Wednesday, November 23, 2011

Why should students pay for the expensive library spending?

Whether it be my under-grad college or IIM, I noticed that the book requisition/periodicials/knowledge resource acquisition process is largely in the hands of faculty, while it is student fees which pays for that. Even in colleges(like IIM-A) where students can suggest books which are usually approved upto a certain monetary limit, I've noticed expenditure on niche books/novels/out dated resources. Now, one may argue that faculty/research scholars may need these books, and that restricting these purchases would infringe on their academic autonomy. But, I've wandered long enough between the library shelves to note the large number of books which have been issued barely 1-2 times, and then left to rot in the shelves. While I do not state that all books/resources must be used, it does seem a waste to me when resources are underutilized, and still spent for

Even when it comes to online resources, the story is similar. Many of the resources are accessible only from the few library computer terminals, which are barely occupied. The few users of them would rank in single digit. Even counting the students who do research projects etc, the number would not cross 30. And yet, millions are spent in providing access so that MBA rankings, MHRD inspections etc can award bonus points for spending on knowledge resources!

Nothing wrong in spending money, but should it be so woefully under utilized? One cannot blame the students for this because they hardly have the time/inclination to read/use those resources. Perhaps, if digital resources were accessible from student personal computing devices AND in user friendly format, the use of the periodicals/resources would improve. When the rest of the world has shifted from input based budgeting to outcome based metrics, it is time for libraries to do the same. Useful metrics would be
  • Average number of books issued per student(split as per year/program)
  • Books turnover(my hunch is this will be a long tail not a normal distribution) stats
  • Hours spent accessing online resources under IIMA login
  • Number of research projects done/year
My main point is that academic libraries do seem broke and should be fixed ASAP.

Monday, July 11, 2011

GTL group corporate governance sham-the reason for the price crash?

In June-11, the two listed companies of the GTL group crashed nearly 75%-80% in a day(since then they crashed even more and there seems no respite). The rumored reasons for the crash(promoter pledged holdings being sold) turned out to be false. And the company took corrective action by clarifying to the stock exchanges in detail, appointing SBI Caps as their merchant banker for restructuring etc. Such actions were necessary to regain a modicum of investor trust(given that the group companies were manipulated stocks in the Ketan Parekh scam in 1990s). As a value investor, I spent 2 hrs poring through the filings/presentations of the companies from 2009 till date. It took time and effort, but finally this is what I could gather.
  1. Artfully structuring shareholdings within the promoter group to avoid consolidating certain balance sheets:- Debt covenants signed by GTL, for GTL Infra and CNIL make it guarantee a major portion of its associates debt, and retain management control. GTL owns 36% in GTL Infra, which(till Mar-11) owned 51% of the Aircel towers acquisition SPV CNIL. Now, GTL owned nearly 33% of CNIL, with the promoter Manoj Tirodkar owning 16%.  Though GTL controlled CNIL indirectly by virtue of controlling GTL Infra, bright line rules were read so that CNIL came only on GTL Infras balance sheet, without being consolidated on GTL. Why should you bother? CNIL represented Rs 5000Cr+ debt.
  2. Avoiding consolidating 'associate companies' where it has equity, guarantees debt and contractually exercises management control:- The main entity GTL(52% promoter owned) is made to co-invest a minority stake along with group companies/promoter itself. And this co-investing is often accompanied by corporate guarantee of the total debt of the associate. For example(before CNIL was amalgamated into its parent GTL Infra), GTL invested Rs 1067crores( with promoter investing 650 Crores individually) for a 49% stake, with GTLs fellow subsidiary investing 51%. Despite this, accounting was done as an 'associate'
  3. Independent directors receiving hefty ESOPs:-'Independent Directors' own 1% or so of both GTL and GTL Infra. This does seem unreasonable. Will they ever have the incentive to speak up? Though other companies DO allow such ESOPs, none to my knowledge have been so generous
  4. Shareholder Quality:- Both companies have low holdings from Banks/FIs/MFs, and even retail shareholders. The major holdings are from hot money(FIIs) and promoters. Considering that India's only independent tower company must have undergone investment analysis atleast once, the omission from the portfolios does seem odd. 
  5. Extension of financial year:- In its 4Q'11 earnings release, GTL decided to extend its financial year from Mar-11 to Jun-11. This reeks of wanting to delay the inevitable viz default. 
  6. Doubtful selection of auditors:- The joint auditors of the firms do not have any international presence, and do not audit a single subsidiary. Though the subsidiary auditors listed in the annual report are all reputable firms, one wonders why did GTL avoid a single firm auditor, which could have done the audit much more effectively? I'm not a Big4 fan, but large complex audits do need it, given that international revenues for GTL(not GTL Infra) are quite large.
 Ironically, GTL has received the ICAIs Golden Peacock award for corporate governance-you all know what happened to another illustrious recipient of that award-Satyam Computers. The company does seem sincere on 'green engineering'(investing 2400crores), financial disclosures(like Enron, all it needed was someone to patiently pore through the disclosures) and corporate philanthropy. And the promoter's rags to riches story is commendable(aka Satyam's Raju). His judgement calls have worked right before, and he MAY have a magic solution to this morass. 

