LIC’s investment in ITC: Are we trying to cure small symptom by ignoring bigger disease?

Court’s acceptance of PIL filed by group of citizens against GoI and Govt. backed insurance companies has created the ripples much like when stone is thrown in the water. But this stone (Filing PIL) may be bigger than one thinks, resulting into bigger, far fetching and unsettling ripples in India.  The PIL filed in Bombay high court raises issue regarding significant investment into ITC company which has major source of profit from cigarettes which causes various types of cancers & eventually casualties in India. It makes a point that it looks unethical & against the law that GoI & its insurance companies are invested heavily in tobacco product company which leads to health issues in massive scale.

The turmoil I face: I confess honestly that the great amount of turmoil was created in my mind ever since I started reading about this. The biggest question in my mind is why the entire India (Media, activists, investors’ lobby, Companies, GoI etc.) is so narrowly focused on this single issue of govt. investment in tobacco product company.

I seek to address below two arguably more fundamental questions in the backdrop of above issue;

1. What is exactly an issue here? 

2. Are there no other larger dimensions we can think of deriving from this particular issue?

1.   What is exactly an issue here? :  Is government’s investment in tobacco product company an issue here? Or is government‘s investment in tobacco product company look unethical & against the law in the eye of broader society, that is an issue here? Or Are insurance companies which protect life investing in tobacco product company which destroys life that is an issue?......We have been made to believe (With the help of media & the cause of PIL) that, the issue is GoI should not fund (invest) in the tobacco product company which may lead to the cancer and untimely death of many as Govt.’s job is to protect the citizens & provide better healthcare to them. With narrow focused mind we can say this is the real issue but I feel none of the above is real issue. We all (not only the govt.) as a nation have failed to stop tobacco consumption which may lead to various types of cancers and consequently huge casualties. This failure in spite of having extensive planning & strategies to reduce tobacco consumption is the real issue in the above context.  The anger of not succeeding into the mission of tobacco consumption reduction has led to file PIL from various parties involved. While the anger is true & justified in some sense but that PIL is not going to put the break on tobacco consumption in India which is the real issue.

Just think from perspective of below line of questions;

•   Let’s say govt. sold all govt. backed investments (around 32%) in ITC in secondary market (Stock exchange) which is bought by other non-govt. entities…..will this change of ownership lead to reduce consumption of tobacco & deaths caused by it in India?  Will this change the current scenario? 
• What is causing cancer? How much different Tobacco products-Cigarettes V/S chewing tobacco products have impact on causing the cancer? Is nicotine a most prominent chemical agent causing the cancer?(In that case we have to be worried about all those non- tobacco products which has nicotine in it). Various medical researches & articles throw light on this aspect but many are still not conclusive. 

2.     Are there no other larger dimensions we can think of deriving from this particular issue? Based on above issue some of the dimensions I would like to touch upon are;

Ø Role of Tobacco production

Ø Extreme narrow focus on tobacco products only

Ø Regulations & socially responsible investments

Role of tobacco production: Are activists against cigarettes only which are generally more hazardous & cause cancer or tobacco which is generally considered to be key contributor to many types of cancer? Logically we should be after tobacco. If we are against tobacco which is major ingredient for cigarettes and other tobacco chewing products, then the concern is not about govt.’s investment in ITC & other cigarette making companies but how(and why) we are silent about existence of ‘Tobacco Board’ which is under Ministry of Comm. & industry, Dept. of Commence, GoI. When India is 3^rd largest producer of Tobacco and nearly earns $ 1 Bil. in the export revenue placing our anger only on cigarette makers, don’t you think is completely unjust & misplaced. When board & ministry are actively promoting tobacco production & because of higher demand more & more farmers are opting for tobacco production how does any policy or any healthcare initiative or protesting outside the HQ of cigarette makers, justify anything in this country! If we are truly concern about growing no. of casualties (around 1 Mil. people die due to tobacco consumption) then why can’t we completely ban tobacco production or cigarette selling in India like Bhutan and Turkmenistan( the practical brain will say there are more than 200 industries which are surviving due to tobacco related business, India will lose ton of revenue & many more reasons to not ban). Then why we keep on blaming cigarette & Gutka makers only, they are not forcing consumers with the gun on their head to buy their products. Consumers with full knowledge of the potential causes and in their right sense buy these products.

Extreme narrow focus on tobacco products only: Though bit older data but many causes of deaths come before cancer caused by specifically tobacco consumption. What have we done to stop top 10 causes of death in India. There are no answers to the questions like why so much of media frenzy about the above issue only? Why are we only after tobacco( Cigarettes & gutka)? Because these are the soft targets. Preventive & curative healthcare & safety system should be designed by keeping in mind top 10 causes of deaths in India.

