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.

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

Women's Reservation Bill - Increasing Chaos and Discrimination

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.

Country	% of elected women	Quota in Parliament	Quota at Party level
Sweden	47 (2006)	No	Yes
Argentina	40 (2007)	Yes	Yes
Norway	36 (2005)	No	Yes
Canada	24 (2006)	No	Yes
Pakistan	21 (2008)	Yes	No
United Kingdom	20 (2005)	No	Yes
France	18 (2007)	No	Yes
USA	17 (2006)	No	No
Sri Lanka	6 (2004)	No	No

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.

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

2. 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

3. 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

4. Accumulated balances should be invested in economically productive, growth enhancing investments[5]

5. Understanding legal and regulatory requirements, restrictions and proposed developments for such initiatives

6. 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.

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[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

Health and Safety Standards

It was still very early in the morning and I was not fully awake on the drive to the airport. Thus when I saw a huge cloud of smoke I dismissed it initially, but the accompanying fat bright orange flames, leaping into the air, jolted me into a state of total awareness. It was difficult to judge from a distance whether the fire had emerged from a construction site or the adjacent slum; but it was relatively easy to gauge that the extent of damage to life and property was extensive. “Maara gaya bechara gareeb” (The helpless and the poor have died), said the driver and drove on; but my mind stopped at that statement. In the city of Mumbai, life comes cheap and especially of those without any means. But just because there is such abundance of life in the country, does it mean that it can be dispensed with easily?

The November 26 attacks of Mumbai created a furore in the city. There was public outcry for a special armed force to be created for the protection of Mumbai; after all, the city has suffered numerous terrorist attacks in the last few years. I was among those who became a part of one such movement, a group that silently but visibly (with black arm bands tied through out the day) declared that we would not rest until such a task force was installed in place. Surprisingly, the government realised the need and the citizens’ stipulation was fulfilled. Yet today I wonder if our demand was adequate. A fight against terror is a must and the country needs to be protected from further attacks; however the loss of life that occurs due to such attacks is no different from the loss of life that occurs due to poor health and safety regulations. So why has there been no crusade in the country towards improving the general living and working conditions in our cities?

Yes we are a developing country and that means that we have limited financial resources. However, that does not mean that we do not try and improve efficiency and productivity. Improving health and safety standards not only protects human life from unnecessary fatalities but also improves the economic output. Take construction workers working on scaffolding without harness for example. A good worker, unable to balance himself will be inefficient at higher altitudes and will eventually be replaced by maybe a less able individual, either by the supervisor or by mortality. Providing the good worker with a harness will help him be efficient and deliver on time. The same harness will also prevent accidental falls and save lives. With India undergoing a construction and infrastructure boom, this safety standard that has apparently been made mandatory by the government, but its use is still not widespread. Setting up of new standards might also lead to an increase in jobs or in creation of new ones–manufacturers, distributors, training experts, inspectors etc. One cannot neglect the increased feeling of safety and security that it will provide to the daily wage earner, increasing his dedication to work.

Joseph Stiglitz, the noble prize winning economist calls communities the fourth pillar of economic development (the other three being markets, government and individuals). The vast economic disparity in India, the caste based society and the restricted access of English to the elite and the upper middle class; have all led to the non-development of this fourth pillar in India. Vested interests dominating inclusive growth and the prevalent acceptance of corruption, both further fuel the economic disparity preventing community development. In the absence of community development and with extreme poverty it is difficult to install health and safety regulations which will be adhered to and be effective. However, just because it will not be effective, does not mean that we should not start somewhere; the same way that just because in the long run we will all be dead does not stop us from living and learning in the process. Any thoughts, any ideas, please do share.

Corporate Debt Market in India - Need of the Hour

Indian regulators have drawn a lot of criticism from global market participants for their limited initiatives towards liberalising the domestic capital markets. From a pure policy point of view, some of this criticism is probably unjustified. However, the lack of attention given to the development of a healthy and liquid public corporate debt market is definitely worth raising some questions.

