Politicos, BCCI Need HR Touch

THERE are vacancies for HR heads in two of the largest organisations in the country. And even though the need for pros to step into these positions was felt acutely over the past couple of months, these two job openings went unadvertised.

The first organisation that could clearly do with a professional HR head is the Board for Control of Cricket in India. The prolonged comedy of errors that was played out in front of the nation clearly demonstrated that BCCI needed two professionals desperately — instead of politicians, it needed an HR head and a qualified spin doctor. The last category has many aspiring naturals already playing the game. But it’s difficult for everybody to fancy themselves in the role of a professional HR head. 

So, why does BCCI need an HR head? For one, because it is constantly recruiting — whether it’s coaches or consultants or players. Secondly, there seems to be some confusion within the board about the job profile — no one seems to be sure whether it needs a coach or a manager. Look at the chain of events leading up to the selection of Chandu Borde as the new coach/manager. They first had Greg Chappell, who had a public fall-out with the board. Then started the hunt for the immediate task at hand — the Bangladesh tour. After searching high and low, the board stumbled on to a talent residing in its backyard: Ravi Shastri. The new coach/manager agreed, but subject to the condition that he be relieved after the tour, presumably because his regular day job was more remunerative (another critical HR insight here, but more of it later). As promised, as soon as the tour was over, the hunt began all over again, with renewed vigour. A shortlist of two names was prepared, which was duly leaked to the media. Then they zeroed in on a name — Graham Ford, former South African manager, currently employed by the Kent county team in England. This name was also leaked to the media. In all the back-slapping and self-congratulatory messages that followed, the board forgot one crucial bit — to interview the candidate or to explain the process to him. So, when after the celebrations, they broke the news to him, he gently told them he was not available for the job! The second choice by then, miffed about the way the board had gone about the whole process, also declined the job. The last-minute solution: a 72-year-old former India cap. 

The other lesson is the way the Congress played out the selection of its Presidential candidate. Poor Shivraj Patil. Once his party first announced his name, he seemed self-assured about the whole election process. Then suddenly, as Patil prepared to move his wardrobe and office to the Rashtrapati Bhavan, the Left threw a monkey wrench into the works. The quest began all over again, till Pratibha Patil’s name was pulled out of a hat. In the meantime, President Kalam’s name also popped up, primarily put forward by the other parties to add to the Congress’ embarrassment. 

There are some elementary lessons on recruiting that both BCCI and Congress can learn from the corporate sector, especially since they also are visibly confronted with the predicament of having to deal with a shortage of talent. Here they are: 

• The first is a truism but bears repetition, especially in this case: know the kind of person you are looking for and whether he has the requisite skill-set and knowledge base. Both will be critical for them to perform their assigned tasks. 

• There should be clarity about the job and work profile (whether it’s a manager or a coach). 

• If the applicant already has another job, make him an offer which is substantially higher than his current packet. It rarely fails (Ravi Shastri must also surely be human!). 

• Please check with the JV partner before recruiting a top-level position. Poor chap should not throw celebratory parties only to realise that he has been left to freeze on an iceberg. 

• Transparency is good but you do not have to reveal all twists and turns in the recruitment process to everybody and his grandmother. Importantly, the candidate should not get to know about his appointment from the evening news. This brouhaha pisses off the rejected candidate, and the Number Two guy is lost to you as well. 

• Try to seek innovative solutions. If your shortlist fails, try to seek candidates from another field. Australia, after all, are the world champions because they decided to get a management teacher. You should not have to fall back on either “loyal” or the straight-and-narrow.

Competition & Good Biz

Every need got an ego to feed 
Every need got an ego to feed
 — Pimper’s Paradise/Bob Marley 

TIME was when dominant shareholders of large companies knew how to be economical with the truth. When faced with pesky reporters asking pointed questions about the next big M&A deal, they would look the journalist straight in the eye and lie unabashedly. Without blinking. These days they have a more sophisticated response — “The company does not wish to respond to market speculation,” or some such. On a more charitable note, they didn’t have a choice but prevaricate, since giving the news away could push up their cost of acquisition. Today, they also have to field some embarrassing questions from the securities market regulator.

They should get prepared for some more awkward questions, this time from a new regulator called the Competition Commission. According to recent reports, this newly minted commission is planning to draft rules that will require companies to inform the commission about its M&A plans. Failure to do so will invite penalties. But there is a crucial difference here: they can inform this new body after they’ve informed the stock exchange about their intentions. The commission will then take about a year to figure out whether the merger or acquisition is in the interest of competition in the system, as well as assess whether it compromises welfare of consumers.

