Legal search – Google Scholar

I tried the newly created Google Scholar law cases and articles search and would highly recommend it to anyone, particularly outside the legal community who wants to do search for cases and legal articles, to use the service. Lawyers have usually flocked towards paid services like LexisNexis and Westlaw, which continue to provide useful though expensive services. Lawyers not willing to pay typically go to findlaw.com. I would however, strongly recommend Google Scholar for its simplicity and quality of their search results – more for cases than for articles though.

See Google blog post on the release.

Divestment and governance in Public Sector Companies

The Economist ran a story this week “Stakes and Mistakes” (link requires subscription) on disinvestment by the government of India of public sector companies. It says the government is privatising the companies for the wrong reason i.e. to reduce fiscal deficit. Instead it should do so to improve governance standards in the companies:

Listing even a small stake helps keep managers on their toes, by subjecting them to the scrutiny of the stockmarket. But the bigger the float, the better.

In fact TT Ram Mohan, my colleague has been saying so for a long time and blogged about it just last week (and his piece in the EcoTimes) – which may have been the basis of the Economist piece. I would like to add that in fact the governance and corporate regulations which govern public sector units should be identical to that of the private sector for the benefits to be really visible. Today swathes of regulations are generally waived or specifically relaxed for the public sector, or often even when rules do exist public sector companies simply violate the law without any serious consequence. Witness the disregard to the listing agreement requirement to have half (or a third) independent directors of so many public sector listed companies.

To add a footnote, in line with the ministry of finance proposal to have a minimum public float of 25% (rather than 0.3%) for all listed companies, it would be good to not relax the requirement for government companies.

Media shames itself - SEBI Board misconduct

If you thought the media in India was fearless and brave, think again. If you thought the new media was even more brave, think twice over.

The government of India appointed the present incumbent Chairman of SEBI, C.B. Bhave in February 2008. There was a cloud over his appointment as there was an on going proceeding against the entity he led NSDL by the regulator, and in the past the regulator had passed several orders against NSDL for negligence arising out of the infamous IPO scam. Several orders were pending against NSDL at the regulator itself. The government selected the Chairman and for the ongoing action, decided that the cases would be decided by an independent panel of members and the Chairman would recuse himself from such proceedings.

After many months of indecision, an independent panel of non-whole time members was formed comprising of Mr. Mohan Gopal (head of the National Judicial Academy) and Mr. V Leeladhar (deputy governor of the RBI) to decide the cases pending against NSDL (and others). The panel came to a decision on the 4th of December 2008. All orders once signed by the appropriate authority are automatically put up on the SEBI website. I am not aware of a single exception to this rule. In addition, for obvious reasons of natural justice, the order has to be served on the parties. Neither was done.

This suppression was highly successful till the Times of India came out with an expose of the facts (see also ET) on the 24th March 2009. The ToI article quotes extensively from one of the two member-authors of the order. I blogged about this then. Despite the expose, SEBI continued to suppress this order, claiming the Board of SEBI was 'reviewing' the order. In the meanwhile, a person claiming to be affected by the IPO scam filed a public interest litigation (writ petition) in the Andhra Pradesh High Court. Several right to information applications were also filed with SEBI trying to pull out the order. It appears the same were denied on the grounds that the matter was pending investigation (though the fact finding ended several years back). The Times of India ran another highly damaging piece based on the PIL: Sebi mum on Bhave's interest conflict. After a full 11 months (only a week after the ToI's second article of 31st Oct 2009), the SEBI Board rejected the order as being beyond the powers of the panel. It may be recalled that one of the co-authors of the report is Dr. Mohan Gopal who has founded an academy to teach judges and is commonly known as an eminent jurist. What is most fantastic about the setting aside of the order is that the SEBI Board does not have the power to set aside its own orders in review. It has not done such a review even when relatively junior officers of SEBI pass orders in a quasi judicial capacity - in fact it has rightly not been done by SEBI in its 17 year history.