Both domestically and internationally, volumes have been published on the lack of a public corporate debt market in India, its desperate requirement for the country’s growth and also the remedial measures that need to be adopted by the regulators. While the knowledge base has existed for the last several years, there is no concrete curative action in sight yet.

The current global economic crisis heightens the need for thriving and transparent public corporate debt markets in India for two main reasons. One, there is a lesson to be learnt from lax lending disciplines and overburdened balance sheets, and secondly and more importantly is the need to disassociate the country’s growth from a desperate need of international capital.

The sub-prime crisis was more than just lending gone wrong; it was money lent incorrectly. In the hay days of the housing boom, US institutions were extending mortgages to students who had no income in sight for years to come. The idea was that these would be bundled with more credit worthy assets and risks would be averaged. In India, the banking system is similar in this “risk averaging” approach; however, the shallow markets raise the stakes involved. The large, mid and the small cap (and hence diversified risk base) companies borrow (working capital and term loans) from the same banks domestically and in foreign currency. The same banks also fund the promoters who own majority of the equity in these companies. Further, the treasuries of these banks subscribe to the equity of the listed entities and are even dependent on the same corporates for fee income. In the absence of any derivatives, all this risk is kept on the balance sheet of the banks and majority of the lending is done by a handful of domestic (mostly public sector) banks. This overdependence on the small banking network creates a potential systemic risk.

There are those who argue that Indian banks have survived the current crisis better than their foreign counterparts. This has largely been due to the high savings to GDP ratio that the country has, which exists with the domestic banks in the form of deposits. So in short, if there was a crisis that was to happen, it would be the average Joe in the country that would suffer like those in the West are currently. A thriving public corporate debt market would take away some of this risk away from the banks.

It would be incorrect to say that there is no corporate debt market in India currently. There is one, but it is not “public” in the true sense and most definitely it is not liquid. Most of the corporate bonds are subscribed to by banks (no surprises here) or by institutions such as LIC. The pricing of the bonds is done not based on a market benchmark but based on the return expectation of the subscribing investor. Thus there is an entry mode but no exit mode. The exit is blocked by the mostly OTC traded market making sizeable transactions difficult and also by the fact that the return expectation of one institution may not be aligned with that of another institutional investor. In fact this probably also brings forth another point – had there been a public corporate debt market in India, maybe the marked to market valuations of Indian banks would have been different; probably leading to more sober balance sheets?

In any eventuality, a corporate debt market in India will necessitate ratings. This will be an impetus to improving corporate governance and financial discipline amongst Indian corporates. A liquid debt market in India will provide benchmark pricings, creating more transparency in the large cap sector and providing more assurance to the small cap sector when borrowing from banks. Public benchmarks will prevent price wars on loans which currently impair the domestic debt markets. Efficient pricing mechanism will also provide more comfort to overseas investors who are reluctant to participate in the illiquid and non-transparent domestic corporate debt market.

International investors do bring in much needed capital, however, in India, in recent times most of this has been speculative money as opposed to long term investments. This is evident in the fact that FII investments in the country exceed FDI investments. In order for the economy to grow and the income disparities to reduce, there are three key sectors of focus – agriculture, education and infrastructure (which includes energy). All these three sectors are capital intensive sectors with returns being generated over the longer run. These require long term commitment to each project invested in. Such commitment is missing from overseas investors. In fact even foreign banks participate only in a limited way in debt funding of long term domestic assets.

To use domestic capital more efficiently, for the growth of these three sectors, a liquid debt market will come in very handy. Companies, issuing non-convertible debentures currently, all subscribed to by LIC or the likes can then tap the public markets and raise incremental proceeds. India currently has approximately a 30% savings to GDP ratio, most of which is channelled to the countries’ public sector banks. With a thriving debt market, maybe the domestic savings can be used more efficiently and the savings to GDP ratio stabilised. With more diversified investments (away from banks and equity markets) and stable returns, the country’s population at large can benefit. And while it might seem that retail investor participation in debt markets would be difficult, active debt mutual funds provide an answer. In fact with the advent of the new pension reform scheme, pension funds can provide a large corpus for investing in the domestic debt markets. Investor education can also pave the way to making individuals realise the value of balancing their savings over asset allocations and averaging return expectations over a period of time.

