Some capitalistic recollect!

Well, this recession has given me a lot of time, thanks to the great capitalist concept of lay-offs. So I’m getting some time to do my favourite thing, rumination! I am prone to pretty weird ideas and people close to me can corroborate that. I have been saying in my previous blogs that, it seems the ‘self proclaimed’ greatest capitalist nation - USA has been trying to solve all its capitalist follies by finding solution the communist way. Just look at AIG, Bank of America, and not to mention GM asking for more & more Federal bailouts. All these corporations have been greatest loss maker in the current financial downturn. Well to be precise, GM has been the laggard for a lot longer time, making spectacular losses for nearly a decade now. The very existence of the firm amazes me. Why have they not filed for bankruptcy at the start of this millennium & handed over the assets to a more efficient user like Toyota for crying out loud? What’s wrong in that, especially in the light of US not minding in financing the Federal budget deficit by selling their papers to more efficient (capital surplus) countries like Japan or China (more than $1.5 trillion combined)?

This brings me to my prime objective behind this article, if you really believe in Capitalism then why on earth you are relying on the Communist way to fix up the mess you created with your belief. Why not go back to ground zero & start looking for the clues to rebuild it. I am a firm Capitalist believer & I can’t even stand the idea of Communism. Just to strike an analogy, Capitalism relying in Communism for rescue out of the current financial mess is like Man relying on God to rescue him from the global warming situation. If you have got yourself into this deep trouble then you better think fast & stick to the basics. Well, I’m not just complaining about the situation, I actually have a probable solution in mind.

The fundamental of Capitalism is the Capital of the organization, the entrepreneur willing to take risk for the ideas he believe in. Putting his money & skills to the work to earn profits & name for him. He also can avail loans from financial organizations like Banks or VCs/PEs for funding the cause, but even they ask for the commitment from the entrepreneur in the form of initial investment. Now just look at the Feds from Capitalistic point of view, they are an organization, they have objective, they have budgets, but where is the capital (I mean Owned funds, not Capital Receipts)? In light of the latest budget proposed by Obama Government, which predicted a deficit to the tune of $1.75 trillion or 12.5% of GDP, isn’t this the most inefficient way of running the organization? Now my question is who made the rule that Government has to run only on debt? Why can’t Governments have owned funds? Why Governments can’t be run like non-profit organizations where they are accountable, even though they are not there to make profits but they have to break-even their operations in a consistent manner? Why the same does not apply to the Governments?

Many developing economies are run in the same manner, Deficit budgeting & Inflationary economy are their USPs. Given the situation of global financial systems, there needs a lot to be done to make good the losses made in foolhardy ventures taken over by umpteen organizations. If the Governments are bailing those organizations out, they can ask for capital in return to fund all the deficits they are bearing for the bail-outs. Otherwise this deficit can lead to another calamity in making; we could enter into galloping inflation worldwide, given the short supply of the resources. The point of contention is why the Governments have to be Communistic in design when the whole economy is strong Capitalistic in nature? Desperate times call for desperate measures, but then why not be desperate the Capitalistic way? I believe there are still many strong Capitalistic believers in US who could be willing to take the risk for their belief. So why not let the entrepreneurs do their bit for the revival of the economy? Why not look at the option of running the Government the Capitalistic way? Worth a shot?

One of my friends suggested me this link which corroborates my view.

The Young Managers, Mentors & their values

I recently went through a case study in Businessworld about YMs (Young Managers). It is about the reckless behavior of the Young Managers, their complete disregard to the seniors' suggestions & lack of readiness to learn from & correct their mistakes. Although I agree with most of the views in that case study, the thing that I thought was missing is the wrong values brought forward by today’s corporate culture. Where is the long term view of the things? All that today’s Corporates are worried about is bottom-line growth (Q-o-Q & Y-o-Y) & share price appreciation, at the cost of anything (Remember RJR Nabisco disaster?). Energy situation, Global warming & Sub-prime lending / over leveraged use of Derivatives causing current financial crisis to name a few.

Whilst this is the picture of values that you demonstrate to the so called ‘cream talent’ without significant experience & adequate EQ to get hold of the situation, what do you expect them to learn? The purpose of acquisition of the talent, their utilization does not seem to have any long term view per se. All the chores are directed towards one thing & one thing alone, annual results! How else would you explain the behaviour of cream talent like B. Ramalinga Raju in the light of ‘satyam saga’? All he was concerned about was the Y-o-Y bottom-line with complete disregard to the long term view of the business & the whole industry in turn. Or did he actually think that he could pull it off eternally (or did he not believe in the principle of company as a going concern)?