Certain NGOs have been lobbying that companies should have to reveal their marriage intentions before the deed is done, as is mandatory in certain countries. That it’s the other way around is a big relief. Otherwise, it would have been an utter disaster. Here’s why. Some years ago, when private equity was still not a fashionable term, one of India’s oldest private equity players had major gripes about the FIPB rule. It required the private equity investor to seek FIPB clearance before investing in any company, listed or otherwise, since the fund was bringing in foreign investment. But the problem usually arose when the company was listed – if the PE wanted to invest in the company at Rs 100 per share, by the time the FIPB clearance would come, the price would jump to Rs 150. This would start a whole new round of negotiations and the transaction economics would have to be invariably reworked. The curious bit here was this: FIPB had wind of this investment deal even before the company’s shareholders. And, what’s even more curious, news of the impending deal would always leak out to the market.

The regulator’s hunger for price-sensitive information does not end here.

Another regulator was offended when a foreign player in its jurisdiction invested a large-ish chunk in a local player. Reason? The foreign player decided to inform the watchdog only after seeking the target’s board approval. In this case, the regulator’s ego was hurt since it was not informed of the transaction ex ante. Is it proper for a regulator to have prior knowledge of a price-sensitive information, before it is properly disclosed to all shareholders? This is a debate that pits the regulator’s ego against the private sector vulnerability.

The Competition Commission, however, might be justified in its role as a protector of competitive systems and consumer welfare. A long debate about how to avoid the pitfalls of the erstwhile Monopolies and Restrictive Trade Practices Act prefaced the founding of the commission. Also, about a year ago, Vinod Dhall (a member with the commission) wrote in a signed piece in this newspaper: “Experience shows that almost 90-95% of the mergers are not objected to by competition authorities. Only a small proportion of mergers face scrutiny and could be prohibited after due inquiry.” That should be of some respite to worried corporates. But a larger worry looms. Experience worldwide shows that most cases linger on for years.

Example: In 1984, Coca-Cola Bottling Company of the Southwest acquired the Dr Pepper and Canada Dry carbonated soft drink franchises for the San Antonio, Texas area, from the San Antonio Dr Pepper Bottling Company, a wholly-owned subsidiary of the parent Dr Pepper concentrate company. The Federal Trade Commission found the deal would impact competition in the soft drinks industry. The company duly challenged this in a court of law. It won the case and the commission finally dropped its proceedings against the company in 1996 – 12 years after the original deal! Sure this is an isolated case, but given the litigious nature of Indians, this pattern has a strong likelihood of repeating itself here. That will be unfortunate and has the potential to bog down the commission’s genuine intentions.

It leaves another large question unanswered: who is to monitor the uncompetitive and monopolistic ways of PSUs and government bureaucrats? Or, stop the administrative apparatus from misusing price-sensitive data?

Airlines Tying The Knot Shouldn’t Surprise You!

I heard them say that you can have your cake and eat it
But all I wanted was one free lunch 
How can I eat it when the man that’s next to me, he grabbed it 
Lord, he beat me to the punch
 —You Make Me Feel So Free, Van Morrison 
    
IN Bengal it is good form, indeed advisable, to carry antacids when attending a wedding feast. It’s like an insurance policy against the malevolent after-effects of genuine culinary appreciation. Unfortunately, the Indian aviation industry also should have remembered to carry its component of acidity busters. A prolonged indulgence has resulted in an inevitable consolidation among the no-frills airlines, or low-cost carriers (LCCs), though it may still be a bit too early to sing a dirge. The music’s stopped and the party was good till it lasted, but the bill has to be paid now. As a result, Air India’s merging with domestic PSU airline Indian, Jet’s taken over Sahara and, now, Kingfisher has wrapped its wings around Air Deccan. These are symptoms of a feast gone on for too long. Call it, if you will, “the alka-seltzering of the Indian aviation industry”!

The former chief executive of a large blue chip looked visibly traumatised after he once had to fly a low-cost carrier from Goa to catch an unscheduled meeting in Mumbai. Reason: there were only two passengers in the entire aircraft, apart from the full crew component! This, to an extent, shows the degree to which some of the low-cost carriers (LCCs) might have built in over-capacity without caring about yields. Over-capacity and a mad spree for market share resulted in cut-rate ticket prices, leading to negative yields.

But, that such a consolidation was overdue should not have come as a surprise. In January, industry magazine Flight International carried a story titled “Indian aerospace: Too much choice?” The question might have seemed rhetorical then, but subsequent events seem to be bearing out the story’s main contention: “Many see 2007 as the year in which consolidation may finally begin, and it could prove to be a pivotal one for the country’s airline sector.” Watch out for what now happens to the remaining LCCs — SpiceJet, IndiGo, and GoAir.