Clearly, the chapter in this dark period of SEBI is not yet closed and courts will finally decide on the fate of the action, though I am not particularly optimistic because everyone would have moved on by the time a decision arrives. Be that as it may, the role of the media has been even more shameful than the role of the Board. The dark chapter has virtually been blanked out. See the rather timid reporting of this big scandal in the major media - as if this was just another setting aside of an order of SEBI here and here. Most of the media has not even reported this, not even timidly. The sole exception to this has been the Times of India (and Economic Times which re-ran the piece) which is often wrongly vilified as being run by managers rather than by editors.

Even more surprising is the even more silent parallel media or new media of blogs and twitter news. The new media, comprised of millions of people writing about billions of issues has blanked the news even more totally.

Remind me again - am I in India or Myanmar?

Educational reforms – murky way ahead IES09

Looks like there isn’t much on the horizon for reforms in the education sector. The minister of Human Resource Development lashed out at the India Economic Summit 09 against for profit educational institutions, saying ‘nowhere in the world’ is education for profit and such a set up would be ‘unacceptable’.

93% of all educaiton in India is governmental and only 7% with the private sector. Much of the so called private educational institutions are either of poor quality or owned by politicians. In effect because of this outrage against for profit, honest private sector people don’t get into education or face phenomenal rent seeking. Either dishonest people or politicians (because they are immune from the rent seekers) thus find it easy to set up educational institutions. Not only are the standards low because of this arrangement where the money is taken in cash, this also forms the basis of the argument that the private sector isn’t delivering!

The argument that ‘nowhere in the world’ is education private and for profit is plainly wrong. Unless of course the world is comprised of western europe and the US. Europe can afford to subsidise education at all levels and therefore standards of public education are quite high. US educational system is both well funded in the primary and secondary education by the government and by private endowments in the higher education. In India, with the fiscal constraints and because of lack of financial support by the private sector, neither is a real option.

We clearly need to move away from short term political posturing against for profit private institutions – the national demands for education and employability are too great for us to ignore this critical reform.

Education reforms – accountibility key missing link IES09

In continuation of my last post on educational reforms – there is a clear need for introducing accountability into the primary and even secondary education in the public sector. The sad truth of our governmental educational system (in primary and secondary) public schools is that teachers don’t attend school, out of the few who attend occasionally, few really teach. Unless, the accountability of teachers is fixed by a) attendance records being made public b) a fair part of the salary being conditional upon performance improvements – there is little hope for reforming the lower public educational system.

The interesting success story of parts of India where citizens have sought attendance records of public teachers and the dramatic impact of such right to information applications on the attendance of such schools is an indicator to this key problem in the existing system. Another indicator of the impact of accountability of public sector education is the ‘Kendriya Vidyalaya’ institutions – which are run extremely well because children of civil servants and important people attend these schools – putting the pressure of accountability by the bureaucrats on improving their performance constantly.

Bureaucracy makes India uncompetitive

Another interesting factoid (or rather the opinion based on a survey of executives, p.13) from the the World Economic Forum’s “India Competitiveness Review 2009” that I had blogged about yesterday, is that “Inadequate supply of infrastructure” and “Inefficient government bureaucracy” account for 40% of “The Most Problematic Factors for Doing Business in India” compared to 11% for “Corruption”. Which means the perception is that the bureaucracy is really holding back India through poor design and poor implementation of their powers/discretions. In other words, India suffers more from the inaction (and wrong clinging to power and controls) of its honest people than it does of its dishonest people. While the line between the two is not always clear – lack of action will not typically create opportunities for bribes by the corrupt, but will shield the honest from wrong charges of corruption.

