Sunday, 13 May 2012


In the last twelve months most CFO- banker meetings have had one common point of discussion – Foreign Currency Convertible Bonds (FCCB). Given that over USD 6.4bn worth is due via FCCB redemption in 2012; the elevated interest in the asset class is not surprising.
What is fascinating; however, is the claim of companies that raised five year unsecured money without ongoing interest servicing requirements that this is expensive financing, notwithstanding that there has been no conversion into equity. Of similar nature are discussions on how the instrument should be non-dilutive or cause minimal dilution in case debt servicing is provided. These viewpoints highlight the lack of FCCB structure clarity. Sensational media attention and certain investor actions have led to maybe unnecessary negative perceptions. Stressful as they maybe, these are essential interactions so that after nine years and USD 24.4bn fund raise India can demystify FCCB.

Brief Overview of Global Convertible History
Convertible Bonds a.k.a CB (as FCCB are known typically) trace their origin back to 1880s, the era of American railroads. Getting debt for construction was expensive and there were few takers of uncovered equity risk. Financiers thus engineered an instrument which allowed companies to borrow cheaper money by permitting lenders to convert debt into equity and participate in the upside. In case the business and hence the equity did not perform, the debt was to be repaid at a fixed cost after a predefined tenor. It was a win-win situation. In Europe, the French, the master craftsmen of derivatives saw the agility of the asset class and had legal framework for CB issuance by 1950s. The global CB market saw a real flurry of activities starting in 1980s. Until 2008, United States and Japan were the two most important global CB markets while France and Germany ruled the roost in Europe. Most Asian issuance came from Korea and Taiwan. However, post Lehman, Japanese issuance dwindled while Asia-ex gained prominence.

Indian FCCB Market 2003 - 2011
India by then had tasted the varied flavours of the CB world. Until 2003 CB issuance from India was sporadic with only large firms tapping this market (e.g. Tata Steel, Mahindra & Mahindra, etc). In 2004 there were few Indian issues but by 2006 this product saw repeat issuers from India. 2007 could not contain the excitement of India Inc. Firms large and small, household names and little known firms all used the CB market to raise war chest funds, capex money or expansion financing.

However, as the economic crisis deepened and the decoupling theory lost ground, cracks appeared in the Indian CB world. Investors became credit sensitive and Indian issuers had to accept that India is a BBB- rated sovereign making majority Indian issuers high yield entities. Indian firms could no longer avail zero coupon benfits. At the same time the exuberance of Indian equity markets faded and Indian promoters could not convince investors that their stocks would return 70% plus in 3 – 5 years. Thus new issuance from India became sporadic.

What happened to outstanding FCCB was more interesting. In the days post September 15 2008, the cornerstone CB investors, the hedge funds, started facing redemptions and margin calls. They were selling any asset class that fetched them liquidity. With pressure not only on equity and debt markets but also fire sale of CB, the global CB index plummeted. Indian FCCB in their high yield stride took massive beatings. Bonds were trading anywhere from 10 cents to 50 cents to the dollar. While investors coped with the carnage, corporate India had respite in buying back paper they sold a couple of years ago at significant discounts.

So the question arises – if companies raised money that was not serviced either in dividend or coupon while they invested it in business to improve top lines and then earned profit by buying these securities back at bargain prices (Sine 2009, companies have bought back FCCBs worth USD 1.7bn – 19% of the issued amount); why is there an environment today that FCCB fund raise has wrecked havoc? The answer to this stressful question is perhaps simple – expectation mis-management.

The global CB market has a market capitalization of c.USD 500bn. Over 55% of issuers with outstanding paper are small and mid cap companies who raised growth financing via CB investors. Their issue parameters did not witness significant alternation post the economic slowdown. Average premiums remained around 25% and most issues carried upfront coupons of 3.5% - 5.0%.

It is in this respect that Indian issuance pre 2008 was different. Issuance from most Indian corporate irrespective of market capitalization carried premiums in the range of 30% - 40% (Average premium was 38.7%, 31.7% and 30.4% for 2005, 2006 and 2007 respectively) and there was no annual coupon. All interest was back-ended. In addition, while global companies restrict fund raising to an issue size to market cap ratio of typically below 30%, Indian issuers raised in excess of 30% of their market cap via FCCB.

Each one of the above mentioned considerations impacts the issuer’s financials and the investors’ return. The subsidized convertible debt for the issuer is because of the embedded equity option in the bond. The value of this option is determined inter alia by the conversion price (determined by the conversion premium), the time at which conversion may occur (American or European option) and the dividend paid on the stock. The lower the conversion price the higher the dilution (EPS and absolute) for the issuing entity, but the probability of conversion and possible return for the investor are also higher. Consequently a lower premium structure is more equity like with a larger debt subsidy. The more flexible the conversion right, higher are the chances that in case of a good share price run the debt will convert into equity before maturity; making the option more valuable for the investor and providing more equity like structure for the company. A low dividend also favours the probability of conversion and hence adds to the equity like nature of the instrument. Another important component of the issue is the size of the issue compared to the market cap and more importantly the free float of the company. If the number of shares that the bond converts into significantly increases the number of outstanding shares then there is a very likely negative share price pressure that can be caused at conversion. Thus this aspect needs to be monitored closely at the time of issuance.