Regulations & socially responsible investments: Simplest tool in financial economics to control or demotivate the set of activities or businesses, is by reducing money supply to it. Strengthening of existing regulations at state level, country level and international level to make these businesses commercially difficult or unviable will go a long way in reducing tobacco product & consumption both. As India is signatory to World Health Organization’s Framework Convention on Tobacco Control (FCTC) which restricts India from investing in tobacco business this investment may look like breach of this treaty. Recent step by Health ministry asking finance ministry to divert govt. investment from tobacco product company is welcome but very late step.

Socially responsible investments: In the world of investment & funding, socially responsible investment is still a recent phenomena especially for the country like India. Under socially responsible investments, investment companies and even lending companies take pledge to invest or lend to those entities which are high on their social responsibilities like more environment friendly, less carbon emitting, pro-healthcare products, processes etc. Entities which are negatively impacting the environment and contributing directly or indirectly to health hazards of the workers, consumers etc. do not receive any investment under socially responsible investment objectives. I feel time is ripe to boost socially responsible investments as an ideology & objective especially in emerging countries.  If investment & lending community starts critically raising these issues, it can send very strong single.

My brain says when company like ITC which has such a stellar return on investment & decent dividend record and has been darling of institutional investors (Domestic & Foreign) for a long time, govt.’s stake sale from ITC is not going to change the scenario drastically. But my heart says that subsequent debate which is generated due to act of filing PIL may lead to creation of tightened regulatory and socially responsible investment environment in India for taming tobacco production & consumption eventually.

Mutual funds are subject to corporate governance risk!!!

“Mutual fund investments are subject to market risk….” we all hear, read and see this time & again which is statutory requirement for mutual funds as per SEBI guidelines.(SEBI has reviewed advertisement guidelines for mutual funds in India) Apart from above disclaimer for investors one more disclaimer should be there stating that AMCs managing mutual funds are also subject to corporate governance risk! Because against the popular belief that mutual funds act and behave in the best interest of their investors, (by acting on clearly pre-defined investment objective and policy) quite often mutual funds behave with vested interest. In this blog, I am focusing on mutual funds that play foul on followings fronts; 

1. Not voting against the management of the investee companies

2. More than cozy relationship between mutual funds & companies

3. Unequal treatment towards various types of investors by mutual funds

1. Not voting against the management of the investee companies:

Current Scenario: Shareholder activism is very fancy word for the country like India and rarely practiced in India even by so called big institutional investors. As per SEBI guidelines,every AMC has to disclose their voting records to investors. Since first set of SEBI guidelines came in 2010 not much has happened on this front. Special Report on Mutual Fund Voting Pattern 2013 Analysis by ingovern (corporate governance research & vote advisory firm) shared some interesting facts like only 1.5 % of total resolutions put forth in 2012-13 were voted against by mutual funds. Back to year 2016-17, as per this article scenario remains more or less disheartening. Indian mutual funds giants like ICICI Prudential mutual fund, HDFC mutual fund, Birla Sunlife Mutual fund, Reliance mutual fund etc. also has dismal number to show.

Drivers behind current scenario:

1. Conflict of interest: If you observe, giant mutual fund houses in India have sponsor & trustees as banks or financial institutions. Certainly mutual funds would not like to take substantial business risk by voting against the management decision of the companies in which it has bought equity shares, as these companies might be bringing business in terms of borrowing from sponsor bank or investing surplus capital with sponsor bank or with other schemes of same mutual fund or bringing advisory, broking, fee- based work etc. kind of businesses to the parent company.

Example: Case of Maruti Suzuki’s related party transaction vote was quite contentious for the inventors. Let’s say XYZ mutual fund (which has sponsor as bank) has bought equity shares of Maruti Suzuki. Now in this case voting against the management may trigger unwillingness of Maruti Suzuki for future borrowing from the bank also if Maruti Suzuki has invested its’ surplus money with same XYZ mutual fund’s liquid scheme it may also loose a business & if in future Maruti Suzuki may come up for any financial activity plan like bond issuance, M&A, FPO etc. it may not prefer to give some part to this bank or related entity. On a similar line you can think of voting on Vedanta-Cairn merger issue, removal of Cyrus Mistry from board of Tata group of companies and so on.

Interesting to observe, foreign mutual fund houses like Franklin Templeton Mutual Fund etc. which do not have any other business in India besides running mutual fund has been quite vocal about taking stance against management decision by voting against them many times.

2. Further tightening of SEBI Regulation:  Currently SEBI guidelines allow mutual fund to abstain from vote on any management decision in the investee company. Many mutual funds are taking unfair advantage of this by abstaining from the vote instead of voting in favor or against, so they stay clear of any controversy or question from unit holders (actual investors in mutual fund).

