In good faith

Promoters of companies who have caused serious wealth destruction should voluntarily step down as managers

Small investors depend on four pillars of the capital market to shield them from the headwinds of governance missteps. Auditors are the gatekeepers who ensure that the numbers provided by the companies are accurate and complete. They are supposed to flag off any divergence in the standards prescribed for book-keeping. The market regulator is trusted to crack the whip when the dissemination of information is asymmetric and prices are manipulated. Institutional investors are expected to form a bulwark against corporate actions that benefit the promoters against the ordinary shareholders. The board is at the pinnacle of the pyramid for the power it wields and responsibility it shoulders. The directors are the representatives of the ordinary shareholders to steer the company to create wealth in an ethical and transparent manner. Being the first responder to any crisis within the company, half of them have to be appointed from outside to maintain their independence. They are many known episodes of how seriously these custodians of investors’ confidence take their role. The most widely recounted of course is the firing of Apple co-incubator Steve Jobs after a showdown with CEO John Scully over the pricing of the Macintosh computer. The most recent is of the board ejecting Elon Musk, the electric vehicle pioneer, from his position as chairman after he recklessly tweeted his intention of taking the company he built private. In the process, he triggered an investigation for fraud by the FBI and had to share half of the US$40-million fine slapped by the Securities and Exchange Commission.

Several owners have been fired for poor performance. David Neeleman, who started the discount airline JetBlue, was ousted as CEO after the carrier cancelled 1,700 flights and stranded 1.30 lakh passengers during a winter storm on the east coast. The fiasco cost the airline about US$22 million, capping two consecutive years of losses. Yahoo co-founder Jerry Yang had to step down as CEO for turning down a US $45-billion buy-out by Microsoft and Google walking away from an ad-revenue-sharing plan. The men behind Research-in-Motion Mike Lazaridis and Jim Balsillie, were the casualty of a management shakeout after the struggling Blackberry-maker lost market share to rivals Apple and devices run by Google’s Android software. Comparable examples are rare in India. Chanda Kochhar, from whom the board has demanded back her compensation after an independent probe panel believed the loan to the Videocon group stemmed from her husband’ business ties, was the MD and CEO of a bank with diversified holdings. The sacking of the first non-family chairman of Tata Sons, Cyrus Mistry, and the departure under pressure of the first non-promoter to head Infosys, Vishal Sikka,are not comparable. While Mistry’s family is the second largest strategic investor, Sikha was a professional manager. So also was Ashok Leyland’s MD who was denied another term by institutional shareholders annoyed with his pay package.

The closest parallel is the abrupt resignation of Binny Bansal, one of the two entrepreneurs who started e-commerce giant Flipkart, following an internal investigation into an allegation of “serious personal misconduct”.  He, however, remains a director and  a shareholder. Earlier, business partner Sachin Bansal had a bitter fall-out with the then board during stake-sale talks with US retailer Walmart.  Promoters, otherwise, are gently reprimanded for corporate actions such as unfavourable share-swap ratio during restructuring so to give them greater control at below market price or related-party transactions. They are given a chance to rectify and provide assurance of good behaviour.  Mutual funds and foreign investors prefer to exit rather than get involved in a long-drawn fight that saps the stock’s valuation in the meantime. Of late, even their sell orders are prompting a corrective action. In took just a day for the parent of Jubilant FoodWorks to roll back the proposal to charge a royalty for usage of brand. The huge destruction of wealth in Sun Pharmaceuticals, DHFL, Zee group companies, ADAG companies and Jet Airways would not have been tolerated elsewhere. The distributor of Sun products was a relative. Issues of opacity have followed DHFL. Zee’s backers leveraged the healthy performance of their group companies by pledging shares to raise funds for unrelated activities and Anil Ambani piled on debt in his quest for dominance. Until lenders stepped in, Jet’s controller was unwilling to let go even if it meant unpaid salaries, default on loans and grounding of planes. The promoter-managers of these companies will set an example if they quit from the driver’s seat.     

