Limits of Exchange Traded Product

Every student of Finance and Economics is repeatedly told that credit risk or counterparty risk is much less when we deal in exchange traded products rather than over the counter contracts. Though theoretically true, this proposition assumes that the exchange is properly regulated.

The ongoing fiasco at National Spot Exchange Limited is an eye-opener for regulators. It conveys a strong message that exchanges do not mitigate credit risk unless its operations are transparent and efficient. It is hoped that SEBI will conduct a detailed enquiry and publicise the learning points. This is not the time for a turf war between SEBI and FMC. The guilty must be exemplarily punished because otherwise other exchanges also will become slack.

Strange Policies

India is perhaps the only country where government policies are flagrantly violated with impunity and inappropriate policies are egregiously formulated to the obvious detriment of the country.

RBI has issued a circular on 1st August as follows:

Risk Management and Inter-bank Dealings

"Attention of Authorised Dealers Category – I (AD Category I) banks is invited to
AP (DIR) Circular No. 121 dated June 26, 2013 wherein it was clarified that if an
FII wishes to hedge the Rupee exposure of one of its sub-account holders, it
should be done on the basis of a mandate from the sub-account holder for the
purpose and that the AD bank should verify the same along with the eligibility of
the contract vis-a-vis the market value of the securities held in the concerned subaccount.

2. In this context, the Reserve Bank has been receiving enquiries as to the
applicability of the clarifications issued in the aforesaid circular to Participatory
Notes(PN) /Overseas Derivative Instruments(ODI) issued by the FIIs. It is
therefore clarified that if an FII wishes to enter into a hedge contract for the
exposure relating to that part of the securities held by it against which it has
issued any PN/ODI, it must have a mandate from the PN/ODI holder for the
purpose. Further, while AD Category bank is expected to verify such mandates, in
cases where this is rendered difficult, they may obtain a declaration from the FII
regarding the nature/structure of the PN/ODI establishing the need for a hedge
operation and that such operations are being undertaken against specific
mandates obtained from their clients."

It was earlier stipulated with justification by RBI that FIIs be not allowed to take positions on the rupee, ostensibly on behalf of subaccounts including PNs where the beneficiary remains anonymous, and thus create more pressure on the rupee. A self-declaration by the FIIs would obviously be self-defeating and therefore the banks were advised to verify the need for 'hedging' by FIIs. The amendment dated 1st August dilutes the guideline to a substantial extent. This amendment only serves to continue to protect the anonymity of PN beneficiaries aka round trippers of funds. Needless to say, the Finance Ministry is a votary of PNs. Poor RBI, they are unable to resist the pressure from the ministry beyond a certain level. Learned prime minister continues to be blissfully inattentive to what is happening. 

Ill-said, Mr.Chidambaram

It is unbecoming of any minister to condemn a constitutional authority. Mr.P.Chidambaram has gone on record criticising the former CAG, Mr.Vinod Rai. "I think the former CAG did considerable damage to the system.He exceeded his jurisdiction and exceeded his mandate."

1) Considerable damage to the system: Yes, the former CAG did disrupt the corrupt system masquerading as the cabinet. Is this condemnable? Was Vinod Rai not doing his constitutional duty?
2) Exceeding his jurisdiction and mandate: Was it beyond his jurisdiction to audit the accounts of ministries and departments? Was it beyond his mandate to probe manifestly corrupt deals? Does the minister expect the CAG to be a cheer-leader for government's misdoings?

Is it the Finance Minister's argument that telecom and coal scandals existed only in the imagination of the CAG? The minister is bullying the present CAG to 'behave or else".

If the minister honestly felt that the then CAG was exceeding his authority, should he not have taken up with the Supreme Court? What prevented him to seek parliamentary action against Vinod Rai? P.Chidambaram was derelict in performance of his constitutionally - mandated duties as he had failed to protect the constitution.

A bad workman blames his tools. A dishonest minister blames the CAG.

Chairman's address at AGM: HUL and ITC

Differences between corporates are brought out clearly in addresses by their chairpersons to shareholders. Hindustan Unilever and ITC interestingly had their AGMs this year on the same day, 26th July. Similarity begins and ends there.

One was held in Mumbai and the other at Kolkata (ofcourse, you may blame the legal requirement that AGM should be held where Registered Offices are located for this West-East polarisation). HUL has no tag line adorning its logo. ITC's tag line is "Enduring Value". 'Enduring' is an over-used word in corporate vision / mission statements and logo tag lines. Apart from long-lasting, 'enduring' also means tolerating. 'Tolerating Value' obviously gives an unintended, pejorative meaning.

Press release of ITC Chairman's address carries Y C Deveshwar's picture. HUL's culture is too anonymous to permit Harish Manwani's picture in the release.

Manwani conveys precious little about company's operating performance (one may ask what is there to talk about?). This is probably because he is a non-executive Chairman unlike Deveshwar who is firmly in the saddle as an executive Chairman. He waxes eloquent on 'VUCA' (a military acronym for Volatility, Uncertainty, Complexity and Ambiguity) and also talks about the megatrends which in his view are digitisation, rise of the developing world and sustainability. Old hat, perhaps. HUL's new business model 'looks beyond shareholder value towards creating shared value'. One hopes this does not mean sacrificing minority shareholders' value to sustain value for Unilever. Deveshwar's address hints at this. Manwani argues that growth has to be responsible apart from being consistent, competitive and profitable.