If the Corporates today were concerned about long term talent retention, would they not spend a significant time on grooming the talent they have acquired? But that is so not the reason of talent acquisition nowadays. The talent is acquired to fulfil a short term requirement, beyond which the utilization of the talent is not known to them. They acquire the talent keeping in mind that they are bound to leave after some period. So no need to spend time on grooming them or inculcating some corporate values in them. Where is the need of mentoring? In light of current financial crisis, the Corporates are offloading the relatively inexperienced talent without even giving them fair chance to prove themselves (again to sustain the short term profitability of the business & to maintain share valuations or what is left of it). After such an experience that is imparted early in their careers, do you expect them to ever be faithful to any of their future employers? Do you expect them to have any values other than saving their own skin at the cost of others? What can a senior manager or a mentor do in a situation like this?

In my view to conclude, the behaviour of the Young Managers of today is not a micro level issue but a macro level one. There are some very serious issues that need to be tackled about the manner in which the businesses are run nowadays. They are quintessential for survival of growth economics & capitalism as we know them.

Revival of global economy

There is no doubt about global turmoil on economic front but there are going to be umpteen opinions about how the global economy can be revived. The evidence is the huge strike called on by as many as 8 unions in France. This has almost stalled the whole country. As we go on from here this could be more than just an aberration.

To move the engines of growth moving as fast as they were a year back, there has to be free circulation of money in the global economy. So far whatever money was pumped into the global economy has been used to make good the losses made by bad assets of the Corporates like Merrill Lynch, Freddie Mac, and Fannie Mae of the world. So more money must be pumped in the global economy to lubricate the wheels of the engine of growth. There are basically two views about the possible quick recovery of the global economy. Let us have a look at them in brief.

One view is that of the governments world over & the actions that they are taking in a little haphazard manner. So far they have concentrated their efforts on rescuing the troubled corporations in their respective countries. So far they have spent as much as $2 trillion in this effort & almost $1 trillion is still in offering. So far the common people have been a mere observer in this preposterous sequence of events. The frequency with which the Corporates were nearing to bankruptcy & the immediate rescue packages declared by the governments to save the jobs in the country & in turn their skin has been astonishing. So should all the hard earned money of the people collected in the form of taxes be spent on revival of the sick companies? Obviously they have not been running their businesses in a correct manner. So isn’t it like rewarding the brats of classes by punishing the toppers. (This looks more like communist than capitalist to me, but hey, that’s just me! This time sponsored by the biggest capitalist, US of A!) This seems to be just an invitation to public outrage.

The second view to revival of the economy could be increasing the public consumption by putting the money directly in the hands of the people who can start spending that, it will flow in the hands of the Corporates who are doing the things right & whom the people trust. This can be done by two ways: by securing & creating jobs of the people working & by boosting the public infrastructure & thereby public spending. (This also is more or less like communism) (So the solution of capitalist follies in communism??? Shock for the American capitalism???)

Obviously in both the cases the banks have to play the role of lynchpin around which the money circulates. But for this the public confidence in the working banks needs to be restored. Both the views mentioned above cannot be executed in isolation but there has to be prioritisation of the actions taken. Should the money left with governments be spent on making good the losses first or should the infrastructure be given precedence over that? Because money also is a rare commodity & is not available in abundance & for free.

Then comes the time to ask who all are responsible for this huge farcical tragedy we got the privilege to witness. Prima facie the responsibility goes to the governments & the Corporates that benefited from the policies followed by the governments such as sub-prime lending & ridiculously low rates of interests for the housing loans & free availability of credit to any & every one. Add to that the lack of infrastructure & transparency in the rating agencies & auditors for the corporations. (Refer my previous blogs for details of this frivolity!) Now it’s time to restore some corporate governance, right after we achieve some government governance.

IT & Employment

The much talked about subject today, the Satyam saga, poses many more questions about the whole corporate governance hullabaloo in the Indian IT industry. The reason for calling it hullabaloo is that last year Satyam was awarded Golden Peacock award for corporate excellence. With the latest discoveries in the case, now they say that even the total employee number in Satyam is also not 53000 as claimed by the annual report, but it is about 40000 & that number was inflated to siphon off money every month.

This is not a small number, the 1/4^th of the staff is fictitious and yet not one person in company raised any eyebrows on it. What are the HR people doing? We are raising questions about the audit people, but we don’t smell the rats that are still sitting in there, employed permanently. This raises questions about the recruiting practices in the IT industry. The already fraught about question is about the bench strength in IT. Hiring the best of the talents in the market & making them sit without work is inhuman & so is hiring them on contract or on vendors roll just to offload them whenever necessary, without much consequence.