India - as competitive as ever

The World Economic Forum has come out with the “India Competitiveness Review 2009″ a few hours back. India ranks 49th out of 133 economies in the Global Competitive Index 2009-10, up one rank from last year’s index. Here are some key findings of the Competitive Index of India:

“The country very much underperforms in the Health
and Primary Education Pillar (101st). The sanitary
situation is particularly alarming, with some indicators
comparing unfavourably even with the sub-Saharan
Africa region. Both the quality and quantity of
education are insufficient. India has been running
cavernous deficits, weighing heavily on its
performance in the Macroeconomic Stability Pillar
(96th). Energy and transport infrastructures are in a
state of disrepair (76th). In this context, India’s rank of
54th for the quality of institutions is encouraging,
although corruption and security remain major issues.
India’s performance in the second Subindex,
Efficiency Enhancers, is better, albeit uneven. This
Subindex accounts for 35% of India’s GCI score and
is of particular importance to the development of the
industry and services sectors. The country boasts a
developed financial system (16th) with a particularly
sound banking sector (25th). Another competitive
advantage is the size of its market (4th overall). The
Indian goods market is also fairly efficient (48th)
thanks to fierce competition and despite the
presence of important barriers to entry. On a more
negative note, the difficulty of hiring and firing
employees makes the labour market rigid (83rd). The
country’s technological readiness (83rd) continues to
be held back by low penetration rates for
information and communications technologies.
Firms, however, are generally adept at adopting and
using the latest technologies. Finally, higher
education in India (66th) is of relatively good quality,
but access to it remains a privilege of the few.
Compared with the mixed performance in the other two
Subindexes, India’s showing in the two most complex
areas of competitiveness, Business Sophistication
(27th) and Innovation (30th), is truly remarkable. This
reflects, to a large extent, the brisk development of
India’s private sector and of a few industries in
particular. Yet, at present, these two categories
account for just 5% of the overall GCI score because
they are not yet the engine of India’s productivity.
To place India’s performance in context, the authors
draw parallels with a number of countries and
country groups. The analysis reveals that India lags
behind almost all comparators in the areas of health
and primary education, labour markets,
technological readiness and macroeconomic
stability. China ranks ahead of India in 10 out of the
12 Pillars – often by a wide margin. However, India
possesses a number of competitive advantages in
several Pillars, namely Institutions, Financial Market
Sophistication, Market Size, Business Sophistication
and Innovation.

The only substantial positives come from the financial sector. How long can be have efficient finance but a hobbled and restrained real economy?

The India Competitiveness Review 2009 is linked.

Reserve Bank of India – legal risks

I was delighted and honoured to be invited to speak at the platinum jubilee celebrations of the Reserve Bank of India organised by the legal department of the central bank at Kochi on the 28th Oct. The other speakers were Mr. Deigo Devos, General Counsel of the Bank for International Settlements (BIS), Mr. Mikael Stenström, European Central Bank, M.R. Umarji, Indian Banks’ Association and Michael Held, Federal Reserve Bank of New York besides the inaugural address by Deputy Governor Shyamala Gopinath.

I primarily spoke of the need to move away from the regulatory philosophy of 1956 which viewed speculation with fatally suspicious eyes and has banned forwards and options in securities outside the exchange space. I also spoke of the increasing synthesis between securities law and macro-economic stability. For instance an important institution like the clearing corporation should be viewed closely not just by the securities regulatory but by the central bank for long term solvency. I also cautioned against the popular demand to shift all Over The Counter (OTC) trades to the exchanges because a) it’s impractical as OTC trades have a nominal value exceeding 10 times the GDP of the world b) such shifting would concentrate risk in one entity rather than the distributed crisis of today – making such a crisis more dangerous not less.

The excellent speech of the Deputy Governor is linked.

The press release of the symposium is also linked.

SEBI order of impounding – self goal

SEBI has passed a curious order yesterday ‘impounding’ some money from a person who is alleged to have committed manipulation. Till now SEBI either collected fees which it kept in a fund for running its operations, or it collected penalty which it remitted to the consolidated fund of India. There is a third category which started a few years back – one of collecting disgorgement amounts from the violator – to take away ill gotten gains from a violator. This third category was kept by SEBI to refund back to the investor directly or indirectly (by adding to an investor protection fund). To give away disgorgement money to the government is expropriation from the victims of the violation who have the first right over such sums.

