Tuesday, May 26, 2009

Winds of change in US board rooms

Whatever else governance reform may mean, I have always been clear about one thing it should mean: independent directors cannot be selected by management; to begin with, at least some independent directors on the board must be chosen by institutional shareholders.

I am not aware of any country where this happens. It certainly does not happen in the cradle of the governance movement, the US. In the US, the majority of companies have provisions that allow shareholders only to vote for directors proposed by management or withhold their vote. This has created a situation where directors get elected even when they do not command a majority of shareholder votes.

As the head of governance Calpers, the California pension fund, notes in a recent FT article, this is set to change. Legislation has just been introduced in the US Congress that allows shareholders to say 'no' to a director proposed by management and to propose their own directors subject to certain clauses intended to keep out frivolous proposals. The legislation also seeks to separate the chairman and CEO rules, another reform I have myself long urged. The SEC, under its new head, is introducing proposals of its own that are consistent with such legislation.

Governance reform is on the agenda of Sebi as well. This is the time for Sebi as well as the government to take the lead to usher in governance reform along these lines in India as well. After the Satyam and Nimesh Kampani affairs, there is concern about the need to protect independent directors from legal actions in matters for which they can hardly been held responsible. Two independent directors are said to have quit every day since Satyam erupted- resignations to date total over 400.

A certain measure of protection for independent directors is fine. But this must go hand in hand with measures to strengthen the mechanism of independent directors. Independent directors who collect huge fees in return for nodding their heads to whatever management wants done is clearly not on.

Friday, May 22, 2009

UK's financial sector

UK has long prided itself on its competitive financial sector and its comparative advantage in that sector. How did this advantage come about? Because of light regulation. In other words, the UK benefited from regulatory arbitrage. To put it more accurately in light of the ongoing crisis, UK bankers benefited from such arbitrage. So, what's to be done about it?

Martin Wolf reviews an astonishing report prepared by a committee that included UK's chancellor of the exchequer, Alistair Darling. The report recommends “ the financial sector be allowed to recalibrate its activities according to the sentiments and demands of the market”. They must be nuts to recommend this after seeing how the market has worked.

Wolf makes a set of eminently sensible suggestions:

First, the UK needs to make global regulation work. It should discourage regulatory arbitrage even if it expects to gain in the short run.

Second, it must, in particular, help ensure that owners and managers of financial institutions internalise most of the costs of their actions.

Third, it must reject egregious special pleading from the industry. The sector argues that moving derivatives trading on to exchangesmight damage innovation. So what? Maximising innovation is a crazy objective. As in pharmaceuticals, a trade-off exists between innovation and safety. If institutions threaten to take trading activities offshore, banking licences should be revoked.

Fourth, while trying to create a stable and favourable environment for business activities, the UK should try to diversify the economy away from finance, not reinforce its overly strong comparative advantage within it.

Fifth, UK authorities need to ensure that the risks run by institutions they guarantee fall within the financial and regulatory capacity of the British state. They should not let the country be exposed to the risks created by inadequately supported and under-regulated foreign institutions. At the very least, they should not undermine other governments’ efforts to regulate their own institutions.

Since "reforms" are the flavour of the day in India today, let me add that some of the above principles should guide banking sector policy in India as well.

A cohesive and stable government?

Those amongst the chatteratti who were euphoric about the mandate for the UPA government must be having to think again, seeing the birth pangs of the new government. The DMK leadership has retreated to Chennai and into a big sulk. Even if compromise is reached on the number of berths, it appears unlikely that the Congress can dictate who the DMK's ministers should or should not be: I doubt that any self-respecting party can concede the point that two of their earlier nominees were inefficient and corrupt.

As for the markets' relief over a patchwork of parties from the Third or Fourth Fronts forming the government and the Left being kept out, it's worth remembering that, in Mamata Banerjee, the Congress has to contend with somebody who was to the left of the ruling coalition in West Bengal. Banking reforms, labour reforms, SEZs- it won't be easy to breeze past Mamata on these issues.