The fixed interest rate determines the cash outflow required by the balance sheet in case of no conversion and the minimum return and a downside protection for the investor. Higher the interest rate, higher is the cash outflow for the company and minimum return for the investor. This makes the instrument more debt like. An annual coupon paid (part or whole of this interest cost) reduces the one time repayment burden on the balance sheet and also compensates the investor for the dividend loss reducing some of the debt like nature of the instrument.

Given these parameters, a balanced CB has a profile which offers the company some relief in interest rate and the investors a good possibility of participating in the upside of equity. This is the reason that the global CB universe has an average premium of ~25% and c. 90% of the issues pay annual interest rather than a zero coupon structure like Indian FCCBs.

The problem with the structure of the Indian FCCB is that at the high conversion prices and low running coupons, the structure is more akin to debt than equity. Yet the instrument was sold as quasi-equity to issuers who did not provide for redemption dues and hoped for conversion.
 In addition, investors did not factor in the possibility that the market may fall and consequently the issue size to market cap ratio may become highly skewed against the issuers making it difficult for them to raise repayment funds.

The headline news attributed to FCCB redemptions, restructurings and rollovers is probably overplayed given that the money would anyway had to be returned to investors had it not converted. This is the implicit rule of the instrument. Annually multifold of this amount is part of bank rollover and restructurings. That does not attract as much attention as the money is understood to be repaid. A few investor actions (e.g. Wockhardt, Zenith Infotech) has made the market overlook the successful restructurings that investors participated in (e.g. Suzlon, Amtek)

All woes aside, the truth is that the CB investor base provided c.USD 25bn to India Inc, money which would not have come via the global equity or debt investors. In fact this is the most non discriminatory investor base which lent without rating or significant covenant requirements to companies across sectors and market capitalizations.

Post Lehman the global convertible bond investor base has seen a shift towards the long only convertible bond investors. These investors raised new money in 2009 when the asset class was trading close to historical lows. However, since then the global CB issuance has reduced (given the economic slowdown) and most outstanding paper has matured. Thus the funds are today sitting on cash positions, looking for deployment opportunities. In fact it was these investors who anchored issues since 2009, including the Welspun issue which reopened the FCCB marketin September 2009. This stable investor base has ensured that in weak market sentiment there has been no fire sale of FCCB, leading to a better performance of FCCB vs. underlying equity.

Long only CB funds typically do not hedge equity or credit exposures and are in the investment for the long haul (3 – 5 years). However, in return for backing managements they like balanced structures which allow them a reasonable opportunity to participate in the upside. India Inc in this market of expensive domestic debt and challenging equity fund raise thus has a friendly investor base waiting to provide growth and incremental financing, albeit in a form such that neither the balance sheet nor the returns are unduly harmed.

Sunday, 15 January 2012

The Attitude Called Indian Democracy

Democracy had me stumped. I had been trying to figure out what it means for years together. My inability to do so had me read history, read dictionaries and even put out a poll to my friends with four options hoping that a consensus would lead me to my destination. Nothing helped and I kept thinking and searching till I realized that this seeming endless search was my answer. Democracy is the flexibility of adapting to the times in order to stay the course. It permits that we change gears, alter the pace and even change tracks. All it expects is that we stay the course.

In India we say we celebrate democracy and yet the country is in a flux. Is it because we are not flexible any longer or have we lost our course? I think it is a mix of both.

The politicos and the law makers are an elitist club that has grown accustomed to a comfort zone. With the experience of the most highly placed leaders comes a particular way of doing things. The age separates them from the desires of world’s youngest democratic population. Flexibility is restricted and vision blurred. With the privileges and the inheritance bestowed upon the younger political honchos there is a chasm between their ideas and reality. The course is thus awry but flexibility plentiful to reach the top. Every new idea that can help us as a nation needs to be shaped and implemented by this collective group that evidently is disconnected with majority of the population.

Those who can make a difference are the urban, educated and aware youth. But we seem to be weary already. Not many of us are flexible to join the services (IAS, IFS, IPS etc.) that connect with the common man and shape policy. We are fixated with the private sector, and rightly so, as we want to improve our standard of living. Consequently the services are being staffed with a majority that is there not by choice but by inevitability. We are hesitant in voting and do not believe in the slow process of weeding out the unwanted with our vote. We cry for our rights and demand that we be looked after and yet every day we forget that we have an obligation of honesty, opinion and productive expression to democracy. Thus the onus to shape the nation is on shoulders who are shirking the very responsibility of altering the future of this nation.

