Desicritics Category: BizTech: Money

CFO or CEO: Who Influences Earnings Management More?

Dr Bhaskar Dasgupta — Sat, 20 Mar 2010 11:01:53 EDT

Well, the previous idea was that earnings management was primarily driven by the CEO and therefore regulators around the world asked for the remuneration details of the CEO. But recently the SEC has started asking about the remuneration of the CFO as well, which in hindsight, makes perfect sense. After all, the CFO is the person who is actually managing the entire financial process which culminates in the production and propagation of the financial and earnings figures and announcement. A recent paper sheds some more light on this rather interesting and topical issue.

The authors cover the S&P 1500 firms for which CEO and CFO compensation data is available over the 1993 to 2006 period giving a total of 17542 firm years. They judge both cash pay and total pay, the latter including everything else such as option grants, incentive plans, etc. On an average, the CFO earns 1/3 of the CEO with an average equity incentive ratio of 11% for CFO’s compared to 24% for CEOs. Please bear in mind that 2002 saw the introduction of SOXA and the authors do include the impact of this on accounting treatments such as accruals management.

Prior to the introduction of SOXA, there is a positive association between the compensation of both CEO’s and CFO’s with accruals management. In other words, more the incentive, more are the accruals within the financial statements and the influence of the CFO is higher on the accruals management element compared to the CEO. The introduction of SOXA meant that active accruals management was dramatically reduced and there is no longer any relationship between the incentives to CFO and CEO and accrual management.

How about beating analyst forecasts? As you would know, analyst forecasts are extremely important in forming the market sentiments which drive how the market reacts post the earnings announcements. Similar to the above finding, the authors find that pre SOXA, CEO and CFO incentives are positively associated with the likelihood of reporting positive earnings surprises. They also find that greater the incentive, greater was the chance of an earnings surprise. In the post SOXA period, the equity incentives of the CEO is no longer positively associated with the likelihood of beating analyst forecasts. But surprisingly, the CFO is still highly influential in the likelihood of beating analyst forecasts.

The authors also carry out some additional tests and find:

We also find some weak evidence that earnings management incentives are strongest when the manager has compensation that is more sensitive to stock prices and the firm’s stock returns are more sensitive to accounting earnings.

In other words, the role played by the CFO is almost independent of the CEO at least in terms of accrual management, earnings management and general financial statements to the wider world. If I was a shareholder, I would peer at the CFO much more closely and if there is an element of equity incentive compensation to the CFO, then peer even more closely with a beady eye. I can see analyst models start to incorporate this as a factor. On the flip side, I am sure the CFO’s will be reading this and demanding more cash based compensation compared to stock based compensation. Not sure what the answer is, but it puts further pressure on the remuneration committee, the audit committee, the external auditors and regulators to make sure that the firms are presenting a true and fair picture of the accounts.

John(Xuefeng) Jiang,Kathy R.Petroni and Isabel Yanyan Wang, CFOs and CEOs:Who has the most influence on earnings management?, Journal of Financial Economics, doi:10.1016/j.jfineco.2010.02.007

Book Review: Complicit by Mark Gilbert

Blokesablogin — Mon, 22 Feb 2010 22:09:40 EST

Mark Gilbert, the Bureau chief for Bloomberg UK writes this lucid account of how the latest economic mess we saw unravelled in the past few years happened. Complicit: How Greed and Collusion Made The Credit Crisis Unstoppable is worth a read.

The journalist shines through. The book breaks down the smokescreen of big finance into small bytes of information that can be digested by the average reader without a degree in finance. It is topical, and as the tentacles of fiscal mess continues to wrap around and squeeze more people and countries dry, it is a good idea to get educated as citizens.

When we consider the power we have as voters and investors, it behooves us to take the responsibility to understand how messes like these came to be and how indirectly we were responsible. It was not a single person's greed. Rather, as a society, we wanted more. We wanted our cruises, our cars. We wanted astronomical returns. We wanted larger homes with a smaller paycheck.

However, Gilbert does not point the finger at us, the electorate and the investors. Rather, he shows the ropes of corporate finance and banking systems. He explains the smoke and mirror schemes adopted by "reputable" financial institutions that encouraged "savvy investors" (that is us) to trust our nest eggs with "gold-rated stars". Soon, the gold turned to dross and even countries were left with pyrite in their vaults.

The old adage of not putting all our eggs in the same basket was thrown out with yesterday's trash. The monopolistic financial institutions created "new" baskets but they were all smaller sections of the one larger one. That was one aspect of the "plot".

This was furthered by raters who ensured that these baskets were woven so tight and lined with sufficient padding to ensure the safety of the eggs. The eggs did not crack, they crashed. They could not even be redeemed to make scrambled eggs.

Have we learned our lessons or will we continue to shirk our responsibilities as shareholders and voters? Or will we educate ourselves and have the wisdom to distinguish the chaff from the grain and protect our hard earned assets?