2. More than cozy relationship between mutual funds & companies:

Current Scenario: Unfortunately many cozy (read favorable) relationships between mutual funds & investee companies are nicely swept under the carpet in such a way that many times not only small retail investors in such mutual funds but also regulatory bodies are also unable to smell it. Many mutual funds’ various debt schemes indulge in such “mutually beneficial” relationship where mutual funds lend via different routes & forms to highly risky companies. Case like Amtek auto and others points towards mutual funds’ deliberate inactions at initial stage. Many times behind the curtains the nexus of promoters, operators (brokers) and mutual funds with vested interest is the only (but very strong!) reason for buying shares of some really spurious companies. I have sensed many of these, based on my professional work experience in Indian financial markets. The investors who are completely unaware and face huge but hidden risk out of these kinds of mal-practices, are investors like you & me (the retail investors).

Drivers behind current scenario:

1. Lack of stronger disclosure norms for mutual funds: Since the inception of mutual funds in India till date, SEBI has done commendable job of tightening the norms & regulations of mutual funds. But history suggests that as the norms increase, the ingenious ways of flouting such norms has also increased. More stringent disclosure norms with more frequent time interval disclosure can give tough time to ethically weak fund managers.

2. Lack of knowledge & interest from unit holders: For any mutual fund, their unit holders are primary clients. These unit holders are many times incognizant of basic rights that they have. Also knowledgeable investors don’t demand the important information from the mutual funds they are invested into. This kind of unquestioning & trusting attitude from retail investors (and many times by bigger investors also) leads to many ethically and sometime legally questionable practices by mutual funds.

3. Unequal treatment towards various types of investors by mutual funds:

Current Scenario: This third dimension is most unknown to many retail investors. Many mutual funds unethically put the interest of one class of clients above another class of clients. For example for equity & debt funds cut off time to get same day NAV (Net Asset Value) for the investment is 3:00PM. If you as an investor applies before 3:00PM on any given day & money is deposited/transferred in mutual fund account before cut-off your investment is made at the close NAV of that day but if your transaction happen after 3:00PM then your investment will be considered on next day’s NAV & not on same day NAV. Here bending of the rules happens in favor of bigger clients (like corporates , institutional investors etc.) I have eye-witnessed, in many schemes (especially in liquid schemes) it happens mostly that even if big clients place buying application after the cut-off time, they are given favorable NAV rather than next day’s NAV which is applicable. Favorable clients (read bigger clients) are given chance for ‘Late trading’. Similarly, at the time of redemption of investment from mutual fund favorable treatment to bigger clients is given especially in case of unusual circumstances. The rumor did rounds at the time of rating downgrade of Amtek auto, that specific mutual fund allowed some set of institutional investors to redeem their investment before officially imposing redemption limit to all the investors in those schemes.

Drivers behind current scenario: Retail investor is the biggest victim in this as by no means he can come to know about favorable treatment given by mutual funds to bigger clients.

1. Lack of strong penalty & disclosure norms: Imposing strong penalty to those who are directly responsible (many times fund managers do not know but relationship managers & sales teams in order to get corporate business silently do this) & also penalty to the mutual fund should come into force.

It is high time that regulator be more proactive rather than reactive to many mal-practices prevailing in the mutual fund industry. This paper brings interesting insight as to how corporate governance at mutual fund might need different treatment than other corporate bodies. Retail investors can no longer live under the mercy of regulator. Being more vigilant & knowledgeable with the dose of client activism is what needed for Indian retail investors to remove the tag of ‘victim’!

The Flipkart saga: VC in driver’s seat part-2

In the last blog, I touched upon what it means for Flipkart when its founders are not at driver’s seat. It would be interesting to see how this change of leadership at Flipkart may shake-up other start-ups & the larger start-up ecosystem in India.

Impact on other start-up companies: 

The CEO level changes are not happening only at Flipkart but many other young companies are witnessing the same. The impact can come in following ways;

I. Wake-up call for founders: The message loud & clear for the founders of the VC-backed start-ups in India is to show the results than promises. Founders may increasingly face pressure from investors to rework on their break-even estimation, to generate better revenues, reducing the cost, put more stress on cost cutting & control, rework on scale-up or expansion strategies etc. VCs may become more vigilant about their investment in Indian start-ups and may take a look at current valuation figure for their start-ups. If founders don’t want to see the Flipkart story getting repeated at their own start-up, then they may have to bring more professionalism, more focused approach towards achieving profitability & maintaining it with decent rate of revenue growth.

II. More professional hiring at top level:  Since founders may lack required experience to handle some of the business operations and rising pressure from VCs after Flipkart incident, it may lead to more hiring of professionals for top management positions to convince investors that founders are ready to give up on some control for betterment of the firm.

III. No easy availability of new capital: This may put a break on easy rounds of fund raising, which was frenzy earlier. In the light of changes at Flipkart and sudden heightened vigilance from VCs, many start-ups may find reluctant investors to invest further equity and even if Investors are ready to invest in next round it might be at marked down (lower) valuation. Due to this adverse scenario playing out where suddenly investors are skeptical about further investment in the start-ups unless the good results are shown, many small start-ups (which has similar business model) who are surviving on the investors’ money may get suffocated & eventually chocked to death.