In the last few months the Anna Hazare campaign has taken the nation by a storm. He is being credited to the point of paralyzing government policy indecision. People’s emotions, their support and their expression and extrapolation are all first time events for India of this century. I do not support Anna Hazare but I endorse his spirit and salute him for demonstrating to the people of India that one man can indeed make a difference. He has rallied the rural, urban, young, old, rich and poor Indians across religions to gather together and voice their frustration. If he can do it, if Arvind Kejriwal could get us a new law,the why can the honest, educated, well meaning, hard working youth not? People coming together in support of Anna Hazare are from myriad backgrounds but with one desire, to see honest and transparent dealing in all actions of those who are sitting as our representative. All the young working professionals have too many daily triumphs and battles in common which bring us to a common base camp. All that we need to do from here is work hard and together to be able to summit the peak of change.

Every successful summit requires courage, perseverance, guidance and a little bit of luck. We are amongst the world’s youngest countries with the world paying attention to every economic political move that we make. We have an incredibly rich history replete with heroes and role models to provide for inspiration. If we find it within ourselves to learn from our ancestors and positively maneuver the world to focus on us, lady luck will be unable to run away from us. Founders of independent India have left us the incredible legacy of a constitution. A framework that upholds equality, freedom and justice for all; and provides us the guidance that we need to help govern a nation so diverse. Only if we took time to read through it would we know that new laws and agencies are not required. We only need to strengthen the constitution, tweak parts of the Indian penal code, assume responsibility to make the representatives more accountable and to start our climb. Once we find that courage to start and work diligently with perseverance, we will easily summit the change we so eagerly await.

This is a time for India to change. This is a time for Indians to change. This is a time to change our mindset and take responsibility for all actions. We are at the end of the day a 45 year old country. For how long can we keep blaming the 60 pluses in parliament for our woes? Surely if we are smart enough to create an Infosys, win the Grammy and the Oscars, go buy and run Western iconic companies and once in a while even win a cricket World Cup; surely we are able enough to learn the ropes and steer our own nation successfully in the direction of prosperity, peace and harmony. This is the time for the youth of India to awaken and realize that their time to create history has come. We need to show our might in hard work and affirmative action. We need to engage in and explore polity, debate and discuss policy, vote for and veto in twenty first century Indian democracy. We are a great nation and the time has come to prove it. If we cannot change our destiny no one else will.

Thursday, 1 September 2011


Being corrupt implies destroying integrity by being dishonest and tainting the object in question. The object is generally a relationship between an institution (or an officer of an institution) and an individual (a customer or stakeholder of that institution) in most cases. However, corruption also extends to individual relationships and that is in the simple form of trust. Trust is the corner stone of all relationships in my view; be it a parent-child or sibling relationship, friendship, boss-subordinate or peer-peer liaising, a doctor-patient association, state-civilian relationship etc. The presence of trust provides confidence that the individuals/institutions related in the equation will conduct themselves in an expected fashion. When that expected behavioral pattern is altered, uncertainty increases and doubts creep in causing friction in an otherwise agreeable equation.

In my experience and discussions, such encounters of broken trust are becoming increasingly common and frequent across social set-ups. These instances are of also of varieties and intensities. I am told there once was an individual who feigned illness with one friend to be able to go out partying with another set of friends. All was well until the time the friend who was lied to spotted her friend all hale and hearty making merry. No big deal really, but this definitely corroded an otherwise solid friendship especially since the trust was broken for a trivial reason. There are innumerable stories of bosses filling in their own bonus kitties and not fulfilling promises made to subordinates or alternatively unwarranted promotions being granted out of partiality. At the end of the year not only does it lead to heartburn but increases churn rates of employees in an organization impacting the team morale and general foundation of the entity in question. Negligent and unconcerned doctors cause grave damage to lives and the medical profession alike. Spousal mistrust leading to violence and abuse is only on the increase if media is to be believed. The state and the representatives of the state not delivering on their promises is now sadly an accepted part of life in India.

Why the breakdown of trust at individual levels leads to societal and professional discord is quite interestingly illustrated by Roy J. Lewicki’s framework[1] of trust and distrust.


characterized by:

Hope, Faith

Confidence, Assurance


· High-value congruence

· Interdependence promoted

· Opportunities pursued

· New initiatives

· Trust but verify

· Relationships highly segmented & bounded

·Opportunities pursued & risks/vulnerabilities continually monitored


characterized by:

No Hope, No Faith

No Confidence

Passivity, Hesitance

· Casual acquaintances

· Limited interdependence

· Bounded, arms length transactions

· Professional courtesy

·Undesirable eventualities expected & feared

· Harmful motives assumed

· Interdependence managed

· Pre-emption, Best offense is good defense

· Paranoia


characterized by:

No fear, No Vigilance

Absence of Skepticism

Absence of Cynicism

Low Monitoring


characterized by:

Fear, Vigilance

Skepticism, Cynicism



If we were to assume a starting point, it may be fair enough to say that most relationships start in the quadrant of Low Trust – Low Distrust(1). There is little expectation from the involved parties of one another. However, a society largely prevailing in this mode is prone to be inefficient given the limited interdependence.