But all that does not compensate for dodgy structuring practices. Even the market seems to realize this, with the severe penalty to even whispers of doubt about the company's stability.

Friday, July 8, 2011

Independent directors/auditors-not busines advisors but rats ditching sinking ships

Whether it be Money Matters, SKS Microfinance, Satyam or companies caught in a legal/regulatory tussle, a few things inevitably happens. The auditors resign/refuse to seek reappointment, and so do the independent directors. This was evident during the Money Matters case(top executives of the company were accused of bribing loan sanctioning officials for seeking loan approval of their clients). The scam broke out in Dec-10, and within a month, the statutory auditor AND the independent directors resigned, leaving the others to bear the brunt. Now, I understand that noone like to be associated with failure. But the reason for resigning certainly is not due to professional grounds. If they had tried to bring changes within and failed, then I would understand. But abandoning a scam hit company, at the time it needs third party help the most, is quite unethical, to say the least.

During every corporate governance debate etc, it is alleged that Indian companies are 'family run' and not 'professionally managed'. The hypothesis is that when owners take a back seat leaving the steering to professional management and independent directors, it is best for the company. But, these are the very people who will abandon ship at the first sign of trouble. Right from the junior employees to the senior CEO level guys, they have little invested in jumping ship. No wonder then, that 'seth companies' may prefer loyal employees from their own region/language etc, who will stick with them through thick and thin. Same for independent directors also.

Now, auditors are not really expected to advice the company, except maybe on improving its controls. But independent directors have a fiduciary duty to the shareholders(besides the company itself). At times when promoters are arrested(like Money Matters/Unitech), it gives independent directors a golden opportunity to step up to the plate, take control and prove their worth. But no, the gutless wimps prefer to resign. If like in Satyam, they had acquiesced in the events leading to disaster, then I can understand(they have no moral right to stay on then), but otherwise it is quite timid of them to resign. 
Takeaway: Show me 1 company whose existing  independent directors steered it from crisis to renewed success. The fact that one is hard pressed to think, proves my point.

Thursday, June 30, 2011

Breach of trust-how corporates earn profits operating trust owned schools

On the face of it, it seems innocuous. A company renders services to a school, and gets paid for it via an operating fee. Whether the school owner(typically a trust) pays directly or not, the ultimate fee impact is on students. For specialized services like computer centers, entrance exam coaching etc, one can understand the need for trusts to outsource their functions to companies.

But when everything from curriculum to strategic initiatives to teacher training is outsourced(in return for fees), one must wonder whether the trust merely acts as a legal conduit for the corporate to 'own' the school viz derive economic benefits. Sample this clause in the 'management and consultancy services agreement' between MT Educare(Mahesh Tutorials) and a charitable trust settled by its promoter Mahesh Shetty(Source:-Page 15 draft prospectus filed with SEBI) 
The scope of management and consultancy services shall include advice on structuring of the PUC courses/curriculum and classes, assistance and consultancy services with respect to recruitment of teachers for the PUC, training of the PUC‟ teachers, providing techniques based on usage of technology, management of tests/examinations conducted by the PUC, advising on and assisting with marketing activities of the PUC,infrastructure management/advisory and support services (including designing of classrooms and laboratories of the PUC and facilitating optimum utilisation by the PUC of the available infrastructure) and other administrative and information technology related services. Our Company may provide all or any of these services to the PUCs 

One wonders what is left? When the core functions of the school are privatized en-masse, then does that service the policy mandate? Now, these private sector operators(MD Educare is NOT alone) will get private equity investments, acclaim for improving education quality, depict photos of the students/schools in their annual reports etc. But at what cost? Instead of lobbying the state Govt to make the required changes allowing private schools as in Haryana, they have chosen this backdoor method. To adopt that famous question, It may be legal but is it ethical?