Impact on the start-up ecosystem in India: 

Indian start-up ecosystem may feel some shake-ups and jolts after changes at the market leader in e-commerce business. The impact may be visible in following ways;

I. loosing sheen in the Job markets: Push for cost cutting may lead for lower recruitment requirement from start-ups. Subsequently, the job market in India which has witnessed huge demand from start-ups for last couple of years may dim significantly. Contribution from start-ups towards new job creations may get hit due to pressure on cost reduction. Also many start-ups are already slashing existing jobs which may add some trouble to the job market.

II. Prolonged wait for start-ups to enter Indian IPO market: IPO market in USA is going hysterical on announcement of Snap Inc.’s (maker of Snap chat App) IPO which is start-up. Initial figures are showing it is valued between $19 Bil to $22 Bil. Indian IPO market & investors can just be envy of this. Indian IPO market may not see in near future entry of any big Indian start-ups heading for IPO route.  Many stake holders in Indian IPO market like merchant bankers, I-bankers, Legal advisors, distributors, Brokerage houses, Retail & institutional investors etc. who are expecting their business to zoom up due to start-ups entering into IPO market, may have to pray for better financial health of Indian start-ups to reach a stage where they can go for IPO. For many big Indian start-ups which are daydreaming for IPO, the increased vigilance & tough demands from investors (VCs) due to invisibility on sustainable profitability coupled with scalable venture, the dream looks distant.  

III. Some rejig of Indian start-up ecosystem:

1.Shying away from VCs & other tough investors: Having seen how Flipkart & other stories are playing out at this juncture, founders of many new start-ups may shy away from going to VCs for raising capital. But I believe this phenomenon is temporary in nature, eventually if start-ups are lacking capital to fund their expansion needs and if it has capabilities to convince VCs then it might go ahead and take VC or other investors’ funding as we know in true sense there are not much of venues (though theoretically there are many venues) where star-ups can go and actually raise the capital.

2.Focus may shift towards being differentiators rather than being ‘me too’ start-ups: For upcoming entrepreneurs who are smart & observant will take a note of what is going around with Indian start-ups. After witnessing the struggles of many existing start-ups to cross break even after years, psychological shift may come to start a start-up which is focused on differentiators (through innovation or by doing things differently) which may have higher chances of break even than focusing on yet another similar product/service –oriented start-up. Also pragmatic founders may focus more on working out sustainable & profitable business model instead of focusing on singular pieces of their business.

Apart from these aspects, many more interesting and important aspects are there in the context with Indian start-ups & ecosystem which are not covered here.

Note: VC/PE taking the control of the firm is not necessary bad signal always. If it can create win-win scenario for all important stakeholders of the firm then sometimes it might be desirable!

The Flipkart saga: VC in driver’s seat part-1

Who thought that there will be a day when a relatively young company (started in 2007) called Flipkart could dwarf big companies like Nestle India, Dabur India, Godrej Consumer etc. in terms of company valuation based on market cap. As per many media news in 2015, Flipkart was valued at around $15.2 Bil. However, current reality is strikingly different. Investors like Morgan Stanley and other have done consistent mark down on the valuation of the Flipkart during the year of 2016.The latest valuation of Flipkart may be around $5.54Bil, which is around third of what it was valued in year 2015.Though this kind of gyration in the valuation figures for start-ups/young companies is nothing unusual but after such drastic mark down on valuation when announcement came that Tiger Global the largest investor (owns around 35% in Flipkart) appointed Mr. Kalyan Krishnamurthy as CEO of Flipkart, it has sent some strong signals.

Let me try to do quick analysis of this announcement in two parts;

Part-1: its’ impact on the Flipkart.

Part-2: Its’ impact on other start-up companies and on start-up ecosystem in India.

Impact on Flipkart :

Move over from founder to the professional:  

Flipkart the e-commerce market leader in India is going to witness for the first time the change which comes from the professional (Mr. Krishnamurthy) managing company as compared to the co-founders ( Bansals) managing the company. This may lead to for sure some organizational cultural and hierarchical rejig. Instead of focusing on vision, mission, higher level strategies and some larger than life goals (which are generally propagated by founders to all the stake holders) the focus may shift to growth drivers, sales, cost control, loss reduction, efficiency, execution etc. Companies are reflectors of their leader’s personality, attitude, approach etc. and Flipkart is no exception to this. Many key positions roles may face restructuring, some may be shown the door and new recruitments may find the way in. I think the key slogan at the Flipkart after the change of leadership is going to be “we mean business”.