From this quadrant, the relationship in the best case scenario moves to the quadrant with High Trust – Low Distrust (2). Entities and societies in this mode are more likely to be very proficient, cohesive and with a higher quotient of well being as they are most prone to resolving conflicts arising due to trust issues[2]. With a high trust factor and a low distrust factor there is a higher likelihood of people not wanting to destroy integrity. Once that integrity is broken the relationship moves into a place which has the presence of High Distrust. It will be unfair to assume that with one instance of broken trust the relationship cascades into the least desirable quadrant of Low Trust – High Distrust (4).

Taking the case of the friend sighted above and that of professional environments, it is likely that from quadrant 2, the relationship first transgresses to High Trust – High Distrust quadrant (3). If repeated interactions lead to situations where the expected behavioral patterns are altered and/or dishonesty pursues, then the relationship is doomed for quadrant 4. In this environment interactions are fairly guarded, conversations monitored, information exchange not optimal and there are significant inefficiencies in the system.

If I take the context of the urban Indian environment today we are in the High Distrust quadrants. With the state, the relationship of the civilians is in the least desirable quadrant 4. In the case of urban middle class amongst themselves, in my view we are in quadrant 3. There are too many expectations that are laid on people in personal contexts and when these are not met with, the situation is of quadrant 4. This partly explains, in my view, the rising spousal violence, killings of employers (unorganized sector) etc. In the true professional environment money is becoming a key motivating factor and that in the environment of recession if monetary payments are not met there is severe corrosion of trust. Thus at work we are shuttling between quadrants 3 and 4. There are fewer people who trust in the “goodness” of another individual or institution.

Thus, in my view, whether we eradicate corruption or not is dependent on whether we can restore trust and eradicate distrust. If we can at least lower the prevalence of distrust, we will be able to move towards creating an environment where dishonesty is lower. Lower dishonesty will promote trust. There is a chance then that we may be able to create an environment of existence are quadrants 2 and 3. Whether, the Jan Lokpal bill, can achieve this aim, I remain skeptical! Not because of lack of trust or dominance of distrust, but because I do not believe centralization of an issue is an efficient means of arriving at a resolution.

[1] Ref: A Cognitive Theory of Trust, Hill & O’Hara

[2] Lewicki et al., A Cognitive Theory of Trust, Hill & O’Hara

Monday, 11 April 2011

We Don't Need No Legislation

I was in London the last week and hence missed the hoopla in the country with Anna Hazare’s fast unto death. I was back in the country for a few hours on Saturday and all I could read and hear was how this one man had given the country some hope of seeing lower dishonesty. I was not convinced; not with Anna Hazare’s spirit but with the suggested course of action, the bill itself. Call me a skeptic, call me a cynic; I just do not believe that another law in this country will actually help reduce corruption. The only thing it will do is generate employment – first for those who help the committee research the draft and then for those who become a part of the Lokpal. In fact if the Lokpal is set up it will bejust another way of exploitation and influencing.

These thoughts were loitering in the corners of my brain cells on Saturday night as I queued outside the airport waiting to get in for my next international flight. Suddenly the lingering thoughts burst to the forefront. There were two youngsters praising Anna and cursing the politicians. It was not their chatter that got my sleepy thoughts to wake up and skip around. It was their actions. As they spoke of the rampant treachery in the nation, they were trying to jump the queue. I was amused with the hypocrisy. I encountered the duo yet again at the security check, scurrying around to see how they could move ahead of turn once more.

This attitude and insincerity is what makes me a believer that legislation will not be effective in reducing or ridding the country of corruption. The interest around Anna Hazare’s fast probably benefited the media the most and the telecom company as some attention has been diverted away, finally! The rest of us will talk of this for a while and then move on to being who we are – finding the quickest route possible to achieve our goals.

Aboard my flight I was fighting my time zone clash and decided to watch a movie. I stumbled across a Naomi Watts film, Fair Game. The film is based on the autobiography of an ex-CIA covert agent, Valerie Palmer, who at the time of the US attacking Iraq was almost about to prove that there were no WMD in Iraq. As the invasion started, her husband, an ex-ambassador to Niger started questioning the government’s motives. In order to divert attention away from the tough questions that were posed, the White House made the couple a pawn. Valerie’s cover was blown, her credibility and track record trashed and her husband was made to look like an anti-American. The world knows today that there were no WMD in Iraq but there is a lot of Oil. If the White House could stoop to abysmal levels only to safeguard the President’s ratings and cover up the lies; I am sure that less powerful people, hungrier for power could stoop to lower levels. With resources and might on their side, a legislation will only be a small hurdle. Yes, I was all along thinking of the Lokpal bill.