Do read this book and decide.

Free Countries and Lower Cost of Debt

Dr Bhaskar Dasgupta — Sun, 24 Jan 2010 20:11:58 EST

Now here’s an interesting research paper which popped into my inbox. In short, the more the political rights, the more free the country, the level of property rights, free and fair elections, competitive political parties, important role played by opposition, minority group rights, a system of checks and balances across the legislature, judiciary and executive, etc, the lower are the costs of debt. To be precise, a one standard deviation in political rights is equivalent to an 18.6% decline in bond spreads. Now that is a serious chunk of change. The authors concentrate on Eurobonds and come up with the following main countries within their study: USA (799 issues), Japan (231 issues), Australia (214 issues), Germany (213 issues), and the U.K. (180 issues). India is also there which surprised me because the Indian bond market is generally anaemic but then the Eurobond market is slightly different. So what are the correlations like? Some very interesting results pop up:

	Log yield spread	Bond rating
Log yield spread	1
Bond rating	-0.65	1
Political rights	-0.25	0.3
SPI	0.08	-0.18
Freedom of the press	-0.31	0.37
Corruption	0.39	-0.46
Expropriation	0.33	-0.39
Creditor rights	-0.09	0.16
Log GDP/capita	-0.24	0.33
Sovereign rating	-0.34	0.42
Cross-list	0.03	0.02
Log total assets	-0.34	0.47
ROA	-0.13	0.06
Leverage	0.06	-0.05
Public	-0.46	0.48
Floating	0	0.08

Not going to go too deep into the analysis of each factor to each other and please bear in mind that correlations do not mean causality. But interesting results none the less. One can do couple of PhD's just on this :)

The researchers then do some rather complicated regression testing. One of their regressions is to analyse the joint impact of creditor rights and political rights on the bond yield spread. This is what they find out.

Pretty stunning visual results, eh? reduce the political and creditor rights and the surface starts to peak. And the gradient is pretty smooth, no lumps or bruises or troughs or peaks. The authors go about doing much more in terms of determining firm level impacts, checking cross listing implications, and other confusing things to me. So I am going to ignore them as the basic answer seems to be pretty clear. I quote 1 paragraph from their paper:

This paper examines the impact of country-level political rights on credit markets while controlling for legal institutions. Higher political rights are associated with significantly higher ratings and lower spreads for corporate bonds issued in both the Eurobond and the Yankee bond markets. A one standard deviation change in political rights is associated with an 18.6% decline in yield spreads on average; political rights impact international debt markets as much as creditor rights. We find that the interaction term between political rights and creditor rights is positively associated with yield spreads, thus, political rights and creditor rights partially act as substitutes.

We also consider the channels by which political rights impact bond markets. Freedom of the press appears to capture much of the effects of political rights, suggesting that part of the advantage of political freedom to credit markets may be due to greater information availability. Socio-political instability in the 25 years prior to the bond issue impacts the cost of debt, but does not capture the effects of political rights, suggesting that political rights are more important as a forward-looking measure of bondholder risk. Corruption and expropriation risk are also priced in bond yields; however, the effects of these variables appear to be more independent of political rights.

Now here’s the interesting take which I took away. Now that firms are becoming more and more globally footloose and capital becoming more and more aggressive, it is but natural that people will try to move these types of firms to countries which have more political rights so as to raise cheaper finance. On the other hand, think about what governments go about doing. They actually give tax benefits and a whole host of other benefits to attract FDI and capital. Here’s a silly thought. Instead of going about offering these kinds of tax breaks, why not try to improve the political rights? That will kill two birds with one stone, improve the society as well as attract firms. Neato, no?

Financial Independence and Freedom for Men

Sumanth — Thu, 17 Dec 2009 10:04:51 EST

Many men dream of being financially free. Many dream of quitting their jobs to travel around the world, spend time with friends and family and start new ventures and do what they would love to do. Most people have read the book Rich Dad, Poor Dad by Robert Kiyosaki. Some young men in 20s declare, “I want to take a retirement or break from work when I turn 35. Maybe, I will set up a company at that time.” I was one such guy. Sometime in 1999, I declared that I want to be financially free in a couple of years, when I had almost no literacy in personal finance or financial instruments.

So, how does one go about creating financial freedom and personal wealth? Being a miser is not the right way.

The process starts with introspection and getting in touch with reality. One has to start with a clear idea about one’s expenses in a month called cash outflow. Cash outflow can include the house rent, the bills, the travel expenses, cost of food and household items, medical expenses, children school fees, donations to charities etc. Most people meet these expenses by working in a full time job. A man is considered financially free, if he is capable of earning his monthly expenses (cash outflow) via his passive income. Passive income is the money a person makes without working, say by investments or being a non-working partner in a business etc.

In some families both spouses work, however we keep those situations aside for the sake of simplicity and focus only on an unmarried working men or a married men with wife playing the role of home maker.