More focus on sustainable turn around:

I think the job of Mr. Krishnamurthy as new CEO of Flipkart, will be cut out to maintain market leader position in the India along with sustainable turn around where focus will be on sales and bringing firm into profit. In this case, it seems sustainable turn around and scaling up of business is going to be two very important ingredients for future higher valuation. Lee Fixel who is Tiger Global head of PE & VC operations would eventually be interested in selling his stake in Flipkart at some eye-popping valuation figure and pocketing the exorbitant profit. In order to fulfill Lee Fixel’s dream Flipkart first has to reach such a high valuation figure. To reach high valuation number Flipkart has to allure and attract equity investors to invest in the company at higher marked-up valuation which will be cyclical and lead to further higher valuation of the firm. But to convince new equity investors to invest in Flipkart is going to be anything but easy from now on. Assuming new equity investors will be more critical evaluators of Flipkart after it has gone through rough patches before making further investment, Flipkart has to prove under new CEO that it is sustainable turnaround story in the largest market, where focus is not only on sales but also on profitability. This is what new CEO’s role might be at Flipkart. If this does not go right, it can spook the idea of bringing IPO at high valuation in future which generally works as exit gate for many VC investors. 

The above flow is represented diagrammatically as below;

Bad NPA is a symptom not a disease!!

It generally happens quite often that we try to cure symptoms rather than the disease and believe that the disease will go away. Same is the case with many of public sector banks’ rising Non-Performing Assets (NPA). When most of the media & experts are fixated on “NPA” trouble, much less attention is paid as to what has caused such escalating NPA situation in first place. In true sense bad NPA is symptom which is reflection of the disease called “Nexus of bad credit analysis habits & outdated credit analysis and appraisal processes with poor loan monitoring, hyper competition among banks (aggressive lending practices), political pressure on public sector banks to clear the loans and bribe for the loan”. Main focus in this bog is on bad NPAs which are created because of any of the above reasons. Good NPA is genuine case of company which is struggling to repay the loan due to some external and internal business factors. Imagine that you have taken a loan from bank and after sometimes for some reasons you are unable to pay EMI for 3 months, then your loan will be called NPA. Further, banks are required to classify NPA under sub-categories which are; 1. Substandard assets (If EMI is not paid for 12 months or less), 2. Doubtful asset (If loan remains as substandard asset for 12 months), 3.Loss asset (As per RBI, "Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted”). I shall try to highlight the bad NPA disease and possible cure for it.

1. Bad credit analysis habits & outdated credit analysis and appraisal processes with poor loan monitoring: When RBI governor himself stated that laxity in credit risk appraisal and loan monitoring is one of the reasons for rising NPA, he was just re-confirming & accepting what everyone knew for years. By no means am I saying that only public sector banks (PSBs) have bad habit of credit analysis & appraisal with poor loan monitoring. Many of private banks are also burying the credit analysis &appraisal process. We all have received calls from private banks for pre-approved loans or instant loans and what not, the question strikes me have they done proper risk analysis & appraisal in each of this case? PSBs which are known for its laxity this problem is much bigger. Many of the credit analysis processes are outcome of bad habits of the person in charge for credit analysis and appraisal. Many of the PSBs are still in love with typical financial statement analysis (majorly done through various financial ratios) and to an extent 5 Cs (character, capacity, capital, collateral and conditions) analysis of credit. This was good in old time but in changing credit risk dynamics and constantly changing economic/sector/company dynamics, it is not going to be enough. Poor loan monitoring (for quantitative assessment) and not keeping in touch with borrowers (for qualitative assessment) has always been welcome activity at PSBs.

Cure: Much needed proposal from government to create stringent appraisal system for infusing efficiency and transparency in government owned banks is a welcome step. This change will go long way to clean up PSBs culture in general and credit analysis, appraisal and monitoring specifically. Time is ripe to create CIBIL like institution which has similar set of work scope but for all type of loans (mainly corporate loans & others) taken by other than individuals. This CIBIL like intuition can generate CIBIL like credit score through centralize system which is created based on borrower’s past history with repayments of the loan and other factors. With the help of centralized neutral agency's credit score at least wrong selection of the borrower (happens with many PSBs) which is also contributory to NPA can be discarded. Many questions are raised at various forums regarding inadequacy of existing mechanism to identify NPAs. Many of the banks including private ones use third party verification agencies’ services as inputs regarding borrower’s financial information, loan proposal etc. These inputs are considered important for lenders. In this case role of third party when it can easily get influence under unscrupulous borrowers or intermediaries has to be put under a scanner. Both the components which are ability to repay theloan and willingness to repay (willful default) the loan should be evaluated. Much is there in terms of checking financial ability to repay but nothing much has gone into understanding and evaluating the willingness to pay. Very interestingly and so far successfully psychometric test designed to gauge borrower’s mind set regarding loan repayment has shown way out for checking willingness to repay. Many of the new generation financing companies are using services of the firms for customized psychometric test for their set of borrowers. Banks can conceive the idea of separate loan monitoring & review unit, which can works towards first establishing fool-proof digitalized platform for monitoring & reviewing the quantitative (financial) and qualitative position on quarterly basis of the key borrowers. Timely review can help generate red flag in advance for the banks to behave more proactively than re-actively. At last, banks should be given more teeth by RBI to recover the bad loans(especially from willful defaulters).