But, seen globally, India could be following only what’s been recognised world over. The outlook’s grim for most US airlines as domestic demand loses altitude. Even Britain’s LCCs are reporting lower passenger demand as airport taxes have soared. Questions have been raised time and again about the viability of the low-cost model, especially when the legacy carriers have themselves launched LCCs as a flanking strategy (though a majority of these had to be wound up later). With the exception of the first, true-blue LCC — Dallas-based Southwest Airlines — most other no-frills have struggled to maintain their yields or margins. Southwest is known for its ability to keep tweaking its model — within the overall LCC framework — as and when market dynamics change.

But, all this also raises another larger question: at which point does the consumer trade off between value and price? Nirmalya Kumar of London Business School wrote recently: “Most low-cost players alter customer behaviour permanently, getting people to accept fewer benefits at lower prices. Low-price warriors are aided by the fact that consumers are becoming cynical about brands, better informed because of the internet, and more open to value-for-money offers.” HBR, December 2006) The key term here is: ‘value-for-money’! Most LCCs in India felt that only low prices mattered to the consumer. In fact, they got the first part of the model right — a single passenger class, a single type of aircraft (to reduce training and maintenance costs), unreserved seating, reliance on electronic sale of tickets, no “free’ meals on flights and reduced in-flight crew component. But, they were also tripped by an exogenous factor — the miserable state of the country’s aviation infrastructure.

Most LCCs in the world rely on secondary airports, which are cheaper and relatively less crowded (UK-based LCC easyJet flies to Luton, Stansted and Gatwick in London instead of crowded Heathrow). In India, the concept of secondary airports does not exist. Plus, flying to the mainline airports adds to delays and longer turn-around cycles, all of which add to the overall cost. This then defeats the LCC model, especially if the airline is pricing its tickets substantially lower than legacy carriers. In desperation, LCCs then dilute value to keep margins afloat — deliberate mis-statements to passengers about delays, turning off the air-conditioning till the aircraft is airborne, faulty ticketing. All this infuriates passengers.

But it would be a mistake to write off LCCs altogether. Watch out for Chapter II of the Indian LCC story. Coming soon.

Customer Loyalty A Myth

COMPANIES that produce or market mass consumption items (including services, like airline flights) are constantly devising ways to retain their customers. This endeavour has spawned an entire new marketing idiom, which borrows heavily from the conjugal vocabulary. Terms such as infidelity, loyalty, fickleness are all used to describe the range of a consumer’s shopping behaviour. Companies also spend fortunes trying to map how consumers go about deciding what to buy. As part of this exercise, many companies – especially those with retail operations – have launched loyalty programmes as an attempt to retain customers.

Loyalty programmes are essentially sophisticated marketing devices that seek to reward a ‘loyal’ customer, thereby encouraging him with greater incentives to spend more on the same products in the future. It’s somewhat akin to buying fidelity through incentives. In today’s context, most loyalty programmes come in the form of points earned for every purchase, which can then be later redeemed against future purchases. Customers are issued cards or granted membership to a lumpy club of buyers.

These programmes have been around for many years (remember the stamps trading programme introduced many years ago?), but the modern form of loyalty programmes was probably born with the advent of the frequent flier programmes started by the US airline industry in the 1970s (American Airlines is probably credited with the first such plan). Interestingly, travel writer Pico Iyer mentioned in a book that most people now earned more frequent flyer miles on the ground (through hotel reservations, car hires) than in the air. 

But, if you look at it closely enough, most loyalty programmes are also attempts by companies to accumulate buyer data. Membership into most programmes requires the applicant to fill in a form that captures some essential demographic data. By collating data on the customer’s buying patterns, his income levels and his possessions, marketers hope to gain insights into what makes the buyer tick. Or, get a rough outline of his mental mapping. This rush for constructing a customer database is also known as the data-for-dollars madness – retailers willing to offer products at a discount in exchange for data on the consumer. 


But numerous surveys and studies have shown that most loyalty programmes are unable to achieve what they set out to do, that is retain ‘loyal’ customers. Mostly, these studies conclude, loyalty programmes do probably end up giving the customer satisfaction but are still miles away from ensuring loyalty. Take a prominent Indian private airline’s much-feted frequent flier programme, which recently won an international award. But, once low-cost carriers were introduced in the market, flyers deserted this airline (the high-flying airline’s eroding market share is well documented). If its programme was indeed robust (attempts to convert frequent flier miles on this airline is still an ordeal), would patrons walk out on it? As this example highlights, loyalty programmes cannot afford to give value the short shrift. Another example is credit cards. Try converting the points earned through purchases and the annual marathon looks like a stroll through the park. 