Sunday, June 26, 2011

How small retail investors are getting screwed in both debt & equity

For the purpose of this post, I'll follow the SEBI definition of retail investors as someone who invests upto Rs 2,00,000 in investments annually(actually SEBI has that limit per IPO but given Section 80C etc, the Rs 2,00,000 limit is probably reasonable per annum).

The Finance Ministry recently appointed a committee on small savings, to revamp the whole system. A key recommendation was linking the interest rates on small savings, to the market determined curves. Even though the recommendation has inbuilt safeguards like limiting interest rate volatility to +_ 100bps/annum, it will still result in less money for the investors. At a point where we are giving incentives to big investors via tax exemptions, FDI relaxations etc, it does not seem fair to reduce the interest rates for only these people. Read the whole report here-

On the equity front, things are not much better. Financial Reporting requirements have become laxer. While some rule relaxations prevent wasteful reporting/printing(for example no need to attach subsidiary annual reports by default if you are presenting audited consolidated financial accounts), other points like 'opt out' emailing of annual report/accounts to shareholders, is a point of concern. All these years, SEBI had recommended that companies should quickly upload the annual report on their websites, but most companies had turned a deaf year. Finally, when SEBI made it mandatory for Stock exchanges to make this information available on their sites, the Ministry of Company Affairs woke up and decided to allow companies to send the annual report to the registered email address of their shareholders. But this comes without a mandate for them to upload it on their sites OR send it on request to the public. After all, stock markets are supposed to help even prospective investors, yet they often have to rely on private services to get the annual reports of smaller companies. Will this situation change? Another point of concern is the relaxation of segment reporting(quantitative and some other details no more needed) and the enhanced ceiling(from 2lakh/month to Rs 5 lakh/month) for identifying highly paid employees. All these points affect all investors, but institutional investors/analysts can access companies directly, which the retail investor mostly cannot. 

Wednesday, March 2, 2011

Did the Income Tax Dept(ITD) BPR project help PwC become India's best tax team?

In Dec-10, PwC was named(for the 2nd year in a row) India's best tax firm. This award(by a reputed journal) reflects the strength of the Indian practice-which anecdotal evidence also brings out. While the quality of the people and processes is beyond dispute, the question is whether PwC India received an unfair advantage because its international parent PwC executed the BPR project for the ITD from 2006 onwards(as mentioned in this press release).

When BPR is carried out,the consultant understands the existing process in depth and then suggests changes. This insight into the workings of the Departments is very helpful at appellate level and can be obtained by

  1. Recruiting former IRS officers/Superintendents into PwC
  2. Designing the systems itself
While all firms can adopt strategy (1), only PwC was given the chance of (2). This information is certainly of competitive advantage. Though I suppose confidentiality provisions would have been maintained, the issue arises of the proprietary of allowing a tax firm affiliate to understand and redesign the IT Dept systems. 

Takeaway;- Did the ITD invite the wolf  inside its henhouse? This question may take some years to answer but till then, the personnel who worked on that BPR project will be in high demand

Saturday, February 26, 2011

The bullish case for MTNL has carried an excellent series on the deterioration of BSNL(unapproved capex plans, litigious tenders, no VRS etc). But there is hardly any coverage about the impending demise of another erstwhile PSU gem-MTNL. Considering that external shareholders hold 25%(GOI 56%, LIC 18%), you would expect some good coverage on this stock. But there's hardly any analyst interest in the stock-when there is enough here to fill a Bollywood potboiler.