The reason to employ people on contract or on vendor’s roll is lack of labour reforms in the country. In India we are not accepting ‘Hire & Fire’ policy for any company. So this is open detour found out by the innovative IT giants in the country. There is no exception to this method, not even the sacrosanct ‘Infosys’. There are so many people being let go by these IT giants in this recessionary time, simply because they needed to save the skin of their on roll, permanent employees. God knows if they are being accounted for! The HR professionals in these companies have become the most despicable people.

No one will raise questions about the ability of the people working on contract or on vendor’s roll, as they all go through the same rigorous process of selection. They would not be in the position if they were not good enough. Another fact anyone cannot deny that these non-employees are the ones who work the hardest in the company with fear & expectation that some day their efforts will be recognized. But when the times like today come, they are made the scapegoats in order to ‘save the costs’. Performance is not the criterion for this dismissal of services. With evidence it can be proved that their performance is better than most of the permanent, on roll staff working on similar positions.

This injustice has to be stopped. Now if all of them were permanent, on roll employees & if Indian labour law allowed ‘Hire & Fire’ policy, all IT giants would be required to rethink a lot before letting these people go and the only criterion for that would be lack of performance. At least there would be a mechanism to address the grievances of the people being asked to leave. Also there would not be any suspicious IT vendors whose only job is to beguile people into work on such high risk profiles, where contradictory to rule the returns are very low for the people who actually bear all the risk. The ‘bull-shit’ in the HR practices in IT industry has to stop. In my opinion the Satyam employee fraud would have been committed through similar means. These contract or off-roll methods have to be stopped or brought under better scrutiny & take my word for it, many more frauds in Indian IT industry will be brought in the daylight.

If at all India is thriving to be a superpower in coming years, first thing they need to do is to get the employment laws in the country right. I know, this would get their cost a little up, but it will not jeopardize the cost competitiveness of Indian companies & instead it will bring in some transparency & in turn brand value in the most ill-organized part of organizations – employment & HR!

Unveiling the hoax

In the view of recent collapse of 4th biggest IT firm in India, namely Satyam. A great paradox! The word ‘Satyam’ means truth. It’s a tight slap in the face of the clamour that Indian IT industry was making about the highest standards they were maintaining in Corporate Governance. What is more painful is that this fraud on the statements & balance sheet was being carried forward for last 7 years, as per the disclosure given by B. Ramlinga Raju, the Promoter & Mentor of Satyam & in turn the IT revolution in India. The whole sequence has left the entire IT & Telecommunication industry shamefaced.
But there is something positive to take from this all. The investors the world over now understand that no one in the world is so sacrosanct to take their word blindly. The extent of this fraud is so horrific that no one knows the truth anymore. No one knows the value of assets & liabilities Satyam holds, the actual turnover it has or for that matter anything in the annual reports. As per the statement given by the caretaking head Mynepalli, they are not sure whether they have enough cash to pay the salary to the staff for Jan 2009.
In such a scenario no one would dare bailing Satyam out or even buy them out, even if it comes to a value of Re. 1 per share. This all was followed by unveiling few more scams in the making. Raju was about to siphon off $ 1.6 billion to his other flagship company Maytas Infra. Which luckily for the investors was discovered by media in time & Raju had to drop the idea. It followed by another event as World Bank banned Satyam for 8 years, because of data theft cases that came out in past few years.
Infosys has come out & publicly announced that they will not absorb any of the staff of Satyam, even on senior positions. They are partially right about it, as no one knows to what extent this scam goes. How can one hide a scam of an extent of Rs. 7000 crores i.e. $ 1.75 billion without having many of the staff accomplice in it. The only salvage for millions of investors is that Raju has been arrested & will be presented in the court. But the problem still is that India does not have its own version of Sarbanes Oxley Act which protects the investors’ interest. Indian counterpart of US SEC namely SEBI is a toothless tiger that only makes noise but can’t bite. This would give a big time wake up call to the bureaucrats & the lawmakers to come up with better mechanism than they have to avoid such instances in the future. At least this will get the economic reforms moving, that had been stalled since the existing government came into power and it’s been 5 years now!
The worst part of this fiasco is that it came in time when it was least needed. Whole world is crumpling under the pressure of recession & joblessness. This even has the potential to pull India into it, which so far was still hopeful of clocking growth of 6.5% in the current fiscal year. But the timing of this fiasco could not be just a coincidence; the scrutiny needs to check where all this started & how. My gut feeling is that, it all started with the dotcom burst in the Y2K. It makes a perfect sense that, Satyam should have collapsed in that burst, but thanks to innovation shown by Raju it not only survived but also was a symbol of strength. When other companies like Infosys, TCS lost their 40% of market cap in the IT slump of 2007, Satyam had lost barely 20% of its. The reason of the strength was impeccable forgery that none of the analysts could suspect.
Biggest question now for the investors is that what the auditors were doing when they signed the Auditor’s reports for all these years. This even has taken world’s trust away from the world’s big 4 accountancy & audit firms. As if the Arthur Anderson’s follies in Enron’s case weren’t enough, PriceWaterhouse Coopers wanted to test the wisdom of the people to discover another scam. Possibly we’ll now be left with only big 3 of these firms or may be we’re on the verge of all new accountability standards which brings some amount of trust back in the business. The stock market watchdogs world over need to come up with some better mechanism than current state of auditors & credit rating agencies. With the current sub-prime crisis & no. of scams that have come out in the recent times, we have all the reasons to question their business models & their integrity towards their profile.
Let us all hope that the outcome of this scam will bring some of the positives that the world has been waiting & longing for. It’s about time that we see the positives of globalisation, put our brains together to innovate the solution.