It is settled law – in fact dozens of SAT and high court rulings have held that under the ‘direction’ making power of S. 11 and 11B, SEBI cannot impose penalty. The order under S. 11B curiously orders that the amount (which appears similar to disgorgement) be handed over to the consolidated fund of India – thereby implicitly admitting that the amount is a penalty – and thus ensuring that the order will be set aside by SAT and the violator will go home free. In addition, it takes money belonging to victims of securities crime and gives it to the government – a doubly unfair outcome. Seems SEBI just inflicted a self goal in an otherwise strong case.

Note: See SEBI Board meeting agenda which shows that disgorgement amounts are not given to the Consolidated Fund of India.

Public Sector – follow corporate governance

The financial express has a piece today on the listed public sector companies. A third of them still don’t follow the most basic of corporate governance norms of one third (or one half where there is no split between Chairman and MD) independent directors. This is five years after the law mandated the requirement and two years after SEBI sent them a notice asking them why penalty not be imposed upon them. Violating the provision can invite serious penalties and delisting from the exchanges. Can the g0vernment pull up the babus who are not doing their job in the appointment process? As I pointed out one year back, it is not the fault of the public sector companies, as the appointment is done by the government and not by them.

See my post of last year for the full context.

SME stock exchange – bad idea

There is a lot of talk going on about a stock exchange for small and medium enterprises (SMEs). Much of it is politically right (in the short term), but bad economics. While it is true that small companies often have access only to bank loans and equity investment by friends and relatives, giving access to the public capital markets is a poor idea for many reasons.

Investors will lose massive amounts of money out of genuine failure as is common in much of small business. This will then be erroneously named fraud and people running these companies persecuted. At the same time investors will be disillusioned because this new beast of an exchange will have 95 failures for every 5 successes. Even private equity investments which not only do a thorough due diligence, but also sit on the investee company’s board and even get them business lose their entire investment in 9 out of 10 investments (they do hope to make it up in the 10th company though).

Without deviating from the recognition that SMEs have a crucial importance to the Indian economy, it would therefore be a bad idea to introduce a classic exchange for SME companies. Even introducing a minimum lot size of say Rs. 10, 00,000 (1 million rupees) as investment will not take away the stigma such an exchange will pose – though much of the losses will be suffered indirectly by mutual funds and insurance companies. It will thus be a bad political move to introduce such an exchange – in the medium to long term. The equity infusion in small companies will necessarily have to continue from traditional sources and governments should aim to improve access to bank loans to such enterprises besides giving whatever incentives are needed to grow the private equity and venture capital industry.

Takeover regulations – what a mess

If you have any doubts that the SEBI takeover regulations are a royal mess, check out the following chart, which tries to unravel the mind numbing complexity (and nearly all of it wholly pointless complexity) in the trigger for a compulsory tender offer. To add to this sad story is the sadder story of regulations being changed almost every moment (SEBI regulations incidentally need to be tabled before the parliament, and thus ought to have some level of permanence). Even as I type this blog post, another amendment is in the works, or rather in the press. So which is worse? Between the two, in my opinion, the frequent changes make the worse story – though there is no reason why both don’t need to improve. If there is no philosophy behind a regulation, it is bound to be changed frequently and randomly – it’s like the adage, if you don’t have a destination, any road will take you. Witness, the US regulations have virtually not been touched in the last 40 years since their introduction.

Note: the chart below will be inaccurate in a few days time. Note also that this is not a comprehensive chart.