A bearish case can be built as follows:-
  1. Risk of losing major customers:- With 47% call units coming from 8% access lines, MTNL is  particularly vulnerable to losing market share if other operators aggressively target our largest subscribers. A similar defection is happening in the Mumbai Power sector between RPower and Tata Power. To its credit though, MTNL has identified high usage “commercially important persons” and is making all efforts to strengthen  relationship with these subscribers. But will this be too little too late?
  2. BSNL issue:- As MTNL mildly puts it(Page 8 of 20-F), We have significant amounts due from related parties and our inability to collect them or change the terms of our arrangements with our elated parties could adversely affect our revenues and profitability. As I blogged earlier, the dispute with BSNL exceeds its total Mcap. And this is only the surface
  3. Pension issue:- The DOT had agreed that pensionary benefits to the Government employees absorbed in MTNL and who have opted for either the Government Scheme of pension or for prorated pension scheme shall be paid by the Government. But this amount is simmering(and not accounted for)
  4. Weak controls(all pervasive):- Controls are weak in major areas like reconciliation of subscriber deposits, accounting for related party transactions and information technology controls.
The stock is beaten down to such low levels that a favourable resolution of any/all of the below issues can send the share price zooming for a while. The pension issue itself is worth Rs 1900 crores and can materially boost performance of the stock-irrespective of operational aspects. A careful tracking of the ligation progress could yield rich dividends

MTNL pending litigation Note 23 F-46 20F 2009-10 filed Oct-10 with SEC

Thursday, February 24, 2011

Why retrospective tax amendments are beneficial in the long run?

As a future chartered accountant(with an interest in taxation), I'm probably biting the hand that feeds many of my co-professionals. But the rationale for retrospective tax amendments should be understood before complaining about it(like the ICAI has done in its Pre Budget Memorandum here).

Like any human activity(and more so typical of a social science like law), tax law is imperfect. In this rapidly changing economic/technological environment, even the best trained policy makers cannot anticipate all the consequences of their laws. This gives rise to unintended consequences as the below examples show;-

  1. In the early 1990's, GE Shipping(of the Sheths) made a virtue of issuing rights shares at par, often at a substantial discount to market value. The conventional explanations of rights issue discount, ownership base not changing etc do not account for it. ProfSidharth Sinha(IIM-A Prof) postulated a probable explanation that for creating tax deductible reserves under Section 33AC of the IT Act 1961(linked to par value of share capital), GE Shipping issued rights issue at par to maximize the par value(depressing share premium to zero!). This fine example of transaction structuring was a perfectly legal way to minimize taxes(even if if went against financial markets canons)
  2. India's tax treaties with Marutitius, Cyprus and other tax havens lead to the incongruousness of Indian assets being transferred without capital gains being paid to India(via source rule). The tax authorities then tried to characterize the  sale of shares as being 'substantially the sale of underlying assets'
In perfectly legal cases like (1), courts may frown upon the morals but no court will uphold the tax demands. But in case (2) where the taxman can build a plausibly arguable case, he may win the battle in court as the present Vodafone tax tussle shows.

Also, as the Statement of Revenue foregone shows, smaller firms pay more tax reflecting that they are not 'optimizing tax as conventionally thought. It is the big fish who pay less tax. So even from an equity standpoint, retrospective amendments level the playing field for big and small players. 

 Moral:- As a famed jurist said, when people play with fire(transaction structuring without an economic rationale save tax saving), they should not complain when they get burned. So if people devise strategies which bend the letter of the law, they should not complain when the spirit is applied via retrospective amendments. 

Thursday, January 20, 2011

Lavasa's 'vision' problem-arrogance or reality?

As the SPV for India's first planned city(2nd if you count Sahara's Amby valley which is more residential oriented), Hindustan Construction Company(HCC)'s 65% subsidiary Lavasa has ambitious plans. But their risk factor No 18(page 21 of prospectus available here) is something new to me.
The breadth of our vision may serve to distract management who may be unable to achieve or maintain an essential level of expertise in each segment of our business due to too many competing segmental interests. If our management is unable to achieve or maintain a necessary level of expertise or if we do not realize synergies across our business segments, our results of operations would be adversely impacted. Further, given the diverse nature of our business segments, we may be unable to recruit and retain adequately qualified professionals who may instead opt for companies with narrower strategies, which may hamper the growth of our business operations(emphasis added)
I have respect for the immense vision of Lavasa. After all, building a mainly commercially oriented city, with the hope that every square feet of commercial space will induce 2 square feet, does need courage and vision given the relatively remote location. Still, this does seem like the management wants to fill boilerplate or more worryingly, they anticipate the problem of distraction. That begs the question-if HCC cannot do it, who can?