Corruption is prevalent world over. The difference in India is that we see it blatantly in our faces every single day. That does not mean that we condone it or do not work to rid society of this ill. However, legislation can never work in the absence of willingness. Valerie Palmer and her husband decided to take the challenge head on and speak the truth. They did not succumb to the might of the White House. Anna Hazare did not worry about himself or how would his actions be received by the government. He believed that it was his duty to bring attention to the rampant corruption in the country and the need to address it and so he fearlessly forged ahead with his mission. It is fortitude that got the system to pause and pay attention. It was his sincerity and courage that got the nation to support him, however, the spirit that he would probably like to see (in my view) is probably absent; my point in case being the duo at the airport.

Legislation can work when there is a need to enforce a right, for e.g. the right to vote or the right to religion. Legislation cannot replace ethics, moral conduct or righteousness. So there can be a legislation that provides citizens with the right to query processes and get information, however, then it is up to law and lawmakers to enforce justice. Giving powers to a centralized committee to enforce “justice” in case of corruption related issues only provides an opportunity for the influential to exert pressure on one body rather than fight their ills through the system. We need to acknowledge that in any form or shape, the center of power and influence will remain the same. To bring change we need to change that core. To strengthen and alter that foundation we as citizens need to speak fearlessly and acknowledge our duties. Our primary obligation and most powerful right is the right to vote. If we execute this duty sincerely and sensibly, in time we will be able to rid the system of the leeches it has come to harbor. Our right to free speech and expression is what we need to capitalize on and not rest till the guilty are brought to justice. Numerous examples exist where with the help of truth and media, the aggrieved have secured justice. Yes there is a cost attached to all this. The cost of giving up some of our own comforts, of acknowledging that the blame game needs to start with self and of respecting that the rights that are ours are equally those of the other billion citizens of the country.

It has become fashionable to blame the government for every difficulty that we face. It has equally become a fashion to heap praises on someone who speaks against the system (rightly or wrongly). Grumbling and washing our dirty linen in public has become second nature to us Indians. We need to stop that, pause, reflect and then take a steadier course where we are in not a hurry to reach our final destination. In pace will come sensibility and responsibility. In stride will come the innate ability to render obligations, shoulder responsibilities and apportion credits. It is our country and it is up to us to shape its future. We can either speed into chaos or walk into prosperity. The choice is ours. No legislation can give it or take it from us.

Monday, 17 January 2011

Jalan Committee Report - Cautiously Over Cautious

With the growth of the Indian economy the Indian stock exchanges too have witnessed a steep growth trajectory. In keeping with globalization and to compete more successfully, local stock exchanges would like to attract additional and diversified capital. However, the recent Jalan committee report has become a hurdle in that direction and in setting up of newer exchanges by non financial sector participants. The committee is of the view that

i. Anchor Institutional Investors (AII) should be limited to Public Financial Institutions
[1] and Banking Company[2] having a net worth of more INR 1,000 crores
ii. for a new entity seeking recognition as a Stock Exchange, AII should be identified from amongst the shareholders holding more than 15% but up to 24% of the equity capital of the exchange
iii. AII should reduce their holding over a 10 year period to a maximum of 15%. The 10 year period will be cumulative for the initial and any subsequent AII
iv. other Stock Exchanges and insurance companies should be allowed equity ownership between 5% and 15%
v. all anchor institutional investors put together should not hold more than 49% of the total equity capital of an exchange
vi. FII should be allowed to acquire shares through off market transactions including initial allotment
vii. to ascertain the holding of an investor in a Stock Exchange (or another Market Infrastructure Institution) the maximum permissible limit should be computed based on the overall direct and indirect, straight and structured investment
viii. given the stable, long term nature of investments required in Stock Exchanges and that listing would bring in conflicts of interest in regulation; Stock Exchanges should not be permitted to list
ix. the maximum return that can be earned on the net worth of a Stock exchange (and other MII) and distributed to shareholders should be capped to ensure that unreasonable profits are not earned

These view points are all valid in varying degrees but, in entirety, at places these views contradict the very concerns that the committee has tried to address.

