India’s feudal governance – what a shame

I read a New York times piece “Some Indians Find It Tough to Go Home Again” on why expatriates find it difficult to come back and work in India. Though the rest of the article was interesting, what made it very interesting was the last paragraph. Here are the paras leading to the final para at the end:

In June, Mr. Ayyadurai, now 45, moved from Boston to New Delhi hoping to make good on that promise. An entrepreneur and lecturer at the Massachusetts Institute of Technology, with a fistful of American degrees, he was the first recruit of an ambitious government program to lure talented scientists of the so-called desi diaspora back to their homeland.

“It seemed perfect,” he said recently of the job opportunity.

It wasn’t.

…

After a long meeting with a top bureaucrat, who gave him a handwritten job offer, Mr. Ayyadurai signed on to the Council of Scientific and Industrial Research, or C.S.I.R., a government-financed agency that reports to the ministry of science.

The agency is responsible for creating a new company, called C.S.I.R.-Tech, to spin off profitable businesses from India’s dozens of public laboratories. Currently, the agency, which oversees 4,500 scientists, generates just $80 million in cash flow a year, even though its annual budget is the equivalent of half a billion dollars.

Mr. Ayyadurai said he spent weeks trying to get answers and responses to e-mail messages, particularly from the person who hired him, the C.S.I.R. director general, Samir K. Brahmachari. After several months of trying to set up a business plan for the new company with no input from his boss, he said, he distributed a draft plan to C.S.I.R.’s scientists asking for feedback, and criticizing the agency’s management.

Four days later, Mr. Ayyadurai was forbidden from communicating with other scientists. Later, he received an official letter saying his job offer was withdrawn.

…
But going public with such accusations is highly unusual. Mr. Ayyadurai circulated his paper not just to the agency’s scientists but to journalists, and wrote about his situation to Prime Minister Manmohan Singh. India is “sitting on a huge opportunity” to create new businesses and tap into thousands of science and technology experts, Mr. Ayyadurai said, but a “feudal culture” is holding the country back.

Mr. Brahmachari said in an interview that Mr. Ayyadurai had misunderstood nearly everything — from his handwritten job offer, which he said was only meant to suggest what Mr. Ayyadurai could receive were he to be hired, to the way Mr. Ayyadurai asked scientists for their feedback on what the C.S.I.R. spinoff should look like.

To prove his point, Mr. Brahmachari, who was two hours late for an interview scheduled by his office, read from a government guide about decision-making in the organization. Mr. Ayyadurai didn’t follow protocol, he said. “As long as your language is positive for the organization I have no problem,” he added.

As the interview was closing, Mr. Brahmachari questioned why anyone would be interested in the situation, and then said he would complain to [the]a reporter’s bosses in New York if she continued to pursue the story.

Bombay Stock Exchange survival – ray of hope

The only hope of survival for the century old Bombay Stock Exchange seems to appear in sight. News that BSE aims to list itself is welcome (see ET piece).

BSE, which ruled the exchange business for well over a century, has steadily lost market share since 1995 and further after 2000 punctuated by many problems. Many of the problems related to the fact that the brokers owned the exchange and controlled the exchange, thus creating a problem for the governing body which had conflicting interests at play, particularly when it came to competing broker factions, some in executive power at the exchange.

The parliament amended the regulatory scheme and mandated separation of ownership from management and from trading rights in what is known in technical parlance as demutualisation of the exchange. Later regulations also mandated that no person could own more than 5% shares (later enhanced to 15%). While these regulatory changes corrected the problem of conflict, it created a second problem of lack of ownership and a vacuum in the governance. No one really cared much about the future of the exchange as shareholders could not exercise any material control over the functioning of the exchange, and a non accountable governing board ran the show albeit independently. This lack of ownership and self perpetuation of management could be corrected only by listing of the exchange – bringing transparency and accountability to shareholders by the management and the Board and also periodic disclosures.

Though listing itself has some minor issues attached, particularly if the listing is at the competing exchange, NSE, the real question is has the action come too late for BSE to survive? Only time will tell, but with the MCX almost ready to launch equity trading, it will be a very competitive market ahead.

Tata finance - insider trading

Last week the Securities Appellate Tribunal (SAT) set aside orders of SEBI in a part of the proceeding against the family of Tata Finance Limited’s (TFL) Managing Director, Dilip Pendse.

After reading the order, I had more questions than a final conclusion on what actually happened. Dilip Pendse was the managing director of TFL and came across price sensitive information in middle of March 2001. His wife Nalini Pendse and a company controlled by her sold 40,000 shares of TFL. It is not disputed that both are deemed to be insiders because of their relationship with Dilip Pendse. What is in dispute is when the shares were sold.

SEBI argued that the shares were sold in end of March 2001 when the insiders had access to privileged price sensitive information. Nalini Pendse and the associated company asserted that they sold the share in Sept of 2000 to a broker, who bought on its own account and sold them in Sept 2000 in a back to back transaction to a third party. The broker issued contract notes (though with a delay of a few days), and the evidence is available because the delay in issue of contract notes resulted in disciplinary action by the Bombay Stock Exchange against the broker and the contract notes therefore were not evidently back-dated. There appears other evidence too including a stamp of the exchange on the contract notes’ covering letter etc.

What makes the case curious is that the shares were delivered only in late March 2001 to the broker and the broker made the payment also in late March (when the parties were in possession of inside information). Leaving aside the issue of this being an illegal forward contract, this is a very unusual transaction because the broker claims to have in turn sold these shares to a third party. Did the broker sell them from its inventory, or was the sale to the third party a non genuine transaction? Questions which will perhaps remain unanswered.

It should also be mentioned that previous orders of SEBI against certain other entities in the same TFL insider trading case had been earlier upheld by SAT.

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.

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.