Is it fair to restrict cross selling for MFIs but not for banks?

Whenever a crisis needs to be analyzed, CA Y.H Malegam invariably plays a role. The microfinance crisis in A.P was no exception, and his committee submitted the report yesterday to the RBI. This report on 'Issues and concerns in the Micro Finance Sector' made the case for restricting other income of MFI as follows
We have observed that some MFIs operate not merely as providers of credit but also provide other services to the borrowers and others.  These services include acting as insurance agents, acting as agents for the suppliers of mobile phones and telecom services, acting as agents for the sale of household products, providing agricultural advisory services etc. While these service can profitably be provided by MFIs along with the supply of credit, there is a risk that given the vulnerable nature of the borrower and his/her inadequate negotiating power, an element of compulsion may creep in unless the provision of these services is regulated.  It is, therefore, necessary that the regulator limit the nature of services which can be provided, as also the income which can be generated from such services, the latter as a percentage of the total income of the MFIs.
This situation is not really different for banks, specially the new private sector ones where a branch manager may often get cross selling targets. The banks often coerce customers for extra services like
  • Taking education loan insurance from that bank's affiliate only(done by SBI)
  • Pushing for investing in MF's from proceeds of matured Fixed deposits etc.
  • Further, banks do levy an insurance administration charge(which the Malegam panel has criticized for MFIs stating that We have also noticed that some MFIs levy an insurance administration charge. We see no reason why such a charge should be levied.  MFIs should recover only the actual cost of insurance.
The RBI does mandate forming separate subsidiaries, arms length dealings etc but does not restrict the total income from such services in any way. Given that the MFI clients do need these services, is it fair to restrict MFIs but not banks.
Takeaway: If the stream of bank scandals/frauds keep growing, can we expect a similar proposal from RBI for banks? Probably not given the clout of the 'Indian Banks Association' but then these are uncertain times.

Tuesday, January 18, 2011

Jupiter Bioscience Ltd_something rotten in the preferential allotment?

While reading the 2009-10 annual report of this company, there was a series of legalese about promoter related share transactions( legalizing earlier allotment, issuing preferential warrants etc). The complicated disclosures did not help in unraveling the chain of events but this is what I figured out
  • Company allotted 27.5 lakh shares @ Rs 146/share(total Rs 40 crore worth shares) in Apr-May'07
  • It then realized that the increased promoter holding would result in an mandatory open offer to other shareholders(as required by SEBI)
  • It then asked the Karnataka HC to cancel part of the shares-but the order 'inadvertently' cancelled the entire allotment
  • Because of this, the promoter holding dipped to 18% creating "block in the minds of the Investors at
    large on account of the nature of the Industry."
  • They then allotted fresh shares to promoters and others from Oct'08-Oct'09 without taking prior approval from BSE
  • When the fact of non approval was realized, the market price had corrected and the minimum price as per SEBI regulations was Rs 90. 
  • While the promoter was willing to accept the new shares(of Oct'08) at the old price, the company magnanimously lowered the price to Rs 90 stating that, "Considering the case being fair and just on the part of the Company towards its promoter, who and his family strived hard for the last 25 years to bring the Company upto this level..."
  • To be fair, Rs 40 crore of the promoter was idling for nearly 3 years on which neither dividends nor interest could be paid. But considering that the mistake was due to the company itself, also that the promoter should not be subscribing shares for quickly selling them, the compensation rationale is doubtful
. The transactions are explained in an opaque manner(another corporate governance red flag)

Friday, January 14, 2011

Time to short MTNL? 3661 crores additional liability may wipeout Mcap of 3316 crores.