The looming recession

It’s been a long time since I blogged. My heartiest apologies to my loyal readers! The reason is quite apparent from the title I believe. According to most of the analysts & self proclaimed experts the recession is already here & it is here to stay for a considerable long time before it gives way to some growth. There had been many financial follies that our Harvard Princeton & IIM grads committed while creating a all gorging monster called derivatives that almost wiped out $3 trillion out of the world economy. This financial blunder is compared to the great depression of the 1930s. Could this be the apparition of the old & painful time that has come back from the underworld to haunt us for coming years?

Well let us first have a look at the reasons why we are facing this situation. The very base of this problem is faulty valuations of the assets held. It all started with the housing bubble in California. The root of this bubble lies with faulty policies brought forward by the No. 42 (read Bill Clinton – a ‘Democrat’ of course – republicans need not be happy for electing the worst ever president, the successor No. 43 ‘Dubya’) & his supporter the so called legendary Alan Greenspan – ex-Fed chief. They came together in a conspiracy of reducing the interest rates to such a historic low that anyone & everyone on the streets of US was capable for getting a housing loan. Obviously the demand for houses started increasing to an unreasonable level. People still kept buying such expensive houses & banks kept offering loans for buying such houses, both considering that they have backing of a very stable asset ‘The House.’
Now comes the time for the financial innovators. These loans offered by banks are converted into Mortgage backed CDOs (Collateralised Debt Obligations). They were securitised by the companies like Fannie Mae & Freddie Mac into resalable assets. These assets were bought by investment bankers like Lehman Bros & Merrill Lynch. Add to that another innovation called ‘Derivatives’, which itself has no value of its own but trades on some other asset like the paper money mentioned above. All of the institutions mentioned above are now liquidated. The correction of the prices started when general people realised that the houses they were buying or holding were not worth the prices they were quoting. So the base of all these financial innovation & great boost to global turnover was removed. The huge castles of cards built over such base had to come crashing down.

Other culprits to the disaster are the rating agencies world over, as all these assets were rated as ‘very safe’ before selling them to next buyer. So all the buyers were also under the misconception that their investments were also ‘very safe’. The valuation models followed by the rating agencies & the investment bankers need to be revisited to avoid any reoccurrence of such disaster in future.

In my opinion the even though the current crisis is very serious & the extent of losses booked are very huge; the biggest difference between the great depression & now is the role knowledge & information technology & media will play in resolving the problem. The biggest problem in recession has always been the public perception & sentiments. So far the media has been disgusting in helping the people out. When the prices were rising to a ridiculous level, they were not bothered to inform people about it. Now as the recession is round the corner, the only thing that can help prevent that is the public sentiment & spending that will boost the consumption in economy. If you read the articles in any of the financial periodicals, you’ll lose your appetite; forget about spending your hard earned money in the market.

In the end if anyone asks for my opinion about the whole situation, I’d say that there is problem in the global market & the recession is not here yet but it will be here. But if all knowledge works in the right direction then it won’t be here to stay for a longer time. I believe we have gathered enough knowledge & are equipped enough to come out of it. Particularly the BRIC nations will be the first ones to rise out of it. Now only the time will tell, how good an analyst I am!