All this points to an insincerity among sellers. They seem to be only keen on either obtaining data or ensuring immediate sales, even if that means sacrificing long-term customer value. The customer ends up feeling having gained nothing. Cards issued by many retail outlets force customers to make purchases against their accumulated points within a stipulated time frame, giving rise to the creeping feeling among buyers that the retailer’s programme is only a subterfuge for short term expediency. Loyalty actually be damned. 


Many studies have also pointed out the ineffectiveness of a one-size-fits-all loyalty programme, since it targets everybody but appeals to nobody. According to a research paper written by two professors at Stanford Graduate School of Business (Wesley R Hartmann & V Brian Viard), programmes work only if a company’s heavy buyers are also its most price-sensitive customers. Segmenting heavy and light customers might make more sense for rewards programmes, suggest the two academics. Reason: the greatest beneficiaries of most programmes turn out to be those who do not need any persuading to part with their money in any case (example: business travellers whose airfare is paid by their companies). In such a case, is the company justified in investing money to reward this lot of buyers? Writing in a column recently in Business Week magazine, Steve McKee (president of McKee Wallwork Cleveland Advertising) posited that companies are better off investing their resources on gaining customer affection, rather than loyalty: “I think many companies have gone too far down the road of focusing on loyalty at the expense of equity… If you focus on share of heart, you will get share of wallet. The reverse may not always be true.” I’d drink to that!

Cos’ Love Affair With Old Brands

IN THE silly season, scandal sheets always have one story to fall back upon – men marrying older women. Many examples involving famous personalities are routinely quoted – Ashton Kutcher marrying his 15-year-senior Demi Moore, Antonio Banderas marrying Melanie Griffith, Tim Robbins with Susan Sarandon. But none of these rags is able to provide any conclusive sociological theory for this. For sure, there are many hypotheses floating around, but none of them is definitive or convincing.

Equally complex is the motive behind scores of companies buying old, faded brands. Anchor recently bought out the old and forgotten oral care brand Forhans from John Oaks Remedies for an undisclosed sum. The acquisition has raised many questions in the marketing world. Why? Does the Forhans brand have any residual recall value? Will it be relaunched with different bells and whistles? How will Anchor make sure that Forhans does not cannibalise sales of its own flagship brands? What strategic gains can Anchor expect to gain from Forhans? It might be useful to recall that Geoffrey Manners originally owned Forhans. The company was subsequently merged with pharma company Wyeth Lederle. Wishing to concentrate on pharma, Wyeth sold Forhans to John Oaks Remedies for a song (Rs 2.5 crore).

Some clues could probably be found in Colgate’s strategy with Cibaca, a veteran brand it bought over from Ciba Geigy in 1994. Colgate initially positioned the brand at a low price point, hoping that first time users would graduate into the organised oral care category through Cibaca.

However, despite the fierce competition in the segment – especially from well-entrenched brands like Babool, Ajanta, Anchor – Colgate was able to create some waves with Cibaca. This helped Colgate consolidate its leadership position in the Rs 2,500-crore oral care market.

But, then not all companies buy old brands to gain market share. Some buy competing brands to kill them off and eliminate any future threat to their flagships. For instance, Unilever bought over International Best Foods and as a result of that Hindustan Lever in India inherited some old brands, such as Brown & Polson. However, for reasons well known to senior Lever managers, Brown & Polson was given an unceremonial burial in India, though the brand probably still exists in some Asian markets. Incidentally, does anybody remember Dipy’s, a brand originally owned by Herbertsons, part of the Vijay Mallya empire? The same group sold off Kissan to Levers in the early 1990s.

Again some companies buy aged brands because they want to use it to spearhead their entry into other, unconquered markets. Take the example of Godrej buying little-known British FMCG company Keyline Brands Ltd for its well-known brands Erasmic and Cuticura. However, Chennai-based Cholayil Pharma, better known as the Medimix group, holds the rights for Cuticura talcum powder in the Indian market. Also, Erasmic – whose current portfolio of shaving creams, foams and aftershave lotions will be introduced first to the Indian market — was better known in the past for its shaving blades.

This time the brands were probably not the main attraction; Keyline’s established distribution channels in the overseas markets certainly were. So, while Godrej will be able to market some of its brands overseas (hair powder dyes and Fairglow soap initially), Keyline’s Erasmic brand will be re-introduced to the Indian market. What about Cuticura? Godrej’s solution: market it to the expat Indian population in the West Asian markets, where the company already has a distribution channel.