Lastly, I do hope good sense prevails in the Congress and the finance portfolio stays with a politician and doesn't go to a technochrat. It wasn't the pro-reform brigade that helped the Congress do well in the 2009 elections, it was the solid political instincts of the Gandhi family, much of which goes against the spirit of "reforms".

Tuesday, May 19, 2009

Understanding the results of the 2009 elections

I don't know in which case instant wisdom is worse: the Union budget or the elections. In both instances, it is the idiot box that plays havoc with sober judgement. Even as the news is happening, pundits are ready to shoot their mouths. Whereas in both cases, a careful dissection of data is required in order to arrive at an informed judgement.

Let us consider some of the conclusions that abound in post-election punditry:

1. Regional parties have been shown their place, national parties have regained their dominance: We need always to distinguish between number of seats won and share of the vote. It is possible for a ruling party to become unpopular and see its share of the vote fall. Still, it may win more seats because the opposition vote happened to be more splintered.

In the present election, Yogesh Yadav estimates that the combined vote share of the Congress and the BJP climbed from 48.7% in 2004 to 48.9% in 2009- hardly any change. This translated into a disproportionate increase in total seats of the two parties from 283 to 321, with the Congress gaining 61 seats and the BJP losing 23 seats.

So, the regional parties have retained their importance. It is just that the relative shares of the Congress and the BJP in the national party pie changed so as to place one party in a stronger position than before.

2. The results are a vote for stability and good governance: This implies that regional parties are an unstable factor and the national parties alone can provide stability and good governance. The figure for the vote share of regional parties has hardly changed. Besides, the BJP, which has provided stability and good governance in Gujarat, is a big loser. The Congress benefited from the electoral arithmetic in many ways: for instance, it made big gains in AP because the Chiranjivi factor ate into the votes of the TDP and in Maharasthra, the MNS ate into the votes of the Sena-BJP. A slight change in the electoral arithmetic could once again create instability at the centre.

3. The results are a vote for "reforms" and the Congress-led UPA should, therefore, fast forward "reforms": The Congress benefited from a rise in rural incomes and prosperity driven by growth in agriculture, an area that is least touched by reforms. It also benefited from measures that "reformers" relentlessly fought: NREGA, the farm debt waiver, the Sixth Pay Commission award, an increase in subsidies and OBC quotas.

The one formation that lost heavily from its attempt to push through "reforms" was the Left in West Bengal which tried to usurp farm land in order to push ahead with industrialisation. (SEZs are an important item on the "reforms" agenda). It is fair to say that the UPA benefited from measures associated with the Left while the Left lost because of measures associated with the "reformers'!

4. The nation has rejected the "communalist" BJP: It is said that it was the BJP's attempts to project Narendra Modi as a future national leader and the vitriolic outbursts of Varun Gandhi that cost the BJP dearly. Really? Then, how come Varun himself won handsomely in Pilibhit and the BJP did well in Karnataka which is considered progressive and was out of the BJP orbit until recently?

I'm afraid none of the explanations put forward, such as the ones above, are free from infirmity. There are only three things one can say we can with a degree of certitude. One, regional parties remain a force. Two, the electoral arithmetic can cause the outcome in terms of seats won to diverge significantly from the outcome in terms of vote shares. Three, the only way to combat the anti-incumbency factor is to focus on measures that have a pro-poor and rural orientation.

Wednesday, May 13, 2009

The rise and rise of regional parties

The great game of searching for alliance partners is on and regional parties are being wooed arduously by the Congress and BJP alike. I hear much tut-tutting over the rise of regional parties. Somehow, there is a perception that regional parties' support or dominance leads to instability and weak governance and only the two national parties, Congress and BJP, can provide stability and good governance. So, take your pick- the secular guy or the commual guy.

Alas, life is much too complex and messy to conform to the preconceptions of the Indian elite. There is no stopping the rise of regional parties, as I note in my ET column, Fear not the regional parties, and, more importantly, there is no reason to get jittery over this phenomenon.

