormous ingenuity on the part of prosecutors. Given the amazing skills of U S prosecutors and absence of political interference, Rajat Gupta's future is dark.

It is difficult to believe that Gupta succumbed to an error of judgement. He is too intelligent for that excuse to be accepted. (I am assuming he did what he is alleged to have done.) He must have been confident that chances of being caught were next to nil. Perhaps luck deserted him when he needed it most. Every dog has its day. It is equally true that every 'kutha' (dog) has its night too.

Congress party's loudmouth, Digvijaya, has drawn a strange lesson from this. He argues that Indian judges should learn to provide bail to the accused pending hearing and finality. Yes, Rajat Gupta is out on bail. Digvijaya should appreciate that the bail has cost Gupta $10 mn and his passport. The bail amount is a staggering amount of $10 mn though Gupta's gain from his crime is yet unknown and may be much less. Indian courts should insist on Rs.hundreds of crores as bail amount when the alleged crimes involve humongous moolah. In the meanwhile, the likes of Digvijaya will be better advised to draw relevant lessons. Will the Indian government let the prosecutors do their job without outside influence?