Having good passive income and having financial freedom is inspiring to men. However, most do not know how to reach there. Many assume it is a function of their salary in the current job and start working harder to get a promotion, a bigger salary hike or an opportunity to work in US or Europe. They get stuck. Some go aggressively into stock markets and buy stocks recommended by friends without doing research on their own. They end up with bad experiences.

The first key to increasing passive income is to be financially literate. That is, one must get educated with financial instruments and learn the long term trends and patterns of real estate or stock markets etc. This literacy is a must before one gets into action. One can also start experimenting with small amounts of money in order to learn.

Financial freedom depends on a person’s net worth. If a person has a high net worth compared to his monthly income and also expenses, then his chance of being financially free is high. So, the first step towards financial freedom is to increase one’s net worth by shifting one’s attitudes towards life, expenses, money and investments.

If you had invested Rs.100,000/- in a simple index mutual fund in year 2003, instead of taking a honeymoon trip to Mauritius, you would have 6 lacs more net worth today. Just ten such decisions would have made your family sit on top of 60 lacs today, earning passive income of about Rs.60,000/- per month for your family.

I did not buy a car in 2003.

The moods, feelings and emotional highs and lows are the biggest enemies of financial freedom. Unless you are ready to take it as a game without high degree of detachment, you can forget about financial freedom. Well, good things in life come with some discomforts and sacrifices. So, have patience and enjoy.

Recently, many young guys are asking me, “Should I buy an apartment? I am getting married after 6 months and my parents are pestering me to settle down and buy a house. My friend bought a house costing 40 lacs rupees. Well, I also see that I can save Rs.50,000/- tax on interest that I pay for my home loan.”
Now, these guys save hardly 2 or 3 lacs in a year from their salary and they are getting ready for a house loan of Rs.30 lacs apart from completely emptying their bank accounts for paying rupees 10 lacs to the bank as down payment. The loan EMI itself is more than 3 lac rupees in a year.

It’s most often a bad decision. To pay the 3 lacs EMI, these guys literally starve themselves. They live on curd rice, when they go onsite (to US or Europe) for an assignment so that they can clear off this loan as early as possible. Buying a house to stay is the first mistake and the next big mistake is to attempt to pay up the entire loan early by putting more hours at work sacrificing other important things in life.

A house gives about 5% returns on investment in India. A house is not an asset, it is a liability. Buying a house costing Rs.40 lacs is as good as staying in a house worth about Rs.40,000/ per month, while great apartments, better than that dream house, are available for rent for as low as Rs.18,000/- and one also get tax breaks on the rent that one pays.

A man can dump his dreams of financial freedom to dustbin, if he buys a house. A house can wait till one is financially free. It’s all about being strong against wishes of parents and peer pressure and tell them straight, “You will not take away choices in my life; I work hard for my well being”. The other way to get them off your back is to ask them to contribute half of the cost of the house for a joint registration. Most parents will back off with this counter offer. Forget about the tax breaks you get from interest on loan. That’s a trap set up by government to push you into lifelong slavery and insecurity.

However, one can always invest in real estate as an individual or together with friends. Here, the male bonding really helps. Buying real estate involves research, legal verifications and price negotiations. This works when it is done as a team.

However, here is a ground rule regarding buying real estate as an investment. Never buy real estate (say land/sites/plots) thinking that it will appreciate in future. Buy real estate, if you find it cheap and if you are fine even if it does not appreciate. In India, people who bought real estate taking small loans in 2002-2005 did make good money out of it. This pattern has now shifted to tier II and tier III cities. Real estate can make one boost one’s net worth. If you had purchased a site worth rupees 10 lacs in Bangalore in 2003 by taking a loan of rupees 7 lacs, then today you may have increased your net worth by about 40 lacs.

If one lives in US, it makes great sense to buy a house at USD 300,000 during recession rather than succumbing to pressure from wife and ending up buying a house at USD 600,000 during a boom. In 2009, the prices of houses in many places in US have dropped to almost 50% of their peak price in 2007. However, this situation and trend has not yet come to house prices in India.

I have seen Multi-Level Marketing (MLM) guys speaking about passive income. However, MLMs seem dirty and tiring, when Indians are involved.

If you have patents or have written books which generate royalties, those also add to your passive income.

Once a person has high net worth compared to his monthly expenses, all he has to do to create passive income, is to shift a portion of that wealth to create some rental income (say commercial rentals) or get returns from investments into businesses and stock markets. If you have a net worth of Rupees one crore (about quarter million USD), then one can have an annual passive income of rupees 8 to 10 lacs easily.

Having financial freedom can help one get into a fast track towards capitalising on one’s ideas and opportunities. If you still work, then you will do it as a choice and not as a compulsion. You can switch to careers, which may not be high paying, but more fulfilling. You can take breaks from work to go on a long holiday with family or take on studying for another degree in a different field. All this will add years to your happy life and will create prosperity and happiness for your family.