Remember, some companies also buy old brands because they probably believe that reviving them could be simpler, or more cost-effective, than launching new, greenfield brands. There is this story of how beverages giant Allied Domecq sold off its brand Plymouth Gin for a song. However, the buyer -– believed to be an employee of brand consulting firm Interbrand — was apparently able to turn around Plymouth around in a year, leaving many red faces at the Allied Domecq HQ. Today there are many specialist consultants in the market – especially in the US — who make a living from buying ‘ghost’ brands, reviving them and then selling them back to mainstream marketing companies.

There are also some who buy old and ancient brands, in the manner of collectors who like accumulating antiques. Subhash Chandra’s (of Zee fame) acquisition of East India Company for just one sterling pound probably falls into that category. But, then, for every brand that receives a new kiss of life, there are many more that are allowed to quietly pass into the night of product cycles.

Lessons for Maya & Co

Here’s a quiz question.

What’s the difference between a political party and a joint stock company? The logical, and common, answer is: lots. Both are structured differently, have different aims, mission statements, leadership structure, stakeholder involvement. The list can be expanded endlessly. But, that’s what is visible only on the surface. Increasingly, the distance seems to be shrinking, especially with politics becoming so competitive and political parties being forced to focus on core competencies.

Also, Mayawati’s “rainbow coalition” experiment in Uttar Pradesh seems to suggest a further convergence between the two organisational structures. Why her? According to elections observers and political experts, she used a caste combo that not only appealed to voters sick with identity politics but also capitalised on the anti-incumbency wave against the ruling Mulayam Singh government. This coalition itself constitutes a promise that she will now be duty-bound to deliver — an undertaking to put an end to identity politics and the beginning of inclusive development, irrespective of caste.

It’s here that she should look at some similar structures existing in the corporate world. In fact, to belabour the same point, politics may have something to learn from business. This newspaper has carried articles in the past about how political parties have a lot to learn from businesses, especially when it comes to handling succession planning, given that most political parties now resemble family-run enterprises. The only exception to this probably is the CPI(M). But to get back to Mayawati and her political party Bahujan Samaj Party (BSP). Her resounding victory in the UP Assembly polls now puts her squarely in a position that will require her to fulfil the glimmer of hope that she so tantalisingly displayed. Look at the challenges that she faces and the similarities with the corporate world.

First cut: Like a company draws up a strategy — which includes product, production, marketing, sales, distribution, finance — for delivering value to shareholders, Mayawati also has an umbrella agenda in place: A coalition of upper and lower castes. But it’s still not a strategy. There’s no clear, well-defined path that shows how the coalition will be achieved in its entirety. She needs to articulate a strategy that goes way beyond finding ministerial berths for upper caste representatives.

Second Stage: She now needs to put a team in place that will deliver the nuts and bolts of the strategy. She has an able Number Two who has helped bring in the votes. He has to now build a team of lieutenants who will be able to figure out what needs to be done to translate the over-arching agenda into a political reality. Only a dedicated team, with credibility at the grassroots level, will be able to make the connection between the back-rooms at party HQ and UP’s arid fields.

Third Tier: Most brilliant strategies flounder because of poor execution. Mayawati’s entire credibility quotient is currently very high and she must make sure she utilises this honeymoon period to make real, effective and sustainable changes on the ground. UP has become the dump heap in terms of development indices — it is at the bottom of the table in almost every category. If she manages to bring in some improvement, the dividends will be enormous. Therefore, key to her success will be effective execution, which also includes zero victimisation of OBCs or the other intermediate castes.

Fourth Principle: The BSP, like a smart marketing company, has understood the need for realignment of strategy and repositioning of its products. And while a good corporate always uses a combination of intuition and market research, Mayawati used only her innate sense and gut feel for analysis. All the opinion polls (supposedly scientific) — commissioned by TV channels — were wide off the mark. Mayawati has to be able to take the repositioning to its logical conclusion for her “rainbow coalition” to make any tangible sense. It’s not enough to just win this one election.

Finally, like all corporate organisations have to look after all their stakeholders, BSP also has to focus on the well-being and welfare of all its constituents.

Good Biz, Poor Governance

IT WAS a characteristic Kolkata winter morning and all of Corporate India was taking an unusually keen interest in a meeting of shareholders convened by a typical boxwallah company. Fittingly, it was taking place in a city, and in a company, deeply imbued with the country’s corporate history. A parvenu, self-styled business tycoon called Manu Chhabria was threatening to take over one of the country’s prestigious corporate institutions called Shaw Wallace and the incumbent management was not giving up without a fight.