2. Hyper competition among banks (aggressive lending practices): Most of the PSBs have jumped into competition (willingly or by force) among themselves and also with fiercely private banks. There cannot be controlled competition, so as the competition increases all types of banks are going to fight to retain & expand their business which is primarily attracting more & more deposits and extending more & more loans. System can ignore aggressive lending practices at its’own peril, and we do not have to go much back in the history to understand how perilous it could be. Credit crisis of 2008 is fitting example where cheaper cost of borrowing coupled with extreme hunger for business led financial institutions and banks stand ready to lend to virtually anyone interested. We all receive one way or another “pre-approved” loans proposals every now and then. To control the competition in this regards, might not be the wise thing to do, but to put up set of measures to safeguard the larger economic system and bank’s equity stakeholders is required.

Cure: To curb aggressive lending practices which are not that prevalent perhaps among PSBs but more in private banks, apart from regulatory measures there might not be much in arsenal to directly control it. Guidelines by RBI as to what types of corporate loans with various features & customized structures can be issued to what type of eligible borrowers can be first step. Linking person in charge & the credit team’s performance appraisal directly with portion of bad loans (which turned into NPA) approved by them, which may lead to negative appraisal can really curb blind aggressive lending practices. Even sales force’s performance appraisal can be linked with how many sound/bad borrowers they brought to the bank.

3. Political pressure on public sector banks to clear the loans and bribe for the loan:  What if Government sponsored a study report which has intention of identifying to what extent loans in PSBs are granted because of some sort of political pressure or with motivation of some sort of bribe.( I guess I am daydreaming!!!) When one sees that there are around 27 PSBs with the branches spread across India, one would drop the idea of trying to identify to what level the motive behind sanctioning the loan is due to some sort of political pressure or personal favor. Unfortunately, there is no way we can say how much of bad NPAs is getting contributed from this. But we don’t need proof for this, based on our personal experience we know, it has significant contribution to bad NPAs.

Cure: Best cure is to reduce GoI stake over some specified time period below majority from PSBs which can easily eradicate the political influence altogether on PSBs. If government continues to be the owner of the PSBs, then it will certainly burden country’s fiscal deficit as huge capital infusion is need to capitalize these PSBs against NPA and also for compliance with Basel III norms. Another interim solution until reducing GoI stake in the PSBs below majority becomes reality, is hire outsiders (Non- PSBs) at top management level and at mid- level to run the PSBs. One path breaking step taken by government is to separate the Chairman and the MD post which is in sync with global best practices to divided the power for better management supervisory & control.

Bad NPAs is a reflection that when ingredients like bad credit analysis habits with outdated credit practices coupled with aggressive lending practices come together what kind of distasteful dish is created which has garnishing of unending political favoritism and insatiable personal greediness. But this can also change!

Corus Plc Acquisition leaving bad taste in the mouth of Tata Steel

Tata steel emerged victorious after series of heated bidding rounds (final bid (the first bid was made by Tata steel at 455pence/share) from Tata was 608 Pence / share, against Brazilian rival CSN’s bid of 603 Pence/share) for acquiring Corus Plc for around $12 Billion, only to see that after some 9 years it has to start disinvesting Tata Steel UK in whole or in part. One of the key plants (Scunthorpe steel plant) is sold to Greybull Capital Llp for nominal value of £1 which includes investment commitment of £ 400 Million and financial packages from Greybull. Undertone has changed in last nine years, from everyone was being so euphoric talking about advent of new era where Indian company was (Tata Steel) taking over global giant (Corus Plc) and becoming hot topic for every other research article and case study, to critically appraising bad acquisition and being pragmatic by cutting the loss and adding yet another story piece to library/case study/research article on how acquisitions go wrong. Let’s try to do quick anatomy of this acquisition deal. The idea is not at all to criticize or disparage this deal because that’s easy & so many mindless (and few genuine) are doing it (I admit honestly it’s very easy to comment or to do post-event analysis of anything and being Indian we love to be judgmental about everything!) but just to touch upon few points which may be interesting to explore further.

Though the potential benefits of the Corus deal were widely appreciated at the time of deal, but I’ll be focusing on few downsides.