It requires an internal paradigm shift to achieve financial freedom. The keys to financial freedom do not exist in outside world, for example one’s salary. The keys lie in one’s internal belief system and the way a person is hardwired to his relationship with money. When a person shifts this paradigm of thinking and attitudes, he slowly starts journey towards financial freedom. Robert Kiyosaki has a game called cashflow101, which makes ones overcome some of these internal barriers and decision making habits that stop us from being financially free.

For many people, investment in markets or real estate is risky business. Well, not taking risks in life is the most risky way to live life.

So, the keys to financial freedom are:
1. Declare your intentions about your future net worth, when you are financially free. Be clear about the time frame. For example, declare, if 1 crore (USD quarter million) created in next 5 years makes you financially free.
2. Stick to your intention even if it appears impossible. Declarations are powerful and they open new possibilities and opportunities.
3. Reduce wasteful expenditure. Do not listen to moods, feelings and emotions.
4. Do not buy a house to stay.
5. Invest in stock markets and/or real estate for long term after sound research.
6. Play Cashflow game (board or software) by Robert Kiyosaki with friends or family.(link)
7. Spend some time learning fundamental and technical analysis, if you are investing in stock markets.
8. Develop contrarian skills and be independent in thinking.

Warnings:

Do not get into buying futures or options looking for quick bucks, if you are a beginner. You will get enough time to experiment with all these beautiful instruments as you grow up. Have patience.

Do not listen to your broker or investment banker. Most of them are incompetent losers, with bad finances of their own. Dictate terms to them and avoid being nice and considerate to their persistent requests.

Realise that Market news channels like CNBC and NDTV profit are basically a kind of entertainment channels even if they get best fund managers to give opinions. I often do opposite of what these news channels recommend. My investment banker and stock brokers hate me.

Nationalization of Indian Banks and the Financial Crisis

Somik Raha — Fri, 30 Oct 2009 16:34:52 EDT

If one reads media articles of the day, it is shocking to hear the praise given out to Indira Gandhi for nationalizing India's banks in the 60's on account of India's stability in the world economic crisis. While many like the Wall Street Journal have criticized these views, their arguments have been on the minor premise (that India is better off with liberalization) rather than the major premise (that we can judge a historical decision from the outcome).

At the fundamental level, a kindergarten error of thinking is committed every time someone says, "Oh, look how terrible/wonderful the outcome is. Hence, what a terrible/wise decision was made!" The inability to distinguish between decisions and outcomes is a malaise that we have to watch out for. The first cardinal principle of decision-making is that one cannot judge a decision from the outcome.

To make this clear, consider the example of drunk-driving. Almost everyone agrees that it is a bad decision to drive drunk. If I am to drive drunk, and get into an accident, that would be a case of "bad decision-bad outcome." If I am to drive drunk, and still get home safe, that would be a case of "bad decision-good outcome." If I am to drive sober, and get home safe, that is a case of "good decision-good outcome." And it could be that if I drive sober, I might still get into an accident. That is an example of a "good decision-bad outcome."

The fundamental point is that if we know the outcome, then we don't have a decision to make. Decision-making is hard because the future is uncertain. The actual outcome is a result of so many variables that disentangling which action led to the outcome is like trying to catch one's shadow. Decisions should only be judged by the process used to make the decision. Was the decision-maker consistent with her preferences?Did she use the best information available to her? Did she create enough creative alternatives? Did she use sound logic to tie together her information, preferences and alternatives to get to clarity of action? More fundamentally, was the frame of her decision restrictive, or did she challenge the assumptions of her frame? Finally, was there commitment to action? These are also known as the six elements of decision-quality.

To bring home the point that nationalization may have little to do with India's survival in the economic crisis, here is a competing explanation.

The nationalization of banks has been hated by many. My personal experience is with the State Bank of India. My grandparents and parents had an account with the SBI. I thought opening my first account would be a breeze. Accompanied by my parents, I walk in to the office. There, I find that the person who opens accounts is late. The gentleman comes into the office, taking his own sweet time, and then asks me what I want. When I tell him I am here to open an account, he says, "Oh, well, it can't be done today. We are busy over the next two weeks because of several holidays. If you come after that, I should be able to help you." I took my two feet and my business right out of the SBI and into HSBC, where it took fifteen minutes to open the account. While HSBC is not exactly the perfect bank, they understand one thing very clearly - I have a choice, and they have to work hard to give me value if they want my business.

Government banks are not liked by the general public, and if anyone can help it, they bank with the private ones. The problem with India is not that we have too many private banks, the problem is that we don't have enough. Most of the private banks serve the middle class. Very few entrepreneurs have dared to enter microfinance or microventure markets.