This was 1986 and, as a breed, corporate raiders were fairly new to the country. The board had convened an extra-ordinary general meeting to decide the company’s fate and the balance rested with directors nominated by the financial institutions. They did the most astounding thing. On the prompting of their bosses in Delhi, they suddenly changed their tune and voted in favour of the raider, upsetting not only bookies’ calculations but also peace of mind enjoyed by Indian corporate chieftains so far.

Institutional directors were appointed to boards of companies that borrowed money from these financial institutions and their sole objective was to act as custodians of public funds. In reality, they usually sat as mute witnesses to various acts of corporate malfeasance and misgovernance, stirring only when they received directions from the government. And, the government officials routinely used these directors as pawns in a complex game of favouritism and cronyism.

There are thousands of examples where the board has jettisoned the interests of minority shareholders in favour of interlopers. In one company, after initially supporting a raider, the institutional nominee directors suddenly changed their spots when the government changed at the Centre. Why? Because the new government was not particularly fond of this raider. In yet another company, an MNC this time, the institutional directors sat tight while the local management turned the company into their personal fiefdom and even ignored the majority shareholders. This time a misplaced sense of nationalism obscured all sense of corporate governance.

How much of that has changed? On the surface, regulator Securities and Exchanges Board of India has been chipping away at the edges to bring in greater levels of corporate governance through something called Clause 49. Essentially, this is part of the agreement that every company has to sign with stock exchanges while listing its shares. This requires every listed company to appoint a minimum number of independent directors on the board. The understanding is that since they are independent, they are not beholden to any member of the management and would thus keep an eagle eye on the proceedings.

However, given the Indian gene pool’s legendary ingenuity, especially in the entrepreneurial space, many companies found ways to get around Clause 49 by appointing relatives and friends as independent directors. This has not escaped Sebi’s notice and some remedial action is expected soon. Indian companies probably drew their inspiration from a large number of US companies where CEOs regularly appointed their friends as directors. These directors, in turn, returned the favour by approving gargantuan pay packages — bonus, stock options and lavish retirement benefits — for the CEO. It is another matter that a number of those CEOs are cooling their heels behind prison walls today.

Well, for motivation, Indian companies need not look further than the government of India. At a time when Sebi is trying to hard-sell minimum standards of corporate governance in India Inc, the government is busy setting just the opposite example. The government recently got all the independent directors – including directors elected by minority shareholders – of public sector banks to step down and has appointed party workers and sundry loyalists in their place. These supposedly ‘independent’ directors include at least five secretaries of the All India Congress Committee, as well as many senior members from the All India Mahila Congress and Sewa Dal. For instance, one socialite-cum-Congress-sympathiser appointed to a PSU bank board has reportedly not attended a single board meeting; ironically, this person has even been appointed to two board-level committees — the special committee for large value frauds and the customer service committee. In another PSU bank board, a Congress leader from Madhya Pradesh has not spoken even once so far. On some other PSU bank boards, these party workers have been known to even canvass for loans.

This being the state of corporate governance, it’ll be a long time before Sebi can hope to implement even the barest minimum standards.

India Inc’s Litmus Test

CRACKLING PERFORMANCE, RECORD EARNINGS, and global footprints. Clearly, the Indian corporate sector has a lot to preen about. The past few years have been marvelous for top-rung companies. But, Corporate India now enters an uncertain phase and its performance will be under close scrutiny. If the soothsayers are to be believed, then the Indian economy might be in for a wee spell of economic gloom and despond. Hypotheses from optimists (including stockmarket analysts) contest this fiercely, but the consensus is there could be slightly tougher times ahead. And, this time — perhaps, more than ever before — the corporate sector’s endurance levels will be severely tested.

The betting is that the economy will continue to grow, but probably at a slower pace than the one experienced over the past 18 months. What will, however, hurt is this: prices of various products will be up and so will interest rates on a variety of consumer loans. A wide spectrum of consumables — especially, food items and other products of daily consumption — is already more expensive than, say, six months ago. A brutal increase in interest rates for a broad array of consumer product loans — such as cars and TV sets — has already slowed down sales of these items. People are also deferring plans to buy new homes.

So, how will the corporate sector respond when the juggernaut slows down? Will it increase prices till a low-cost competitor pulls the rug from under its feet or will it increase capacities to sell more? Many classical management and economic textbooks say that the best time to build capacities is during a downturn. The April edition of The McKinsey Quarterly has an article titled “Preparing For The Next Downturn” which looks at some of the practices adopted by companies that came up tops during the last recession.