1. Biting off more than one can chew – Competency to manage larger & diversified organization: It is always enchanting to see David taking on Goliath in business world. In world of acquisitions unfortunately just winning over Goliath (by exorbitant premium payout) is not the end of the story, here David (Acquirer) has to actually manage the Goliath(Target) profitably over longer time frame to be considered it as true victory. Imagine one company is trying to acquire another company which itself is the product of two companies merged eight years back and trying to settle down. Well, this is the real story of Tata steel acquiring Corus Group Plc which was new entity coming into force in 1999 as merger of British steel and Koninklijke Hoogovens. One of the very reasons of this merger was to put life into dying British steel which was incurring losses. After the merger of two entities, Corus Group Plc was consisting of huge diversified product portfolio (Diversified product portfolio is considered to be one of the foremost reasons for acquisition, but what acquirers forget is whether they can manage effectively this diversified product portfolio or not especially when they are lacking expertise of this, based on no such experience in the past) having four divisions and the core business comprised of manufacturing, development and allocation of steel and aluminum products, variety of services like; design, consultancy, technology etc. Corus Group was 2^nd largest steel maker in Europe having revenue of £ 9.2 Billion, having 42,600 employees spread across 40 countries before acquisition. Tata group might have got too much of confidence & guts from group company Tata tea’s successful acquisition of giant Tetley- four times bigger company in the year of 2000. But it seems Tata steel never got the competency and expertise of managing huge, diversified, and culturally complex (within Corus Group there was internal conflict going on between British arm and Dutch arm) organization, this kind of organization itself reduces probability of success in the long run. It would be interesting to see and explore why Tata Tea -Tetley was successful as compared to Tata steel – Corus Group, specifically from perspective of managing larger organizations after acquisition.

2. Mountain of Debt: Intolerable burden of debt is capable enough to break backbone of the business. Let me dramatize this whole high premium pay out eventually leading to high debt scenario for Tata Steel. Imagine with aim of satisfying the hunger need you entered in Pizza outlet, here Pizza outlet which was big but having really tough times, seeing you and another few fellows entering the outlet the seller suddenly created big hype and said, “I have only one Pizza left which is of the finest quality and having it will give you some super natural powers and you will be the greatest!” “Whoever bids highest will get this last on earth Pizza”. You started bidding at Rs. 100 for this Pizza, another person also starting bidding up over and above Rs. 100.  Meanwhile, some shrewd fellows understood the whole gimmick and left the outlet. Furious bidding was going on between you and another person in run up to have this miraculous pizza and in hope of converting yourself from Bollywood Krrish to Hollywood Iron Man(Many companies go through this notion of becoming larger than life entities by making grand acquisitions).So much blinded by this elusion highest bid was made by you at Rs. 133.60 which is 33.6% higher than first bid made by you. Only to realize that you have won the so called miraculous pizza but you have only Rs.44(roughly 33%) in your pocket and for the rest Rs.89.60(67%), you have to take loan from the banks at interest rate of around 8% p.a. Just to add more spice, imagine the similar pizza you bought was sold at around Rs.89 previously. So, actually you have paid roughly 49 %( From Rs.89 to Rs.133.6) premium over the previous price of the Pizza. Now just take a pause and think, take yourself out from the above drama & put Tata Steel in your place (Where Pizza is Corus Group). Tata Steel paid 33.6% premium per share for Corus over first bid. The final bid of 608 pence/share was around 49% higher than the Corus share price as on 4^th/Oct./2006.And the fun part is almost 67% of total $12 billion of acquisition amount has to be funded through external debt. Around $725 Million (including $400 million of Corus’s existing interest burden) was projected to be paid as interest obligation after acquisition. Funding larger part of the acquisition through external debt (Fancy name is Leverage Buy Out – LBO) has caught up the fancy of every another company but it is forgotten that it is double edged sword which can kill/ severely damage the company and same has happened with Tata Steel.  One can see Quick financial data charts comparison.

3. Curse of buying commodity business at peak of commodity cycle:

If we observe the global commodity cycle for steel, it picked up at all time high during 2007-08(Steel, other metals and materials were huge in demand thanks to Global economy on its pick and 2008 Beijing Olympics) where steel price was recorded $1265/MT in June of 2008. From this pick due to demand of steel waning off (Due to prime reason of late 2008 financial crisis of unprecedented scale - nobody could have got this right so no fault of Tata Steel) price has been falling to as low as $ 90/MT in March of 2016. Tata Steel bought Corus Group in year 2007 where steel pricing was sky rocketing thanks to mammoth demand from China and other parts of the world. Entire demand projection for steel based on this 2007-08 pick (which was important ingredient for projected revenue calculation for acquisition) went for a toss due to huge crackdown in demand as aftermath of financial crisis. Problem of buying commodity business at the pick of the cycle is that Acquirer Company must have while deciding valuation of the Target Company incorporated this pick demand & high price in future projection of revenue which leads to higher valuation of the Target Company & easy justification to pay premium over and above existing market price of the share. It is important to build valuation on worst-case scenario projection basis or mixed of different scenarios based average valuation. Buying commodity business at the pick was never a good idea as once commodity cycle turns down, falling prices create huge pressure on profit margin & sustainability of business. Especially when it is known fact that commodity prices move through different phases of super cycle it becomes very imperative to see that as acquirer you are not caught at the wrong end of the cycle.