Now, you might ask, how may we explain the fact that India escaped the financial crisis? Didn't nationalization help there? To answer this, we have to first understand why the crisis happened in the first place. First, in the 70s and 80s, the US government pushed private banks to give more loans to people in lower income groups. The banks, instead of doing this sensibly, started giving out loans to people who couldn't afford them. The logic was, "housing prices always increase, so if there is a default, we can always seize the property and sell it in the market." Well, that didn't happen. While this kind of silly logic is not surprising, what is surprising is that the finance industry is supposed to have the tools to protect itself agains such a risk. What happened? It turns out that in addition to being pushed by the government to take risk, the conventional tools of finance systematically underestimated the risk (using models borrowed from quantum mechanics that have little validity in the real world). Once a few people get Nobels in economics creating complicated equations that explain the market, no one dares to challenge it. If some one (like Nassim Taleb) does, they get shouted out. The entire financial industry engaged in the same set of dangerous practices, using the same methods and tools that made them feel they were safe. There was no diversity in the system. And so, when the system collapsed, all of them went down together.

In India, on the other hand, bankers have traditionally mistrusted statistics and finance. They understand common sense - if the borrower cannot afford the loan, then no loan should be given out. If the borrower is a police officer, lawyer or politician, there are high chances that they have no intention of repaying, so don't do business in these three categories (I am not saying I agree with these rules, but I am saying that most bankers in India follow some version of this). This mistrust of finance and statistics and reliance on common sense is a huge factor is saving our economy. I suspect that if we did a study, we might find that some private banks that used traditional financial models were badly affected by the crisis.

What is the problem with statistics and finance? Classical statistics is dogmatic about restricting itself to past data and will not allow one's beliefs about the future to come in. For instance, a newspaper report that says Gurgaon's water table will vanish in five years should immediately send shock waves in a banker's mind - all loans under process in Gurgaon should be under review. It doesn't take much to figure that if there is no water is five years, that property will be worthless.

Traditional statistical models will pick this up much later when defaults actually start showing up in the data, by which time, it may not be possible to save the bank. Finance, to the extent that it relies of classical statistics, faces the same problem. Taleb, in his book,The Black Swan, gives the excellent example of the statistical turkey, who is fed for a thousand days, and as each day passes, its belief about getting the next meal increases. Guess what happens on the 1001st day - Thanksgiving! The day before the turkey gets slaughtered, its belief about the future should be the highest given it has the most data with no deviance. That is the problem with all models that are exclusively focused on the past.

There is another big problem with finance. It takes the decision maker out of the decision, and is focused on things like "objective market price." There isn't any. For a trade to happen, two people have to be happy - the buyer and the seller, and both walk away thinking they got a good deal. There are only personal selling and buying price limits that each individual decision maker can place on what they sell or buy. A market is not something we create, but what results when people are left alone. All attempts at gaming or predicting the market have blown up in a spectacular way.

The lesson that Taleb and others have pointed to is simple - stay away from centralization. Let there be diversity. That is what protects us. It is not that hard to understand - if we all have the same genetic make up, then a disease that affects one type of people will wipe all of us out. Thankfully, we are different, and therefore, there are many who are not affected and reserve the strength to help those who are.

Will Manmohan Get An Economic Nobel?

Vivek Sharma — Mon, 12 Oct 2009 10:44:01 EDT

It is about time our Sardarji got it. Sardarji who is credited as father of optical fibers managed to dodge the Nobel by a whisker. I often look at that name on the wall of the Subway stop of Kendall Square/ MIT, and marvel at our inability to remember and recognise his name. But Manmohan Singh is a name that strikes a familiar chord in the West. Had there been no Manmohan Singh, we, Indians, could have been eating chai-pakoda, filter coffee-samosa, thumbs up and chaat in place of MacDonald's Burgers, Pizzas and KFC nuggets. The man who leads the greatest democratic nation in the world, (and emphasises the fact that India has more voters than the living and dead voters of the United States in the twenty-first century), the man who leads the most destitute crowd of voters into a capitalist, globalized economy, the man who has helped India become a keyboard thumping nation of 'code-monkeys' and 'phone-donkeys', making late-night forays into their stylised cubicle prisons from where they answer phone-calls with assumed Western accent / name, that man, his team, his party deserves some Western pat on the back. But maybe Sardarji will not get it for precisely these reasons and others that we will see in rest of my post.

Manmohan will not get it as he is overqualified as a politician. He is too gentle with words, too urbane and he lacks the element of drama so essential for getting credit for things. He does not offer to change the world, he has already done that to 1/5th of the world (or been largely responsible for guiding it through). He does not have a monstrous predecessor who ruled his country before him, he is neither fighting any wars nor spending great amount of public money on financing big banks that hand out million dollar bonuses. Manmohan does not have the charisma to carry a Nobel Prize into the front-page controversy anywhere except in Pakistan and in China. Both these countries are significant to the stability of the world, and who would want to enrage them by offering the prize to an Indian.

