Infrequent postings

Many thanks to my students of this year for voting me highly in their evaluation of my teaching. It was great to have you too.

Enough teaching for the time being, now it is time for me to become a student for a few days. I am going to the Kennedy School of Government for a course on 'Global Leadership and Public Policy for the 21st Century'. Thanks to the World Economic Forum and sponsors for their generosity in sponsoring this.

I will be unable to post for several days on this account. I know several posts are due, which will probably need to wait for a few weeks. This blog will at least be an indirect beneficiary, given some focus on governance and public policy.

Satyam - auction of prima donna?

The conditions of the new Satyam Board in auctioning part of the company is quite baffling. Here is the list I could figure from newspaper reports:

• The process bars the successful bidder from selling or disposing any material assets for two years.
• A three-year lock-in period for the winner of the bidding process on its entire shareholding from the date of public offer.
• The new owner will not be allowed to discontinue the main business of the company or undertake any new unrelated business.
• Shortlisted bidders will get access to overview of the current vision, strategy and operations of the company. None of the information provided by the company stands up to any warranty.
• The new management has to cooperate with the investigating auhtorities like SEBI, SFIO, SEC, CBI, RoC and CLB who will continue their probl against the previous management.
• Inability to freely throw out 100 key personnel.

All these combined with contingent liabilities running into billions of dollars makes the deal very unattractive. It would be better if the new Board acted as if they were selling a dubious company with infinite liabilities (no one will know these as these are under the domain of the US courts) rather than some prized company. I don't think the new Board can or should dictate any terms, simply because they are not in a bargaining position. Already, their acting tough has resulted in almost all bidders dropping off the radar. Ultimately, I think any winner will suffer a near certain winner's curse. Since a bulk of Satyam clients are based in the US, it will be relatively easy for enforcing a US court decree on Satyam.

Derivatives markets committee - kosher date?

SEBI has today put up the final report of the committee constituted under the Chairmanship of M Rammohan Rao to review the derivatives market. Though I have not read it, there is something very curious about it. It is not dated, though it indicates the report is of December 2008. Why put up a December report in March, or is SEBI trying to distance itself from the committee chairman by dating it before the Satyam fiasco and fraud unraveling?

Wall Street strikes back - gimmeabreak

In a rather aggressive attempt, CEOs of Citi, Bank of America and JP Morgan have criticised the US congress' attempt to tax bonuses by upto 90%. While I can't comment on the constitutionality of the provision - though some people have opined on it, I find the provisions entirely fair. The proposal is that if a) you have borrowed taxpayer money b) the borrowing is over $5 billion USD c) bonus is granted where the household income of the person exceeds $ 250,000 - then 90% of the income will be taxed. I don't see what is unfair about it, want taxpayer money to distribute as bonus to people who are jointly causes of the demise of the entities? - agree to the terms or return the money. In any case, there is no equity or fairness in any taxing laws, so also I would guess under US laws retrospective tax laws would be constitutional. I don't think it is relevant that the people who caused the mess (assuming way too much) are not the specific ones who are getting the bonus.

See WSJ article

Vikram Pandit memo

Ken Lewis memo

Pakistan securities markets rationality

In a good move, the Compitition Commission of Pakistan has fined the Pakistani exchanges for prohibiting prices to go below a particular index level last year in a move that drew widespread humour and sarcasm. This is a good move in turbulent times - here is the press report from Bloomberg:

March 19 (Bloomberg) -- Pakistan fined its three stock exchanges for imposing trading curbs last year, the first action by the regulator against the bourses after the restriction.

Competition Commission of Pakistan imposed a 6 million rupee ($74,626) penalty the Karachi Stock Exchange, it said in a statement yesterday. It also fined the Lahore Stock Exchange 1 million rupees and the smaller Islamabad bourse 200,000 rupees.

SEBI and SEC funding

The corporate counsel blog reports about the damage done to the US securities regulator SEC by poor funding by the government when it needed it most. In stark contrast the Indian securities regulator faces the criticism that it is sitting on too much money. SEBI in fact runs primarily on fees collected from intermediaries etc. (and interest on the corpus of funds). In addition the Comptroller and Auditor General (CAG) has also criticised SEBI for not keeping its funds with the government and seeking appropriation on a when needed basis. Though SEBI probably has the power to keep its own funds on a reading of the relevant provisions of the SEBI Act 1992, from a philosophical perspective, a middle way between the cramped growth of SEC and limited accountability of SEBI's growth may be the best way forward.

See Times of India piece on CAG pulling up SEBI and IRDA for not keeping funds in 'Public Accounts'.

Madoff hurts Indian regulators

Last week I was in a marathon session of conference speeches in Delhi and Mumbai. In almost all of them I mentioned how our regulatory system worked better than say the American system. I mentioned how, Ramalinga Raju is in jail while Bernie Madoff with a 40 times bigger scandal to his debit was under house arrest and was busy mailing jewelery to his relatives after getting uncovered. Unfortunately, my overstated boast is no longer valid. As John Gapper of the FT reports from the courtroom:

The end of Bernie Madoff’s liberty came swiftly. “It is my intention to remand Mr Madoff. I do not need to hear from the government,” said Judge Denny Chin briskly, a second after Ira Sorkin, Mr Madoff’s attorney, had ended his hopeless plea for his client to remain on bail.