The analysis presented here is based on:
i. the fact that the Committee views Stock Exchanges as utilities with the objective of providing stable infrastructure for an efficient and well regulated trading market platform at reasonable costs for public consumption
ii. the fact that Stock Markets are no longer geographically restricted
iii. the particular nine recommendations mentioned above

Stability comes from a long term investor ready to commit the significant initial capital and willing to exit at a return without the need to earn a regular return in the short run. To that extent the committee makes a valid point that there has to be minimum net worth of the AII to be able to invest and support the Stock Exchange through its growth phase and there is merit in the proposed 10 year period provided to bring down the AII holding down to a maximum of 15%. This will give the initial AII sufficient time to sell at a reasonable return once the business has stabilized
[3]. However, with the capping of the profits and the listing ban the committee seems to have closed the exit for AII. Institutional investors manage monies for third parties who they are accountable to. Their needs to be a justification for them to be investing in equity of an entity that has restricted profit sharing during the tenure of the investment and which at the time of exit might not even find takers. With a risk free rate governed cap[4] on investment there would be better investment opportunities available, maybe even in the debt markets without the risks of an equity investment and probably a more liquid option available. The listing ban further narrows return and exit opportunities for institutional investors. In India, with its shallow investor base, this implication then contradicts the committee’s own views that Stock Exchanges should have a diversified holding. Another contradiction to diversifying holding is restricting the AII to Banking Company and Public Financial Institution, a proposition which in addition loads the risk of investment on the institutions that already bear significant long term risk for the economy(specially in the absence of public corporate debt markets). The ownership as defined by the committee is vague in mentioning a capped 49% cumulative holding by all AII. It is unclear whether this limit is defined at the time of seeking recognition or post the 10-year divestment period. With lack of such clarity, there is also a lack of taking on from global experience.

Global Stock Exchanges have witnessed evolutionary changes in the last decade that have probably outpaced any development in this segment since its considered establishment in 1460 (with the setting up of the Antwerp Stock Exchange)
[5]. Historically, world over, exchanges were set up as non-profit organizations by the broker dealers who used the services that the exchanges offered. On 24th September 1996, the Australian Stock Exchange (ASX) became the first exchange to notify its members of its intention to demutualize[6]. Since then there have been a vast number of demutualizations and listings of Stock Exchanges across the world. The World Federation of Exchanges, which has about 70 members, reports that 42% of its members are publicly listed exchanges and another 18% are demutualized. These numbers highlight the fast pace at which the holding structure of global Stock Exchanges has changed in the last 12 years and that even in a deep economic crisis, a wide number of exchanges have managed conflicts and maintained stability despite being listed. The Committee’s concern on conflict resolution is a serious concern, however, one that can be addressed by the regulator. SEBI is a globally respected markets’ regulator with world class surveillance systems. Upon listing the regulatory function should either be moved out from the Stock Exchange to SEBI or the regulatory arm should report to SEBI and not to the Stock Exchange management. Both these models have been successfully adopted by exchanges such as NYSE, LSE, ASX, Deutche Boerse etc. These are exchanges that upon listing have been able to increase their footprint across regions and adopt better policies as integration brought in best practices to the larger organization.

One of the biggest benefits of globalization has been the increase in competition and hence the reduction of the commissions that Stock Exchanges charge. Ultimately that is also the aim of Jalan committee, to have affordable transaction costs for the end user of the Stock Exchanges’ services. In order to ensure this there needs to be competition in the sector which can only happen when the entry barriers are reduced. The report does not lead to that direction. In fact with a restriction on who can be an AII and profit sharing, the entry barriers only increase. The Indian telecom sector is a classic example of how reducing entry barriers benefit the end consumer. It also highlights how a strong regulator can ensure policy formation to protect the interests of the consumers. Thus even if global experience is neglected, domestically we have examples that can aid opening up of the Stock Exchange forum to the benefit of the general public.

While there are significant alterations that can be made to the Committee’s recommendations (in context that was laid at the onset), there are two recommendations which are noteworthy. The first being permitting FII to become equity holders via an initial allocation, this will be a more economical means to invite newer investors leading to diversification. The second is calculating maximum exposure limits using direct and indirect, straight and structured investments; once again this in the true sense will allow more investors to participate and also prevent dominance of any one investor.

There are a number of other recommendations that can be debated. However, in the context of time and criteria laid out it will be sufficient to say that there is a lot more analysis and deliberation required before any ownership recommendation is accepted. If we propose to become a global economy of stature and significance then cautious risk taking will be required as opposed to the conservative crawl that appears in the current form of the report.