Regional parties have shown themselves more responsive to caste and regional aspirations and this has inevitably eaten into the vote share of the national parties. This will continue until a more homogenised and prosperous nation emerges with the middle-class being truly middle, meaning accounting for, say, more than 5% of the population, as is the case today (depending on what income level you want to take as a cut-off).

As political scientist, CP Bhambhri, writes in a companion piece in ET, regional parties have found it necessary to capture power at the centre in order to better cater even to regional aspirations because, in the Indian federation, the centre still calls the shots. In the process, regional parties are compelled to develop a national perspective. That is the beauty of democracy: it causes political actors to modify their behaviour in ways that generate wider support and hence leads to more acceptable behaviour.

There is much condescension when it comes to regional leaders- they are not as savvy or well dressed as their national counterparts and so the inference drawn is that they may not have the skills to run the nation. Nonsense. If you have run UP or Tamil Nadu and done so more than once, believe me, you have what it takes to run the nation. I quote a distinguished bureaucrat in my column as saying nice things about Deve Gowda. TSR Subramaniam, former cabinet secretary, expresses the same sentiments about Gowda. Outlook editor Vinod Mehta wrote recently that the most impressive performer from the Indian delegation at a Davos conference he attended was Gowda, not one of our high-profile businessmen.

So, let us not deride regional parties and regional leaders. Instead, let us welcome gracefully the changes being ushered in by our marvellous democracy.

Saturday, May 09, 2009

Gujarat a star in agriculture

Gujarat has always been a star in industrial performance. It was news to me that Gujarat is a star i in agriculture. Gulati and Shreedhar analyse the phenomenon in an ET article. Agriculture has grown in Gujarat at an astonishing 9.6% in 2000-01, more than the thrice the all-India figure.

One key driver has been the Sardar Sarovar project and the increased availability of water in a state in which irrigation cover is only 36%. One can understand why the project arouses strong emotions in the state. Another driver is technology, especially new varieties of cotton with the private sector taking the lead. Then, good roads, better regulation of electricity for agricultural use and a thrust on extension services have helped.

The authors conclude, "Strong political commitment to promote rural development, a long term vision, and the capacity to implement this are perhaps the key ingredients of Gujarat’s success story".

That must explain Modi's success- there's a lot more to development in Gujarat than the Nano project.

Friday, May 08, 2009

Indian firms in world's 'most reputed' list

Rediff has a story on a list of the world's most reputed firms listed by the Reputation Institute of the US. (I must confess I have no clue who they are). The following are some of the Indian firms that figure (world rank in brackets):

1. Tata group (11)
2.SBI (29)
3. Infosys (39)
4.L&T (47)
5. Maruti (49)
6.HLL (69)
7. ITC (95)
8. Canara Bank (102)
9. Hindustan Petroleum (111)
10. Indian Oil (112)

Interesting omissions are the Ambanis and the Birlas. It's also interesting that Infosys, which has invested so much in building an international brand and HLL, which is a well known brand, rank below Tata and SBI. The top 10 includes four public sector firms.


I finally finished reading Shantaram. I say 'finally' because I am a slow reader and the novel runs into over 900 pages.

Shantaram, which came out in 2004, is penned by Gregory David Roberts, an Australian who was serving a jail sentence for armed robbery in his country. He escaped from jail, landed in Mumbai, spent several years there as part of the local underworld, was recaptured in Germany and, after serving the remaining sentence, got his novel published. He needed to write it thrice because his captors destroyed the first two versions when they found out. Roberts has since made Mumbai his home.

The novel is an epic, along the lines of,say, Gone With the Wind. And it's more than a novel, it's a soul-stirring experience. To think that a man could go through all that, retain his humanity and find the reserves to write a splendid novel! Roberts' mother taught him to appreciate literature and he spent his time in the Australian jail devouring first-rate fiction. It shows in his own writing.