The authors then distill a short list of common attributes that helped these companies prepare themselves and emerge as leaders during the dark days. These are: lower leverage on balance sheets, better control on operating costs, diversified product offerings as well as business geographies.

From the looks of it, India Inc’s creamy layer seems well in control of all the four parameters. Sure there will be some body-bag cases, but chances of survival for large parts of the corporate landscape seem pretty high.

Rule One requires that companies lower the leverage on their balance sheets during rough times. What this means is companies entering a slow-down with lower levels of debt have a better chance of surviving the slump than their peers and competitors. Fortunately, many Indian companies have already done this, thanks to a long-ish regime of low interest rates worldwide. Many Indian corporates took fresh loans at lower rates that they then used to repay the older and more expensive loans. Many when even a step further: they went to the market with an equity issue and used part of the proceeds to repay the entire loan. So, today large parts of India Inc looks squeaky clean.

There’s a corollary here. A clean balance sheet helps companies achieve greater financial flexibility. Especially, when during a slowdown the leaders are looking for acquisitions and lenders (typically banks) get extra cautious about lending. According to the McKinsey article, which is based on a survey of some 1300 US companies, the better performers clearly spent more on both capital expenditure as well as M&As during both lean times as well as boom periods. And, it was cleaner balance sheets that really afforded them this enhanced agility.

Corporate India seems to be well on track with the other three parameters as well. It used the intervening period to improve the productivity and efficiency of its manufacturing and service processes. What helped in addition was competition from global imports and products. Many companies also score well on the diversification of product offerings and business geographies — Tata Steel, pharma companies and the auto component sector have developed a global footprint over the past few years.

There’s one dark cloud though: how will the banking sector tackle the imminent slowdown? If the corporate sector has been able to emerge stronger, more resilient from the past few years, there might be a lesson in it for even the banking sector - a dose of globalisation could actually turn out to be a live-saver.

Of Archaic Laws & Booby Traps

ANTI-MINE ACTIVISTS and organisation around the world should include India in their list of contaminated countries. Not because the Naxalites are reportedly booby-trapping large swathes of Chhatisgarh with these subterranean explosives. The expertise of anti-mine activists in weeding out live UXOs – or, unexploded ordnances – might come in handy for defusing large chunks of Indian corporate legislation. Many Indian Acts are full of landmines and present potential threats to enterprises and investors.

Look at the Securities (Contracts) Regulations Act. There is a provision in the Act that forbids two parties from entering into a private deal on futures and options. All such contracts have to be transacted on the designated stock exchanges. Therefore, if you have an agreement with your partner to buy back his shares three years hence at a price determined now, which is a kind of an options deal, the courts can rule that the agreement is null and void, ab initio. This absurd rule, otherwise known as Sec 18A, states: “Notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be legal and valid if such contracts are—(a) traded on a recognised stock exchange; (b) settled on the clearing house of the recognised stock exchange, in accordance with the rules and bye-laws of such stock exchange.” But for the provision to kick in, the courts have to intervene. And for that to happen, somebody (ideally one of the partners) has to go to court.

Ideally, a shareholders’ agreement is like a contract and once two parties sign on it, it becomes binding on both. But, hey, wait a second…here’s an escape route called Sec 18A, provided courtesy GOI and free of cost. And the crucial words are: “Notwithstanding anything contained in any other law for the time being in force…” So, if you signed a deal with your JV partner in a hurry, and want to extract more out of him now, you now know where to look.

Add to this another joker in the pack, Foreign Exchange Management Act, and the Indian corporate landscape resembles a veritable war zone, pocked with undetected landmines. FEMA states that in the case of unlisted shares, the “fair value” has to be worked out as per the erstwhile Controller of Capital Issues. This is strange on two counts: one, the Reserve Bank (which administers FEMA) insists on flogging CCI, which was abolished way back in 1991-92! Also, if it’s an unlisted company, why should anyone bother?

The recent Vodafone purchase of Hutch almost came unstuck because of these rules. Vodafone, after buying out Hutch’s 52% in its Indian operations, wanted to buy out the 12.26% held by Asim Ghosh and Analjit Singh for $430m, according to a pre-determined valuation. Immediately, there was pressure on the government to stop the deal. Reason: its pre-determined prices are essentially null and void. FEMA also kicked in. Fortunately, the Foreign Investment Promotion Board (FIPB) cleared the deal on Friday.