In fact, we Indians would be enraged if he got a Nobel, after all Gandhiji did not get one, after no writer after Tagore managed to get one, Bose (aka Bose-Einstein theory) got none, Bose (aka JC Bose) did not get one. We are happy this way; this Nobel is quite inconsistent with Eastern values, where we don't value individualism and temporary success as much as we value good karma, i.e. good action, and success which arises in form of good effects seen by coming rebirths and generations. Nobel prize in economics has been awarded in past to people who guided world economy into great recession of this decade: showing it is a transient award, given for predictions rather than results. It is given for things that look mathematically consistent (though all real life conditions are ignored), for things that help the richest country now remain the richest country with people carrying greatest amount of personal debt, which finances luxuries that requires largest per capita consumption of energy, causing oil companies to become rich by waging monopolistic campaigns in oil-field-carrying nations, causing first rate energy crisis which will follow. It is given to policies that create Banana republics, not to policies that provide cheap health care and education to masses. Exceptions are always there, and of course, if it were not the free flow of ideas that spawned this post, I would have believed and said the opposite to everything I said here so far. I don't verify facts and figures while writing such conundrums, and sometimes awards are given in similar vein, so maybe my approach to saying things here is not totally vague.

Maybe the Chinese Premier must be given the Nobel, for allowing Marxism to be reinterpreted in such a way that China has now more billionaire than any other country, that is if we forget to count the billionaires in United States. To redefine communism in this way took less than two centuries after the issuance of Communist Manifesto. I am sure Karl Marx is re-reading his theories and trying to understand what went wrong, that his brainchild Marxism is now interpreted in this way. Also the Maoists in India, who want a China-like communism in India, must be quite confused by the turn of events in China itself. Perhaps by shifting 70% wealth into the hands of 1% people (according to some unverifiable propaganda estimates), by reinventing the meaning and purpose of communist party, and keeping 1/5th of world population under control while they did it, the Chinese Communist Party and Chinese Premier have made an unprecedented economic breakthrough that deserves a nod of approval from the Nobel committee. Maybe Arvind Adiga or his character from White Tiger, are already rooting for the Chinese Premier. China already produces every toothbrush, shoe nail, nut, bucket, dinner plate, door handle, undergarment, comb, hairbrush, (maybe even flags of other nations), TV remote, table-lamp switch and imitation weapon (read Charlie Wilson's War for details) used by people in rest of the world. Such progress deserves a prize, more than our progress indicated by our Sardarji's facts and figures.

Who knows though, maybe Manmohan will get it anyhow. He might get it as the committee has never given a prize to a person of his community and its about time that the economic prowess of Punjabis was awarded. He might get it as they begin to comprehend that the growth rate on Indian GDP and inflation has defied most of the World Bank estimates in the past two decades. It will be a good idea to award him the prize and claim that International Monetary Fund, and the intellectual and economists are supportive of former professors even after their leaving practices and posts for offices of political intrigues and power-plays. It is no small matter however that when Chanakya, the famed economist of Mauryan empire from twenty-three centuries ago, was the prime minister, the Indian contribution to GDP of the world was a decent 33%. We are only off by the second digit in that figure, and 3% is not bad by any means. We had 1/3rd of world' population back then, and through middle ages, the GDP was decently high, provoking so many attacks on the nation. To safeguard ourselves from colonists, Mongols, Greeks, Huns, Islamic tyrants from beyond the Hindukush, to safeguard ourselves from a repetition of those bloody war, we as a nation decided to stop being so rich. But Manmohan wants to make India look rich, and he needs encouragement. He definitely needs encouragement. We could have been spending money on getting rid of insurgents everywhere, on borders, in bordering states, in Maoist-infested states. We could have been spending money on providing possible places for professors and researchers to make their grand discovering in India. We have avoided all these temptations, ensured that we export our talent, and we keep our farmers dependent on foreign seeds, so that our commitment to world economics is not questioned.

For this level of incongruity in practice and values, in poorman's pocket and rich man's mansion, in supposed technological advances that create only code-monkeys & phone-donkeys, for this level of dedication to profits of world's multinationals, for this level of focus on removing hunger by letting the hungry die, for removing insurgents by giving them the lands they ask for, for liberating India from licence-raj, where politicians made direct fortunes, and taking it into an era of economic liberalization where politicians still make money, and unknown forces get the profits, for all this chaos and trying to make sense of it, I recommend Manmohan for the Nobel prize of economics, and if that is not possible peace. The nomination process for 2010 will open up soon: start casting your votes in his favour folks!

Banks To Charge For ATM Access For Other Bank Customers

DeeptiA — Mon, 12 Oct 2009 01:46:57 EDT

On April 1, 2009, the RBI brought in a move that was supposed to remove the restrictions on using the ATM's of other banks. Before this move, if you wanted to use the ATM of some other bank, then it would cost. These would include a direct to the customer for checking account balance, or for withdrawing cash, and could have gone up to Rs. 50 in direct charges. Removal of this limit was a major benefit to customers, since you could now go and access any other ATM. So, if you are out shopping, and run out of money, you would not have to search for the ATM of your bank, instead all you have to do is to find the nearest bank and use the ATM, and all this free of charge. Banks were not too comfortable with this measure, but given that this was an RBI Directive, they went ahead.
However, this was free only for customers, the banks still had to clear expenses among themselves. So, if you were an ICICI customer, and wanted to use an ATM of SBI, there were some expenses that the banks would have to bear.