It's impossible to capture the splendours of the novel in one short post. Roberts has said in interviews that the events are real, only the narrative is fictional. There is a charming account of Roberts' six month stay in a village in Maharashtra's interior where he is given his Indian name, Shantaram; a moving description of life in the slum near Cuffe Parade where the locals adopted him as one of their own; great encounters with Abdel Kader Khan, the underworld don, who combines a fine command of the English language with a fondness for philosophical speculation (every week, he and his comarades meet for lofty discussions); Roberts' embroilment in the war in Afghanistan when he accompanies Khan and others on a journey through Pakistan to arm the Taliban in their war against the Russians; and Roberts' falling in love with Karla Saaranen, a mysterious, beautiful and thoughtful American lady of European extraction... (you have to read the novel to know what the mystery is about).

Some of the scenes in the novel will stay with me for a lifetime. On one occasion, Roberts and a small boy (Khan's nephew entrusted to Roberts in order to experience slum life) find themselves attacked by a whole horde of dogs in the slum at night time. They try to fend off the pack with bamboo sticks but it's a losing battle. Then, Kader Khan's bodyguard materialises out nowhere, iron rod in hand. He's a trained martial arts specialist. He leaps into the air in true martial art fashion, swirls and strikes. Two dogs have their brains shattered. The entire pack, stunned at somebody taking the attack to them where Roberts was merely defending, flees.... Roberts is saved.

Then, there is the Colaba police station where Roberts is held for a few weeks. The lucky ones are those behind bars. The others are herded into a small corner leading to a toilet where shit is overflowing.... the weakest have to stand for days in a heap of shit until they drop dead....

One day, the detainees are led out and taken to Arthur Road jail (home to Sanjay Dutt for a while). Roberts is motioned to a corridor. There, the convict warders are waiting with lathis.... Roberts has to run the gauntlet but choses to walk in a gesture of defiance as the blows rain on him. He lands in his cell bloodied. The jail itself is hell with the warders showering blows on inmates at will. It makes your blood boil to think this is what the Indian system has been reduced to. One gets a sense of the daily brutality visited on the weak and the defenceless by the Indian law enforcement system.

What, one wonders, is the IPS brass doing? The only thing you could say in extenuation is that things are not much better in jails elsewhere. In his jail in Melbourne, Roberts was subject to the same kinds of senseless beating and cruelty. Recently, during the G-20 meet, the cops in UK, considered to be more civilised than the rest, were flailing their batons at harmless protesters. I guess it goes with the uniform, the sense of power it gives you. The power to ill-treat and also the power to extort huge sums of money.

The Afghan expedition is a story in itself. It takes weeks of trekking through the mountains to get there, with a maniac as escort. This man has only one mission in life and that is to catch hold of Russian soldiers and torture the life out of them. The return journey is a horror, with Roberts and a few survivors holed up in a snowy cave with no food or water for several days. Roberts makes it to a hospital in Pakistan and then finds his way back to Mumbai. With his heroic role in the Afghan expedition, he becomes a privileged member of the gang, specialising in counterfeit passports. He makes good money out of it.....

I won't narrate more. I will leave you to find out for yourself. Shantaram is being made into a film by Mara Nair. I can't wait to see it (I understand work on the film has stalled because of some problems in Hollywood). Let me just say that the book leaves you shaken and stirrred, to use a famous James Bond line.

I had a post some time back on another book on Mumbai, Suketu Mehta's Maximum City. That is also about the seamy side of Mumbai. But the philosophical approaches of the two books are very different. Mehta is appalled and outraged at the violence and corruption that lie beneath the surface in Mumbai.

Roberts writes with empathy and affection for those on the seamy side. There is understanding and love, an underlying humanity that comes from having experienced the worst of it. Roberts is now off smoking, drinks and drugs and leads the life of a celebrity in Mumbai. I doff my hat in humble salute to the man.

Unconvincing "stress" tests

The much awaited results of the "stress" tests on top US banks is out- the idea is to see how much extra capital these banks would need under fairly realistic economic scenarios over the next couple of years. The estimate: $75 bn in order to be well capitalised by the end of 2010. The biggest requirement is at BofA: $34 bn.Total losses at the banks are estimated at $600 bn. Of this, $363 bn would be recouped through earnings.