[1] Defined under section 4A of the Companies Act 1956
[2] Defined under clause (c) of section 5 of the Banking Regulation Act
[3] This is with the assumption of a new Exchange being set up
[4] As mentioned in the report “The cap may be fixed by SEBI after taking into consideration ‘risk free return’ based on the yield on a 10 year GOI bond and a ‘risk premium’ to account for the risks faced by MIIs including equity risk premium and liquidity risk due to non listing of MIIs.”
[5] The origin of Stock Exchanges is traced back to Antwerp Stock Exchange established in 1460, however, Amsterdam Stock Exchange established in 1602 by the Dutch East India Company is considered the first Stock Exchange in the world as we know it
[6] ASX finally demutualized in 1998

Sunday, 14 March 2010

Women's Reservation Bill - Increasing Chaos and Discrimination

Legislative Brief

March 9, 2010 was probably a historic day for the Indian Parliament as there was co-operation witnessed as never before. The women’s reservation bill was passed by the upper house unanimously; almost unanimously to be precise, as there was one sensible parliamentarian perhaps who used her/his grey cells and voted against the bill. A lot of hoopla has been surrounding this supposedly landmark bill which aims to empower women in India. However, rationally, I cannot understand how this bill promotes equality or empowerment of women.

To begin with, the mere fact that a mandatory number of seats in the lower house of the parliament have to be allocated to women belies the definition of equality. Equal opportunity advocates that all deserving candidates be judged on merit; worthiness based on qualification, experience and suitability for the job at hand. Gender has no contribution to the worth of a contender. In the current day and age in fact gender based selection is actually considered discrimination – just as advised by Indian laws pertaining to gender determination of a foetus, right to education of children etc.

There is an argument put forward by the proponents that the reservation stipulation will encourage participation of women in the law making process of the country. Consider a situation wherein the number of women contesting elections is equal (or alternatively lower than) to the number of reserved seats. All female candidates will either automatically get elected irrespective of their abilities or dummy candidates will be installed to gain “supporters” in the corridors of lawmaking. Lack of competition is never good for a democracy and more harm will be done than good with an unaware / puppet woman candidate being allowed to grace the halls of the parliament as opposed to a well meaning and able man. If we really want to encourage participation of women in politics, we need to have equal opportunity recruitment/representation at the party level. No discrimination during enlistment of party members and a minimum number of women must be given the right to contest election. With equal opportunity being granted at the bottom of the pyramid there is right encouragement. Creating an avenue at the top only increases the probability of misuse.


% of elected women

Quota in Parliament

Quota at Party level


47 (2006)




40 (2007)




36 (2005)




24 (2006)




21 (2008)



United Kingdom

20 (2005)




18 (2007)




17 (2006)



Sri Lanka

6 (2004)



Table 1: Political Representation of Women across the Globe

Source: PRS Legislative

An average of the statistics from the above data indicates that in cases where there is reservation at the party level only women have an average representation of almost 30%, whereas in countries where there is parliament level reservation only the representation is only about 20%. Currently Indian parliament has c. 11% women representation

The new law provides this enabling handicap to women for a period of 15 years, after which there will be a considered renewal of lapsing of the law. If instead, the 15 years were to be focused on creating equal employment opportunities for women, incentivising experienced women such as IPS and IAS officers to move into the parliament (for example only) and providing safe and dignified environment for women to operate in, the results will be sustainable and generate a meritorious playing field. In fact, in my view, if we really want to empower and encourage women then the Indian laws need to demonstrate that any infringement on the respect and safety of women will be met with severe consequences. No individual can sustain efficiency and productivity in an atmosphere devoid of dignity and security.

There are other provisions of the bill which are quite confusing. Firstly the reservation is only for Lok Sabha (the lower house) and not the Rajya Sabha (the upper house). How is their equal representation with one house having the mandatory representation and the other being left out? Secondly, the bill proposes that the constituencies that will be reserved for women candidates will be rotated within the states / union territories. What if the deserving candidate belongs to a non-reserved constituency? She now has other women candidates having an unfair advantage over her candidature! What is the incentive for a candidate to work for the welfare of the constituency if in the next election the playing field will not be markedly different? Thirdly, in case there is a state/union territory with a single representation in the lower house then that seat is to be reserved for a woman in the first election in a three year election cycle. What happens in the other two elections to deserving candidates who are overshadowed by male competitors by unfair means? Or what happens in case the government is dissolved prior to the next scheduled elections and women lose their opportunity to make a difference in a longer staying and more stable government? In my view, to be more effective, 15 years should be devoted to decriminalization of politics, reduce the apparent monarchy in Indian politics, counter influence of black money and introduce electoral reforms that the country is in dire need of.

There are a number of flaws in this new “landmark” law. Once again, we are attempting to do patchwork and cover the inefficiency of the system rather than adopting a more sustainable and painstaking bottom-up approach. Unfortunately this quick fix reform provides another divisive tool to a society which inherently has many to deal with already! The reservation in many ways is reversal of attempts to create a non-discriminating society.

Wednesday, 4 November 2009

Pension Fund and the Unorganized Sector

Unorganized sector constitutes the segment of workforce whose activities or data is not regulated under any legal provision and there are no regular accounts maintained. Currently there are c. 363m unorganized sector workers in India (ca. 85% of the Indian labor force). This sector provides large scale employment and contributes to the national product significantly.