What is the winning strategy in a VUCA world? Foresight and agility, Consumer centricity, Local thinking and Global acts (reversing the hackneyed paradigm 'think global, act local') and Attraction of great talent will do the trick. Is business so simple? 'Lifebuoy' soap is a constant refrain in every year's address as far as one remembers. Manwani also says, "Lifebuoy is more than a bar of soap". Yes, it is also literally a lifebuoy for HUL.

 Vijay Govindarajan and Chris Trimble convincingly argue that it is time for corporates to look beyond glocalisation and invest in Reverse Innovation. Manwani could have referred to this.

"Values-led " and "Purpose-driven" leadership also is a recurring theme for HUL. Manwani justifiably takes pride in the company's brands being agents at the forefront of social change. Manwani finally assures (warns?) that "at Unilever and at HUL, we have a clear point of view about where we need to go and how to get there". One hopes that HUL and its minority shareholders will not be forced to forgo their interests in favour of Unilever. Companies are apt to misuse the royalty payments tool.

Deveshwar straightaway talks about ITC's continued robust growth. The company's triple bottom line (financial, social and environmental)  performance is stressed at great length. ITC has been water positive for 11 consecutive years, carbon positive for 8 and solid waste recycling positive for 6 years. Harvard Business Review named YCD as the 7th best performing CEO in the world in early 2013.

Deveshwar leverages India's unsustainable Current Account Deficit to go hammer and tongs at royalty payments made to foreign companies. He advocates larger creation of intellectual property within the country. A typical motherhood statement nobody can contest. He bemoans the vice-like grip of foreign brands in Indian market. He makes a legitimate claim that ITC aspires to build world-class brands in India. "India is perhaps the only country in the developing world where domestic world-class cigarette brands (nurtured by ITC) have been able to outclass any foreign brand by a long margin."

ITC chairman has cleverly points out that royalty payments to foreign companies may be misused to reduce tax payments to Indian government. He is logical in pleading for similar tax deductions for domestic companies which are developing their own brands.

Deveshwar concludes by thanking the shareholders, a courtesy that Manwani is too professional to uphold!

Who is poor?

Project "Garibi Hatao" was undertaken in late sixties and early seventies with gusto. So, we may be excused if we suppose that there is no poverty in India now. Disappointingly, the Planning Commission keeps reminding us that there are still some poor people in India though their numbers are rapidly shrinking.

Consumption expenditure per capita of Rs.34 per day is enough to upgrade a city-dweller from poverty. When one can have a full meal for Re.1 near Jamma Masjid in Delhi, what and where is the problem? Why don't we lower the poverty bar to Re.1?

It is sad to hear Kapil Sibal and Digvijay Singh question Planning Commission's scholarly figures. How can they forget that our economist-PM is the Chairperson of the Planning Commission?

For now, Mr.Singh is maintaining his typical majestic silence. If the criticism against Planning Commission's 'erudite' figures becomes more shrill, we may expect him to reiterate his disassociation from the Commission of which he is only the chairperson. If he can so easily estrange himself from his own Cabinet, why not from the Commission? Keep it up, Mr.Prime Minister. As  the CNN IBN Hindu polls show, we continue to be in awe of you.

This is not done, Mr.Chidambaram

It is generally believed that P.Chidambaram is among the more competent and better-behaved ministers in the central cabinet. He is even tipped to be our next prime minister if the UPA is again returned to power. There are some who wish that he would become the prime minister but they want the UPA to lose. A typical example of self-contradictory hopes! So, if such a person does something inappropriate, we have reasons to be disappointed.

Indian Bank is opening a branch at Manamadurai today. Punjab National Bank is opening three branches at Tirupathur, Alangudi and Sivaganga today and tomorrow. Oriental Bank of Commerce also is opening a branch. All these branches are in Sivaganga district. All are inaugurated by the Hon.Finance Minister. He has similarly opened a large number of bank branches in the same district in the recent past.

There are two glaring irregularities here. Why should public sector banks bend over backwards to open disproportionately large number of branches in the minister's home town? Would they open these branches in Sivaganga if someone else is the Finance Minister? These banks are owned by shareholders and are accountable to them. As regulators, RBI and SEBI are expected to prevent this manifestly unethical practice.

Secondly, why is the minister regularly sparing his 'valuable time' to open bank branches? He can inaugurate a bank , say the upcoming Women's Bank. The idea of a Women's Bank may be hare-brained but its inauguration may merit the presence of FM. If the prime minister does not disapprove PC's action, may we expect the PM also to start opening bank branches and post offices in his home district in Punjab and, er, Assam?

Hung parliament?

CNN-IBN-Hindu polls indicate that elections if held now will throw up a hung parliament. Some concerned citizens hope that instead of parliament, parliamentarians should be hung! Such is the quality of politicians in the country now.