What do we make of these figures? Two points. One, these losses come after the accounting standards were tweaked on mark-to-market losses of toxic assets. Two, the IMF had estimated US bank losses at $1.6 trillion over the next couple of years and estimated the extra requirement of capital at around $500 bn. The market is, therefore, likely to perceived the US Treasury as under-estimating capital requirements in order to hide the gravity of the problems at banks. That, in turn, means the chances of raising additional capital from the market would be zero.

Even otherwise, chances of banks raising additional capital are bleak. FT estimates total capital requirements at $55 bn, assuming some banks want to repay capital given by the US government and also some asset sales. This amount is three times total US equity raisings in the last six months. There you are.

Since banks can't raise capital from the market and the US government is unwilling or unable to pump in more, Richardson and Roubini, writing in the FT, say that insolvent banks should be closed down, with creditors taking some of the hit (depositors alone should be fully protected). What about the Lehman effect? The authors argue that market discipline would force banks to change their behaviour in ways that would instil confidence in the market, so credit would become available.

Well, well. For this process to work out would probably take years. So implementing this solution would require some nerve. Academics have the license to prescribe theoretically neat solutions but the global crisis requires a solution here and now because there is real suffering all round. I doubt that there will be any takers for the Richardon-Roubini solution where large banks are concerned.

Sunday, May 03, 2009

How real is the Taliban threat in Pakistan ?

I have been following with interest the scare stories about the Taliban being 60 kms from Islamabad and the dire prophesies about Pakistan's nuclear weapons falling into the hands of terrorists. Are things really as bad as that? I came across an article in Asia Times, which made a lot of sense to me:
Pakistan is not an ungovernable Somalia. The numbers tell the story. At least 55% of Pakistan's 170 million-strong population are Punjabis. There's no evidence they are about to embrace Talibanistan; they are essentially Shi'ites, Sufis or a mix of both. Around 50 million are Sindhis - faithful followers of the late Benazir Bhutto and her husband, now President Asif Ali Zardari's centrist and overwhelmingly secular Pakistan People's Party. Talibanistan fanatics in these two provinces - amounting to 85% of Pakistan's population, with a heavy concentration of the urban middle class - are an infinitesimal minority.

The Pakistan-based Taliban - subdivided in roughly three major groups, amounting to less than 10,000 fighters with no air force, no Predator drones, no tanks and no heavily weaponized vehicles - are concentrated in the Pashtun tribal areas, in some districts of North-West Frontier Province (NWFP), and some very localized, small parts of Punjab.

To believe this rag-tag band could rout the well-equipped, very professional 550,000-strong Pakistani army, the sixth-largest military in the world, which has already met the Indian colossus in battle, is a ludicrous proposition.

So, what's behind the hysteria being drummed up in Washington?

To start with, what Washington - now under Obama's "Af-Pak" strategy - simply cannot stomach is real democracy and a true civilian government in Islamabad; these would be much more than a threat to "US interests" than the Taliban, whom the Bill Clinton administration was happily wining and dining in the late 1990s. What Washington may certainly relish is yet another military coup - and sources tell Asia Times Online that former dictator General Pervez Musharraf (Busharraf as he was derisively referred to) is active behind the hysteria scene.

.........Moreover, there are canyons of the Pakistani military/security bureaucracy who would love nothing better than to extract even more US dollars from Washington to fight the Pashtun neo-Taliban that they are simultaneously arming to fight the Americans and NATO. It works. Washington is now under a counter-insurgency craze, with the Pentagon eager to teach such tactics to every Pakistani officer in sight.
There are wheels within twisted wheels. The only thing unexplained above is in what ways concretely the US stands to gain from a military regime in Pakistan. What are the larger designs of the US to which a civilian regime would be an obstacle? And, more importantly, where does India figure in the US plan for Af-Pak?