4. What’s true goal? Larger than life/Ego-feeding V/S Long term profitable sustainability:  HP’s $11 billion acquisition of Autonomy Inc., Google’s acquisition of Motorola for $12.5 billion, Alcatel-Lucent deal and many more have one thing in common these deals failed massively. There is constant tug of war between whether merger/acquisition fits into long term profitable sustainability of the firm as objective or over-inflated egos (of CEO/Top Mgt.) which compel to do merger/acquisition so that they can have even bigger companies to manage, even larger role to play and justified in front of the BOD that they are doing this for better future growth of the company, and being covered and discussed by every other top media houses & intelligentsia. Many important and eye-opening articles/researches are done on the matter of how over-inflated ego of CEO/Top mgt. has created nasty failures in M&A world and wasted billions not millions of wealth of shareholders. The crux is till what point shareholders are ready to allow their acting agents to go for M&A as per their whims and fancies, how BOD can put control over this. It has been seen that in the heat of limelight and ever increasing expectations from all stakeholders for higher growth even genuine/rational CEOs tend to go down the path of going for disastrous M&A deals in this case strong BOD guidance and control should be in place. Perhaps, Tata Steel also went down this same path where Tata Group’s hunger to be in top ten players by acquisition route in steel industry and setting the benchmark of a sort that how small company from developing nation can still go for giant from developed nation, played big role.

 To sum up, it is very paradoxical to observe that in M&A world which has seen so many failed mergers and acquisitions and relatively very less successful deals in long term, still companies and high profile CEOs get tempted by this mirage and record M&A deals are created. Interested reader can explore this book on failure of M&A.

It is high time to device proper control system for vigilance over decision makers where deal value is huge from stock holders’ perspective. 

Truth is more dramatic and thrilling than Fiction (James Bond movies): The inside story of Mossad - Book Review

Book review:

Book:  Mossad the greatest missions of the Israeli secret service

Authors: Michael Bar-Zohar, Nissim Mishal

Publication: ECCO Publication,2012.

I confess the moment I finished reading up this book, I am no longer a fan of James bond like movies. If I was not cognizant of the fact that, this book is collection of daring & most dangerous missions (at the heart is unbelievable plot-lines of the missions) by the Mossad- Israel Secret service, the book could have easily been considered as one of the superb spy novels.

Consider this, on shores of Gaza suddenly boat appeared which was carrying Palestinians and they were followed by Israeli soldiers in torpedo boat. Eventually, Palestinians managed to escape from the shore with some help from local Gazan youngsters. Rescued Palestinians who claimed to be members of the Popular Front for the Liberation of Palestine, coming from Tyre refugee camp in Labanon. Leader of rescued Palestinians requested to the local Gazan if they can arrange meeting with Popular front commanders of “Beth Lahia”(Terrorist organization) in Gaza, as they have weapons & other vital information to share. Very next day, Rescued Palestinians were called in isolated house, where they met with Popular front commanders of “Beth Lahia”. The moment they sat facing one another, Leader of rescued Palestinians raised his hand and looked at watch. It was signal. All rescued Palestinians pulled out handguns and opened fire, all commanders of “Beth Lahia” in that room were killed. The entire rescued Palestinians team escaped, only thing was they were not Palestinians (members of the Popular Front for the Liberation of Palestine). The Leader was Captain Meir Dagan, Commander of the IDF’s(Israeli Defense Forces) secret Rimmon Commando unit and others were his team. Adding more spice, now imagine this seemingly “movie thriller” plot was not played out in today’s ultra-modern spy world but in the year of 1971. That’s true.

Many other missions like above is the soul of this book. My favorite parts are Ch.1(King of Shadows),Ch. 6 (Bring Eichmann Dead or alive), Ch. 10 (“I want MiG-21!”),Ch.11 (Those who will never forget), Ch.12 (The quest for the red prince) and so on, actually all of the chapters.

One of the most famous missions, the hunt for the terrorists who were responsible for attack on Israel athletes during Munich Olympic in 1972, on German soil is covered in this book. Similarly one of the most secretes and covert operations of bringing “Adolf Eichmann” the cruelest face of Nazi and the leader who orchestrated the holocaust, is simply breathtaking as it unfolds. Eichmann was considered to be responsible for extermination of 6 million Jews.

The chapters in the book are very much detail-oriented yet crafted like script to keep you on your toes all the time. Michael Bar-Zohar and Nissim Mishal have taken a great care by providing sources of information for every chapter, to make it as nearer to the reality as possible. But in my personal opinion reader is advised to take content of the book with grain of salt, as veracity of every content in no way can be validated. Certainly as it happens, there could also be hidden propaganda of putting Israel into “right frame” in world’s eye, so reader should be wary of that too.

In my personal opinion…. (Sorry if it sounds like too patriotic, but then that’s what it is !):

Informative & daring stories of Mossad and Israel, has certainly one thing to teach our country India (and Indians, especially those pseudo secularists) that country itself is responsible for its fate. India should stop begging and crying for help from other nations when dealing with enemies-terrorists. (as every nation has its own political agenda and such help is not free of cost). Every Indian should read this book at least just to understand to what extent the county and its people goes to stand, fight and defend its sovereign and its people no matter wherever they are in the world.