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.