The scandal prone telecom sector has seen most telco stocks fall. MTNL being mainly a fixed line operator(a declining business) with heavy pension liabilities, the stock price has fallen to Rs 51 and thats why I thought of it as a 'contra buy'. Both the notes to accounts & audit report for 2009-10(available at merely said that Note No.16(a) & (b) regarding the amounts recoverable from DOT/ BSNL are subject to reconciliation and confirmation and in view of various pending disputes regarding each others claims we are unable to comment on the impact of the same on the profitability of the company.

But then I stumbled upon the C&AG audit report on Central Public Sector undertakings covering the 2009-10 reporting year.  And that was a shocker. Summarizing Page 11 & positions as per the audited accounts;-
MNTL- BSNL owes us Rs 1580.11 crores net
BSNL-MNTL owes us Rs 2080.99 crores(net).
There's a difference of 3661.1 crore between these 2 positions. And this does not find a mention in the audit report(to be fair-the auditor does not have access to BSNL's accounts and so must state the bland excuse "we are unable to comment"..

Since 2005-06, C&AG has been trying to get the Govt(DoT) to resolve this dispute between its two PSU's. But the management has not taken any initiative. Given the IPO plans of BSNL(on hold for now), this festering issue is bound to come out and heads will roll. But when will that be? God alone knows.This unfortunate episode highlights the agency problem at PSU's-there is no 'skin in the game' and inaction is not punished. By any token, 5 years is too long a time.

Takeaway: -Why should we care about disputes between 2 Govt cos? MTNL is listed and a F&O stock.If the press highlights this, short sellers could have a bonaza till the Govt clarifies. And given the weak systems of MTNL(as mentioned in its audit reports), it is likelier that its figure is incorrect.

MTNL accuses Tata Communications Ltd(TCL) of Rs 243.55 MM fake ILD charges

While reading the MTNL notes to accounts for 2009-10, Note 30 was really surprising. Companies have commercial disputes but taking it to this level is strange. The amount is small in comparison to the turnover/assets/profits of either company but reflects poorly on TCL's internal controls. This matter was not publicized and even the press has not captured it.To quote the note(emphasis added)
In respect of MS Delhi, a sum of Rs. 243.55 million payable to TCL for ILD charges for the period Oct- 09 to March-10 has not been paid due to heavy spurt in ILD traffic towards M/S TCL. On technical analysis it was found that these calls were made to some dubious and tiny destination. These destinations do not confirm to national numbering plan of the respective countries and are not approved destinations as per approved interconnect agreement. Further these calls has not got physically terminated to the destinations The observations were shared with M/S TCL. M/S TCL has also been advised that the balance which relates to fraudulent calls is not payable and accordingly no provision has been made in the books of accounts. However the above has been shown as part of contingent liability.
If other telcos start auditing their bills from TCL, are we looking at an earnings surprise sometime in the future?

Saturday, January 8, 2011

Companies contributing x% to the exchequer.

An Indian blue chip company proudly totals its tax payments(excise, service tax, customs duty, sales tax) and proudly claims to have contributed a not-so-small chunk of India's GDP. This claim is ironic considering that it was once India's major zero tax company. A blockbuster film and a book not available in India, have accused the company of evading taxes during the 80's. Still, the claim per se is questionable. It is the end consumer who pays indirect taxes. The producer only remits the taxes to the Govt. If there is any measure, it should be
  • Direct taxes paid(income tax/wealth tax etc)
  • Net Indirect tax paid in cash(this would reflect net value addition)
But then, no one reports these things except in the cash flow

Friday, January 7, 2011

The (ab)use of procedure to serve vested interests

Recently, the TOI reported that the Central Government(GOI) had cancelled the proposed All India common medical entrance exam. And why? Because MCI had not taken prior approval as required by the MCI Act 1956. Such a lapse could well have been condoned post facto but despite an expert body(MCI) proposing and the Supreme Court approving, the GOI decided to scrap the notification itself.

Surely, prior approval clause was meant to curb arbitrary/hasty action by autonomous bodies/regulators. But not granting approval in such cases amounts to misuse of the law.

Section 19 of the Prevention of Corruption Act 1988 provides for 'previous sanction' before a Government servant can be prosecuted for corruption. Needless to say, the number of approvals are few and difficult under this  Act also. Delay is the best weapon in the hands of the corrupt.