Prior holding (%)	Acquisition (%)	Post acquisition holding (%)	Is a compulsory tender offer triggered (?)
0	5	5	No
0	14.99	14.99	No
0	15	15	Yes
10	4.99	14.99	No
10	5	15	Yes (though absurd because a 5% acquisition with 15% holding is exempt)
14	5	19	Yes (also absurd)
15	5 in one year	20	No
15	6 in one year	21	Yes
49.99	5	54.99	No
50	5	55	Yes
55	One share (not through open market purchase or buy back)	55 + One share	Yes
55	One Share (through open market purchase or buy back)	55 + One share	No
60	Consolidation by tender offer	75% or 90% (depending on the min public shareholding	Yes, but offer can be for less than 20%
70	4.99 (through open market purchase or buy back)	74.99	No
75	One share (where minimum public shareholding per listing agreement is 10%)	75 + One share	Yes
75	One share (where minimum public shareholding per listing agreement is 25%)	75 + One share	Prohibited
85	One share (where minimum public shareholding per listing agreement is 10%)	85 + One share	Yes
–	Change of control	–	Yes

Serious Fraud Investigation Office – tries seriousness

The SFIO was thought of as an apex investigative body for complex economic offenses when it was set up in 2003. Unfortunately, it can do little investigation or enforcement. In a story in Mint their complete irrelevance is demonstrated:

SFIO has written to capital markets regulator Securities and Exchange Board of India (Sebi), Reserve Bank of India (RBI), National Securities Depository Ltd (NSDL) and the income-tax (I-T) investigation wing in Ahmedabad and Mumbai asking for records of all the proceedings against key financiers and entities allegedly involved in the scam.

“In August, we wrote to the agencies asking for all the information required for investigation, but no one has responded yet,” said the official. He declined to be identified as he is not authorized to speak to the media.

Government agencies don’t even bother to reply to its queries. It has been given no real investigative powers by parliament and tries to eke out some meager powers under a dozen sections of the Companies Act. If someone refuses to co-operate, it can do little except make a reference to other agencies of the government/statutory bodies – the same agencies which refuse to even reply to their letter of August.

It is time to either empower it or to disband it.

See the Mint piece here.

ADRs and GDRs – a world of opacity

I appeared on “The Firm” on CNBC this weekend and spoke about the regulatory loophole in the takeover regulations for ADRs/GDRs. I also wrote for them a piece explaining the issue in some more detail.
Besides the issue of ADR/GDR voting rights – I also raise the issue of shareholding disclosures by ADR/GDR holders. Since there is no exemption from disclosure norms for them – clearly, people holding ADR/GDRs over 1 or 5% are today violating the disclosure norms under the takeover regulations and the listing agreement.

Here is the video and here is the piece at thefirm.moneycontrol.com

Thank you Menaka for plugging for the IPO blog to your viewers on the show.

Dual listing – FM should be better briefed

Day before, the Finance Minister said dual listing cannot be allowed because of exchange control restrictions. He is clearly not being properly advised. Also based on what I have read extensively in the newspapers, there seems to be a major mis-conception about what dual listing is. People are assuming dual listing would mean that MTN the South African company would be listed in India and that Bharti would be listed in South Africa. That is not how dual listing works – that example is one of quadruple listing.

Dual listing means that Bharti would continue to be listed in India and MTN would continue to be listed in South Africa. They would exchange cash flows to make the two companies economically single though legally distinct. They would also agree to exchange equalising cash flows on liquidation as also enable voting rights of one company to elect the other’s Board so that the Boards have identical people.

Given this, there is practically no issue of exchange control. You simply cannot buy MTN shares in South Africa and sell them in India – as MTN shares are not listed in India. Since both shares should have an identical value though in different currencies, any price differential would raise arbitrage opportunities. So if the Bharti shares are valued at above the price of the MTN shares, someone could sell Bharti stock in India short and buy MTN shares (long) in South Africa. To repeat, one cannot do a cross-border buy/sell transaction thus there is no exchange control restriction. The small arbitrage trades can easily be done under current laws – FIIs can buy and sell Bharti and MTN stocks in their respective countries and Indian shareholders too can do arbitrage under the $250,000 foreign exchange window given to each Indian (or 1 million dollars for a family of four).

Can someone advice the FM properly?