Reduced disclosures for rights issues - SEBI discussion paper

SEBI has put out a "Discussion paper on rationalisation of disclosure norms for Rights Issues". In brief, the paper seeks to reduce the disclosures by companies seeking to come out with a rights issue based on the recommendations of the disclosure advisory committee of SEBI. This is a flawed recommendation as it seeks to reduce disclosures in rights offerings - assuming a high quality of continuous disclosures by companies. In fact the quality of continuous disclosures by companies is poor because of the poor design of the fragmented disclosure regime - not because companies (even blue chip ones) don't want to properly disclose. This was sought to be remedied by introducing a far superior form of continuous 'integrated disclosures' by the same committee. Without implementing that recommendation, implementing the present proposal will be dangerous as it reduces net disclosures.

PS: See my previous post on integrated disclosures.

G20 - if wishes were horses

Financial Times has a terrific graphic on expectation of various countries from the G20 meet:

G20 Wishlist

Now don't get too optimistic with the outcomes from this meet.

PS: A statement from the finance ministers and governors of the G20 countries is out. As expected, it commits to nothing at all. (14th Mar 09)

Jack Welch and shareholder value

TT Ram Mohan has a post criticising Jack Welch's recent outburst on 'shareholder value' being irrelevant. I fully agree with his critique of the otherwise brilliant man:

"I wouldn't have minded if he had put forth sound arguments for his contention. I can't see any. Welch says:

On the face of it, shareholder value is the dumbest idea in the world,” he said. “Shareholder value is a result, not a strategy . . . Your main constituencies are your employees, your customers and your products.

Tell me, does that sound terribly original? Has any worthwhile CEO claimed that shareholder value creation was a strategy? Not at all. CEOs merely focus on it as the objective. Now I know that lots of academics and practitioners think there is something terribly wrong with this objective- I wrote about this in an earlier post. But none has come up with a worthwhile substitute for it."

Satyam auction - illegal disclosures?

Today's Mint has a piece by Manas Chakravarty and Mobis Philipose - "Minority shareholders at Satyam being short-changed":

"Why the company’s shares continue to be unstable even two months after B. Ramalinga Raju confessed to the swindle is that shareholders are still in the dark about its financial health. While it’s true that a restatement of accounts could take time, there are some basic details it could certainly share.
It’s not that the newly appointed board of the company has no information to share either. In the bidding process it has announced, the company will share financial, business and legal materials with shortlisted bidders, subject to non-disclosure agreements.
***
Simply put, all information that is to be made available to the bidders should be made available to Satyam’s minority shareholders as well."

While the piece is dead on, there is a far more serious problem with the selective disclosure of company information to the shortlisted bidder by the Board of Satyam (and approved by SEBI). It is that such disclosure would be illegal under Indian and US laws. The insider trading regulations of SEBI clearly prohibit selective disclosure of price sensitive information to select persons to the exclusion of others. The impact of violating the law is quite serious and in fact SEBI has pursued persons for such selective disclosures in the past. Similarly, Regulation FD of US Sarbanes Oxley Act also clearly outlaws such selective disclosures. Are we now going to have the target of the revamped Board of Directors commit an illegal act, aided by the regulator itself?

Financial sector reforms - IBA

Two days back I was at a well attended International Bar Association conference on business law held in Mumbai. On a panel that I was on, about financial reforms, I gave my usual more-negative-than-thou theory to all the panelists who spoke about we'll-be-ok-in-two-quarters spiel. I made three short points of reforms in this era. First, we should have a single regulator for the financial sector as recommended by the Mumbai as an International Financial Centre committee report - covering securities, banking, insurance, pension and government securities. Such a bold and correct step reducing regulatory arbitrage would never be possible except in times of crisis. It would be a tragedy to waste the crisis for such reforms. Second, with a need to give a fillip to and to create the fiscal incentives on infrastraucture spending and in light of the need of a Public-Private partnership, it is key to move forward rapidly on creating a vibrant corporate debt market. We can't afford otherwise. Third, in light of the Satyam scandal, there is a need to immediately introduce a vastly superior system of corporate disclosures (a blueprint of which has been readied after three years of work on the subject). It would be tragic if this is not immediately implemented and confidence in India Inc suffers because of poor disclosures.

PS: I have posted about the third point previously (integrated disclosures) and hope to write about the specifics of reforms needed in the corporate debt market.

Financial crisis humour - necessary cost cutting

Here is an excerpt from a piece from the New Yorker:

"Mr. Pepall, every day is now casual Friday for you. In fact, you don’t even have to bother getting out of bed. If time is money, mazel tov—you are now a rich man.

To those of you in Quality Control: As indicated by the new sign in your rest room, employees must wash their hands before not returning to work. If you don’t understand what that means, ask Mr. Pepall.

It has come to our attention that certain persons feel that executive-compensation packages have been unduly awarded. Management has zero tolerance for negativity. Moreover, now is not the time to play “the blame game.” In days like these, we must tighten our belts and be team players. Note: Anyone who received a signing bonus will be required to return it, posthaste, with interest. In fairness, senior V.P.s were asked to give back the income from last year’s exercised options, but they concluded that the calculation would be difficult and onerous.

Finally, we’d like to announce, with tremendous relief, that once Mr. Pepall and the folks in Quality Control go (and after Mr. Sonnenfeld is replaced with voice mail) no further layoffs are foreseen this quarter. From now on, however, we will operate as a “Stage 2 Company.” Anyone wishing to retain his or her job must therefore: (1) obtain an updated photo I.D. (available through Mr. Pepall) and (2) furnish your own salary."

Here is the full piece.