Major characteristics of the unorganized workers are:

- largely live below the poverty line

- suffer from low literacy levels

- are migrant in nature and

- are dispersed all over the country

In order to improve their quality of life it is imperative to cater to the following

- pension

- healthcare

- life insurance

- accidental unemployment insurance

- unemployment security and

- maternity needs

c. 44% of the unorganized sector avails of life insurance schemes via LIC / GLIC. Healthcare provisions are difficult and expensive to set up not to mention the many hurdles they present. However, setting up of dedicated pension fund will not only address the primary requirement of pension but can also be extended to cater to the last three requirements on the above list.

At present the old age support available to this sector in particular are:

- private savings

- family support

- selected central and state government schemes

- extending working life

Private savings are generally not available and where available are not adequate[1]. Family support is on the decline. Government schemes have limited scope in terms of adequacy and coverage[2]. Extending working life is not a viable option[3]. It is evident that there is a pressing need to develop old age security schemes for this sector.

Core functions of a Pension Fund

  1. Reliable collection of contribution / taxes and other benefits
  2. Correct payment of benefits
  3. Incase of pre-retirement loans ensure timely repayment
  4. Secure financial management and productive investments
  5. Maintaining an effective communication network (data collection / record keeping)
  6. Timely production of financial statements and reports

In order to establish a fund that can deliver on these core functions the following challenges need to be met

  1. Assess the segment of unorganized workers[4] that has the capacity to make regular contributions. This analysis should contain data on the segment’s earning capacity, their spending and savings habits and what their ideal saving level and contribution be. From there it can be deducted how to generate pension contributions:
    1. Via redirection of discretionary expenses
    2. Via redirection of existing savings
    3. Via future real increase in income

In addition, to incentivise contributions and help the establishment of a fund, corporate sponsors need to be sought to match workers’ contributions

  1. A team of like minded skilled professionals needs to be assembled to
    1. educate the target the audience and market the fund
    2. manage the corpus to generate positive returns
    3. administer demographic/earning changes in the sector
    4. constantly work internally and externally to expand the quality and scope of services provided
  1. An effective MIS system needs to be designed for record keeping and monitoring of
    1. individual fund inflows and outflows
    2. earnings of individual funds
    3. loans and repayments
    4. tax or subsidy collection
    5. generation of timely reports
  1. Accumulated balances should be invested in economically productive, growth enhancing investments[5]
  1. Understanding legal and regulatory requirements, restrictions and proposed developments for such initiatives
  1. Most importantly design and manage the financial corpus to deliver
    1. Adequate coverage and level of protection
    2. Affordable, profit making and sustainable service
    3. Robust framework which can withstand economic shocks

Government of India recognizes the need to implement social security for the unorganized sector[6]. Thus it has embarked upon the highly ambitious pension plan reform scheme addressing the entire Indian labor force. In case of the unorganized sector in particular, this scheme plans to establish a voluntary contribution mechanism. There is a mention of outsourcing the administrative tasks to the private sector under a licensed and registered program. Government of India has sought help from the Asian Development Bank in this respect.

As a part of this “joint effort” a survey was conducted that generated the following results:

  1. 2/3 of respondents have not given any thought to retirement planning
  2. c. 20m have shown willingness to join a national pension fund based on
    1. Financial capacity
    2. Interest rate
    3. Age between 30 – 50 years
  3. most people (38% - 45%) mistrust private banks
  4. most people trust nationalized banks (mistrust percentage 0% - 2%)

A commercial set-up is required to make this initiative productive and sustainable. While government support is crucial to the setting-up and longetivity of such a fund, it cannot be run by the state. Western governments are running into the red with their state run social security schemes. This business to be sustainable and profitable needs to be a private operation run by a team of like minded, experienced professionals dedicated to the success of this operation. India needs to bridge this gap at the earliest to ensure economic prosperity and inclusive growth.

[1] Research conducted shows that Indians in general do not start early enough retirement

[2] There is financial limitation and existing schemes are either limited to certain states or sub-segment of unorganized workers

[3] By 2045 it is estimated that India will reach a declining share of working age population of the total population

[4] The most vulnerable segment of this sector is that of women (in particular widows). While not only do women earn less than men, they are 10 times less likely to own property. Thus it could make sense to have special funds created to cater to women and widows. However, to start with the initial corpus might not be significant enough and hence this has to come as an offshoot of a positive return generating fund.

[5] This could lead to scalability of the operation to microfinance, emergency loans against savings etc.

[6] Certain state governments also see this need and there exist a handful of schemes trying to address this in their own way. For e.g. there are 5 welfare funds set up for beedi workers created from the cess that is collected from the manufacturers, Maharsahtra government offers unemployment security etc. However all these efforts are disjoint