 

-Mohan Sule

The josh is high

The interim Union Budget 2019 is as much a report card of the past five years as it is a statement of intent of the Modi 2.0 government

Who knows the importance of messaging than the master communicator Narendra Modi? The prime minister has fully used the spectacle of the presentation of budget, even a truncated version, to present his report card. The success of Swatch Bharat, last-mile electricity connectivity, thrust on solar power, auctioning of natural resources, attack on shell companies through recall of high-value notes, unveiling of a uniform indirect tax code, an insolvency law that facilitates disposal of assets and regulation that makes property developers answerable to buyers were some of the big scores. An interim budget does not have the expansive canvas of a full-fledged exercise. The restriction did not hamper acting Finance Minister Piyush Goyal from projecting a prosperous and healthy New India built on a foundation characterized by spending thrift, targeted expenditure and broad-basing of taxes. The tone was set by the repeated emphasis on inflation as low as 2% compared with the 10% average in the 10 years of the UPA government. The feat of keeping prices subdued, it was implied, is a bonanza than a relief. The last term’s focus was tackling headwinds of two consecutive years of drought and the subsequent crop output glut, policy paralysis and crony capitalism. Now the time had come to prepare a blueprint to accelerate the momentum of the fastest-growing economy in the world. The blanket of social security, affordable homes, an extensive road and flight network and cheap data will embolden spending and spur creation of jobs as will higher allocation for infrastructure and the rural employment guarantee scheme.

So far the comfort of pension was restricted to the public sector. The National Pension Scheme has opened up access to retirement saving for the organized sector. The goods and services tax will expand the share of formal employment but not completely eliminate the unorganized sector. Covering the casual workforce will complete the triad that that also comprises universal health and life insurance. It will deepen the pool for issuers of debt. The trinity of Jan Dhan Yojna, Aadhar and Mobile has created a framework to identify the recipients of social schemes. The monetary back-up to the small farmers, in addition to interest subsidy during calamities and on timely payment of loans, puts money into the hands of those in distress. Many are outside the system to qualify for loans. The snubbing of across-the-board farm loan waivers is an unambiguous signal that reckless populism cannot be at the expense of repayment discipline, particularly when defaulting promoters are losing control over their companies. Supplementary measures such as crop-damage compensation and hike in minimum support prices to 1.50 times the cost of production for all 22 staples are temporary solutions specific to the situation.  The cash infusion is likely to be a precursor to a bigger policy decision of universal basic income that substitutes all subsidies including those on fertilizers and fuels. The unmistakable theme of the budget is prudence rather than profligacy. 

Support steps have been calibrated to trigger consumption. The rebate on taxable income up to Rs 5 lakh per annum can be drawn even by those in the higher bracket by making full use of the varied exemptions available. Investible funds and surplus will find their way into savings instruments of mutual funds, government and insurers. The liquidity will boost the capital markets. Buybacks by IOC, ONGC and CIL will go to meet the current financial year’s divestment target of Rs 80000 crore. Ten PSUs will offer shares worth Rs 90000 crore in FY 2020. Another deserving beneficiary is the new streamlined real estate sector, one of the biggest employment generators. Despite being an election year, the focus of the stimulus is on insulating the growth momentum from the inevitable company of spiraling borrowing rates by allowing only 0.1 percentage point slippage in fiscal deficit. A manned space odyssey to the moon is as much a reiteration of our scientific capability as it is a pronouncement of readying to take off into the next growth orbit after putting in place safety nets for citizens. For the first time has any Indian government looked beyond short-term challenges to offer a sweeping view of how it will shape up the next decade. Elimination of human interface while filing tax returns in two years provides a glimpse of an India that harnesses the vast coastline without degrading the environment, deploys automation to ease living as well as to generate employment, attains food and infrastructure sufficiency alongside free healthcare and empowers citizens with minimum interference under the rule of the law. The Modi 2.0 government promises to be an even more exhilarating journey.

-Mohan Sule