Also, banks that that had huge customer bases and were finding that their ATM's used to remain busy were obliged to keep on expanding the number of their ATM's; which is why banks such as SBI and ICICI have a large number of ATM's, while smaller banks such as Yes Bank, Deutsche Bank, and many others have a much smaller number of ATM's. By allowing customers of these smaller banks to access the larger networks had 2 associated problems:
- It would have some negative effect on the load of the ATM's of the larger banks
- It would remove the competitive advantage of the larger banks in terms of a much wider and easy availability of the ATM network compared to smaller banks

As a result, there was a push by the Indian Banks Association to add some constraints to this availability of ATM's, and from October 15, there would be some restrictions on this service (link to news article):

From October 15, a customer can take out a maximum of Rs 10,000 per withdrawal from ATMs not owned by the bank in which he has an account, and the number of such transactions would be limited to five a month. Going by the IBA guidelines, a savings account holder may get five free third-party transactions a month and could be charged from sixth onwards. However, current account holders might not get any free third-party usage.

For customers of banks with a much wider ATM network, this may not make much of a difference, but for people having accounts with smaller banks and who have got used to being able to use other ATM's, this restriction may bite (for example, somebody who has got an ATM of another bank right next door). Personally, I have never had chance to use the ATM of another bank, so may not matter much to me.

Positive Steps by SEBI - Anchor Investors, No Load Funds, & Lower Fees

Aaman Lamba — Thu, 18 Jun 2009 11:09:58 EDT

SEBI Chairman C B Bhave continues his trend of investor-friendly actions by various announcements today.

SEBI, the market regulator in India, announced the approval of 'anchor investors' for public offers. This allows an individual or entity to subscribe up to 30% of the institutional share of an IPO, similar to a pre-placement agreement, and enforces a lock-in of 30 days on such investors. Since 50% of an IPO is typically reserved for institutional investors, this would mean upto 15% of the total offering could be given to an 'anchor investor.'

The bidding process for anchor investors will be done one day prior to the opening of the IPO for subscription. This would thereby impute confidence to the retail investors as they see a large investor taking a significant stake in the IPO.

This step is expected to stabilize public offerings and give an overall boost to the primary market. This could lead to concentrated shareholdings, though, and it is likely the general norms of any single investor holding over 34% stake in a company having to make an open offer will still hold.

In addition, SEBI announced that entry loads on new or existing mutual funds would be done away with. Any commission will be disclosed and paid upfront by the investor to the distributor, bringing much-needed transparency into mutual fund investing. This revolutionary step could shake up the mutual fund industry overnight.

In an even more far-reaching decision, no listed company will be allowed to issue shares with superior voting rights. There could also be no preferential issues with superior voting rights. This levels the playing field between investors and promoters, who have typically used this route to reward themselves.

Fees on both equity and debt have been cut by 50% and rights issue disclosure norms relaxed.

Finally, the Board would consider amending its structure to provide itself powers similar to those of a civil court, lending it more teeth and enforcement powers.

Amicable End To Producer-Multiplex Strike in Bollywood

Bubbly — Mon, 15 Jun 2009 08:38:07 EDT

At long last, the producer–multiplex strike came to an end on June 5. The last major release was Akshay Kumar’s 8x10 Tasveer on April 3. For nearly 63 days the strike went on over revenue sharing row. Lot of canned stuff was released but it found no audience. All major releases were at a stand still.

It is estimated the strike has resulted in overall losses of about Rs 211 million. The multiplexes wore an empty look. Meanwhile, the entertainment front was taken over by IPL cricket and the Lok Sabha elections. With them coming to a fruitful end, movies have again come to the forefront.

A meeting took place at Yashraj Studios and a marathon session of around 14 hours went on to reach an amicable deal. Yash Chopra, Mahesh Bhatt, Sajid Nadiadwala, SRK and Aamir Khan attended the meet.

It was decided the multiplex owners would give 50% to producers in the first week, 42.5 % in second week, 37.5 % in third week and 30 % in the fourth week for all movies. For all blockbuster movies that manage to collect around Rs. 17.5 crore, it would be 52, 45, 38 and 30% respectively. This does work out in the favor of the producers and distributors but leaves the multiplex owners a little dissatisfied.

Due to the strike, many major releases are awaiting release. Producers don’t want to step on each others’ toes lest they eat into each others' profits. So, there is a phase out schedule for releases. Even with this arrangement, it remains to be seen how a gap of two months would be filled. Some major releases are bound to overlap with the other major releases.