Here’s another interesting case. A few months ago, Narotam Sekhsaria sold off his stake in Gujarat Ambuja to Swiss cement company Holcim. As part of the deal, Mr Sekhsaria also made Ambuja sell off its stake in Ambuja Cement India, an SPV that held Gujarat Ambuja’s stake in another cement major ACC. Under the agreement, Ambuja is to sell off its stake in ACIL in three tranches of 9,53,7500 shares each. The first transaction, completed in the first quarter this year, was struck at Rs 55 per share. Now comes the clincher: the pricing for the next two tranches (to be completed on April 30 this year and April 30 next year) too has been determined (at Rs 56 and Rs 61 per share, respectively). This is like an options contract and can be taken to court by Gujarat Ambuja minority shareholders.

The pact between Holcim and Ambuja for transfer of ACIL shares, at pre-determined prices at a future date, constitute an options contract and can be held to be null and void. The lawyers would have surely wrapped the contract with overseas arbitration clauses and guarantees from various multinational banks. But the minority shareholders might not take to this too kindly. Especially since Gujarat Ambuja had to bear huge interest costs on loans taken to fund the ACIL equity during the ACC acquisition. Now that cement stocks are doing well, they end up with peanuts.

But, guess, who is making the most of all this confusion? It’s a breed called lawyers.

A Case Of Mixed Ethics At Mint Street

IN THE FINANCE ministry or the Reserve Bank of India, rules for banks are decided on the basis of their shareholders. In other words, parentage determines the rules for a particular bank.

True, this is not applicable for all banking operations. Stuff such as the mandatory liquidity ratios, provisioning norms and risk weightages for different asset classes are uniform for all banks. So are a host of other operational details. But the bullet starts biting when it comes to corporate governance norms. One of the areas with the widest divergence is the role and designation of chief executives and the selection of bank directors. Two recent examples highlight the discrepancy in bank governance norms.

First, the government recently asked all listed public sector banks to halve the number of shareholder directors and replace them with government-nominated ones. The second example is the recent public —and rather petulant —exchange between UTI Bank CMD PJ Nayak and RBI. Here’s the spat in short: The bank’s board wanted to re-appoint Mr Nayak as CMD, but RBI put its foot down and said the post had to be split into two — a chairman and a MD. At this point, Mr Nayak told the board that he would continue only as CMD, since “having spent 7.5 years as CMD, it would not be possible for him to function in a different and lesser capacity in the bank and he will, therefore, cease to be associated with the bank after July 31”. This was stated in an announcement to BSE.

The public airing of differences occurred because of the varying rules that exist for different banks. Take public sector banks first. The board composition of these banks is determined by the Banking (Nationalisation and Acquisition) Act, 1970 and 1980 — two archaic pieces of legislation that were drafted for a specific purpose at a particular period in time (mass-scale nationalisation of private banks in two tranches). The Act has undergone several amendments, but one feature remains unaltered: all PSU banks must be headed by a chairman-cum-MD. The only exception is State Bank of India, which is governed by its own Act. For a variety of curious reasons, the government, as the largest shareholder of PSU banks, and RBI (as regulator of banks) have refused to split the posts.

On the other hand, all private banks have to compulsorily appoint a non-executive chairman and an executive CEO or MD. There could be legal reasons for this — these banks are not governed by the antiquated Act mentioned above, but by the Banking Regulation Act. If you look at the boards of most new private sector banks, the chairmen are usually appointed in a non-executive capacity (and are mostly retired senior RBI officers) while the chief executive is the main executive for driving the bank’s growth.

The story is completely different with foreign banks. To start with, foreign banks are regarded as branches of their parent organisations. For example, American banks in India are usually branches of their parent organisations in the US. This peculiar structure is to make the parent liable for any big risk event here. The parent’s capital is then directly committed to the bank’s operations in India, which acts as a safety cushion. This also has a bearing on the board structure. Foreign banks, since they are not incorporated as legal entities, do not have a legal board. They are allowed only an advisory board, which is headed by a non-executive chairman, usually a senior retired bureaucrat.

RBI appointed two committees in recent times to take a look at corporate governance in banks and financial institutions. The first, headed by RH Patil, among other things said: “…any steps to improve corporate governance in the Indian economy would remain incomplete and half-hearted unless public sector units are also covered in this exercise”. The second panel, headed by former HLL chairman AS Ganguly, in fact, went a step further and noted, “It would be desirable to separate the office of chairman and managing director in respect of large-sized public sector banks. This functional separation will bring about more focus on strategy and vision as also the needed thrust in the operational functioning of the top management of the bank”.

However, despite suggestions and the evident infraction of ‘desirable’ governance norms, the government and RBI soldier on in their belief that the goose and the gander need separate sauces.