Review - Union Budget 2008-09

This year’s budget was expected to be populist one as we are going into election before the next budget. And to certain extent the FM Mr. P. Chidambaram has lived up to it. The Highlights of the expenditure planning are as follows.

• National Rural Health Mission 15% increase in allocation

• Outlay of Rs. 16534cr for health care

• Initial allocation of NREGS Rs. 16000cr for all 596 rural districts; may be increased if necessary.

• Bharat Nirman allocation Rs. 31280cr

• LIC to cover woman SHG’s (Self Help Groups) linked to banks.

• Irrigation outlay Rs. 20000cr vs. Rs. 11000cr

• Waiver of debt schemes – for marginal & small farmers: complete waiver of loans – could be reimbursement to PSU banks – it would amount to 4% of all loans of banks: positive for PSU banks as some written of losses due to prudential norms will recover & NPA’s could be reduced by 0.5 – 1% – Amount of Rs. 60000cr total agri-loan waiver – needs to be done by June 08

• Addressing the demands of Anganwadi workers the basic pay to teaching staff increased from Rs. 1000 to Rs. 1500 & cleaning staff from Rs. 500 to Rs. 750

• 5 more UMPP bidding to be opened

• Exchange traded FOREX derivatives to be introduced

• Defence allocation Rs. 1.05 lakh cr up 10% from Rs. 96000cr

• Rs. 55000cr revenue deficit 1.4% vs. 1.5% previous year

• Fiscal deficit 3.1% vs. 3.3% previous year

Lot of emphasise is laid on expenditure to bring social justice just as was expected. But not much is being said about capital expenditure on infrastructure & to improve quality of education. 3 additional IIT’s & few IISc’s are planned but nothing about Management Schools.

The revenue side has been a boost as there was record collection on Direct as well as Indirect tax receipts. So little was done to tamper with the same.

Customs

• No change in peak rate

There was lot of hue & cry about possible custom duty & CVD cut to boost the supply side to reduce the cost push inflationary pressures but the budget has turned out to be total failure from that perspective. Same mistake is being repeated from last year. Also there was expectation that duty on crude would be reduced to cope up with fuel price pressure but that also did not come. So no relief for inflation from fiscal policy point of view. Monetary policy alone would not be enough to curb it, so it’s a failure on control of inflation parameter.

Excise

• Cut in excise for Buses, chassis, small car, 2/3 wheeler to 12% from 16%

• Cut in excise on Pharma products 8% from 16%

• Bulk Cement 400/ton

• CST 2% from 3%

Attempt is made to give a fillip to lagging auto industry. Also to cover the price limits put on pharma products. This move will surely achieve that.

Direct tax

• Slab changed till Rs. 1.50 lakh - nil, Rs. 1.5 – 3 lakh – 10%, Rs. 3 – 5 lakh – 20%, above Rs. 5 lakh – 30% & above 10 lakh add surcharge

• Women Rs. 1.8 lakh threshold

• Senior citizen Rs. 2.25 lakh threshold

• Corp rate surcharge unchanged

• Section 80D applicable for expense on policies of parent/s Rs. 15000

• Section 80IB – construction of Hospitals – 5 years haven, Construction of Hotels in Heritage sites recognised by UNESCO

• Short term capital gains tax increased to 15% from 10%

• Commodities transaction tax introduced

• DDT (Dividend Distribution Tax) 15% unchanged

• DDT waiver for subsidy passing profits to parent co. to avoid double taxation provided the parent is not subsidy to any other co.

• Bank transaction tax withdrawn

• STT (Securities Transaction Tax) unchanged

• STT on options premium only

Direct tax part lives up to populist budget. This would again put a demand pull inflationary pressure on economy as there will be more disposable income in the hands of individual which is boost to consumeristic tendency of the young generation.

There are many negative factors for the capital markets though. STT was expected to be reduced which was not. STT should have been removed from Options & Futures which not exactly materialized. DDT still not removed which still is sort of double taxation. There was expectation that the FM will try to boost the dull capital market condition but there was little he added to it. Few things are good as no DDT chargeable to earnings transferred from subsidy to parent company, with not enough clarity on additional clause. The banking transaction tax is removed, which was not fair in the first place; so correction of mistake. Scrap of TDS on debt instruments: this move is a boost to debt markets in the country.

In all, this budget could be termed as populist neutral budget which is precursor to elections. The FM is living up his wish to keep the budget as a non event. Wait for the year when you are not much concerned of this article.