The first major release after the strike was Vashu Bhagnani’s son Jacky’s debut Kal Kisne Dekha on June 12. It met with a mixed response. Although the audience was waiting for a new release, this film did not find favor with them. It was anticipated that with no other major release and it being the only release after two months, it will meet with success. At some multiplexes, it did do well but overall it is pretty much so-so.

In the coming weeks, other major releases will be Paying Guests, New York and Kambaqt Ishq. The latter is carrying excellent pre-release reports. There is excitement among entertainment starved viewers. It is time cinema halls were filled with the audience. And the end of the strike signals to this development.

It remains to be seen how the major multiplex chains like PVR, Big, INOX, Fame, Cinemax and Fun benefit from this arrangement. Whatever the case may be, it is back to business again. The real life “war” has ended and the time is for the reel war to start. There are bound to be release clashes. That may not portend well for some.

With good planning, the producers can ensure that their films are released without hurting the other. This will require a lot of delicate maneuvering. Everyone will be on the lookout for the profits to wipe out the two-month long losses. If greed does not envelope them and they can go along with the tide no matter what, then it will work out healthily for all.

Till now it has been a cruel summer. This year has not produced any bonafide hits and that is extremely unfortunate. There have been flops galore and average hits. Half the year is over. It has been a loser phase with losses all around. If the film industry has to survive, it has to do a lot of re-thinking.

Let’s hope with the trickle of new releases, it becomes a shower of rain that would indeed be welcome in the heat of 40 degrees. 2007 and 2008 had been record-breaking years in terms of revenue earning for Bollywood. But in 2009, it has only been Rs 320 crores which is below par when compared to the previous years. Movies mean money and that should continue along with entertainment.

As of now it is good news that new releases will be there each Friday. One can look forward to the usual entertainment fare each week. The audience is happy. Everyone has heaved a sigh of relief. This itself portends well and points to a win-win situation.

With the major hurdle crossed, it is happy days are here again. One can resort to the dream world of celluloid. The darkness of cinema halls is welcome.

The worst is behind us. Let’s hope there is not a repeat of this strike ever again. Nothing much was gained out of it in terms of results. Now it is time to celebrate and look forward to Fridays filled with fun, frolic and films. Whoa!

PSU Divestment in India - The Rocky Path Ahead

Ashish — Sun, 14 Jun 2009 08:11:22 EDT

When the Congress Government came back to power with an enhanced mandate and higher numbers (and consequently, a less dependence on allies to make up its numbers), the markets welcomed the step, with people talking about a re-start of the earlier stalled divestment process. In fact, with the amount of money that the Government has committed towards its ambitious social welfare programs, it needs to arrange for large sums of money to fund these programs. The disinvestment program seems a good way to arrange money for these programs. However, not everything seems to be going the right way for the Congress; even though the allies are lower in number, the opposition from them is still prevalent.

Right now, the 2 main allies of the Congress, the Trinamool Congress of Mamta Banerjee, and the DMK of Karunanidhi seem to have problems with the policy of disinvestment. The DMK is opposed to the policy of disinvestment for those Public Sector Units that are located in Tamil Nadu (these PSU's are a source of public patronage, and the DMK needs to ensure that continuous patronage opportunities remain). The politician belonging to DMK and Karunanidhi's daughter, Kanimozhi, made a statement against the process of disinvestment as well (link to article):

In the Rajya Sabha, the Congress-led government's new agenda for disinvestment faced opposition from its key ally DMK. The DMK's opposition to the government's disinvestment policy echoed in the Upper House with party MP Kanimozhi arguing that generating revenue by divesting the PSUs would not help. "I welcome that the UPA government has laid a lot of emphasis on welfare schemes and on social sector spending. But we also have to keep away from the temptation of generating revenue by disinvesting our PSUs," Kanimozhi said

Another important ally, Trinamool Congress, has already made it clear that it would not allow rampant disinvestment of the PSUs. Though the party has not yet made its stand clear in the House, party chief Mamata Banerjee opposed some of the `radical' ideas when the draft of the President's address was discussed among the cabinet ministers, Trinamool sources said.

Principally, the Government has no role to play in many of the sectors of industry. After all, why is the Government in the business of running airlines and having to spend huge amounts from taxpayer's money to prop up Air India, or be in the business of telecom, or in financial industry, or many other similar areas. These are then totally dependent on the whims and fancies of the Minister (even for a critical area such as Road building where the previous Minister had a big hand in the slow down of road expansion).

Further, when the Government does want to disinvest, for sectors of industry where the Government should have a zero role, it should get optimum return. This is not possible through the normal case where the Government disinvests its shares while maintaining a 51% stake in some of the PSU's. For PSU's where a Government stake is not critical, it is better to follow the earlier Government (NDA) policy of strategic sale whereby the Government sells its controlling stake to bidders. This results in a much higher return, and is the optimum way to get returns from the disinvestment process.