India is a young country today with an average age of c. 25. As we grow older as a nation, we will need savings that generate stable returns and that are to some extent decoupled from risks to the financial sector. So along with corporate India, it is the nation on the whole that will benefit from a thriving local corporate debt market. Let us hope that the upcoming budget addresses this need of the hour with some proactive actionable suggestions. The rest we will then need to wait and watch.

Brand Perception and India

With the existence of monopolies and public sector dominance, and in the absence of competition and multinational companies; Indians pre 1991 were resigned to buying what was available. Those who had desires and the monetary power, opted for the parallel black economy that sold “imported” goods. It was a mini nation of the elite living in another nation which was crawling on its knees. With the lowering of import duties and removal of the licence Raj in 1991, the flood gates opened. A swarm of international and private companies occupied the Indian consumers’ time. Instead of selecting only between Thums Up and Limca, the Indian consumer now had three colas to choose from – Thums Up, Coke and Pepsi. Even the “lime and lemony Limca” fought a fierce battle of supremacy against 7 Up and Sprite.

Every industry segment witnessed new entrants (both domestic and international) – from FMCG[1] to media to aviation to automobiles. With each player trying to maximise its market share, organisations embarked on the road to establishing their unique selling points (USP). During the industrial revolution non-local manufactures undertook “branding” exercises to increase awareness and acceptance of their products. This was an attempt to try an associate a certain experience or quality with the product in order to create a follower base. Some of the first brands thus to be established during that era were Coca-Cola, Quaker Oats and Campbell Soup[2]. Similarly to entice customers, Indian companies post 1991, embarked on a journey to create their own brand image.

This quest reached a level where even election rallies were being driven as marketing campaigns. Remember the “India Shining” tag line of the Bhartiya Janta Party (BJP) in the last general elections! It’s sad that despite an innovative approach to Indian politics, the BJP lost elections[3].

It is not just BJP, but a number of Indian firms have spent millions of dollars on brand building exercises, unsuccessfully. Remember Onida television – “neighbours’ envy, owner’s pride”, or Amul chocolates – “a gift for someone you love” or my personal favourite – ECE “Bhool na jana ECE bulb lana[4]” the jingle was sung in a multitude of Indian languages one after the other!

Today, while there has been some success, urban Indians still recognize very few Indian names as “brands”. This conclusion is the result of a survey[5] with Indians in the age group of 18 to 62, living either in Indian metros or overseas and across professional backgrounds. Each participant was asked to respond to a simple question “what do you think of first when you hear the term Indian brand and the term international brand”. The results were quite fascinating. About 11% of the respondents replied stating that the term “Indian brand” made them uncomfortable denoting inferior quality or service, however, international brand to these individuals meant quality, expense or luxury. Only one of the 55 respondents actually said that his/her instantaneous reaction to “Indian brand” was trust in quality while “international brand” made him/her suspicious.

Leaving aside these responses, an analysis of the remaining answers came up with a very interesting tally. There was one Indian name that came out as being the strongest brand in India – Tata, with 44% of the respondents thinking of Tata as their Indian brand. In fact, if two other responses that belong to the Tata group of companies are added to this set[6], then the Tata Group walks away with almost 50% of the votes. On the international side, it is a same number of voters, 44%, who came up with varied answers which no one else in the analysis group had covered. So urban Indians relate to more foreign brands than Indian, might be a fair analysis. To further substantiate this thought is the fact that the most popular “international brand”, Coke, received 22% of the votes while only 22% of the respondents came up with Indian brands which were different from the choice of any other respondent! Thus, in a country with the most listed companies globally, the urban Indian middle class seems to miss the palpable brand equity domestically.

One reason for the weak brand recognition in India is that the middle class which has the largest targeted audience group is undergoing a brisk attitude change. Globalisation is rapidly altering the life style expectations of this segment of the society. For any “brand” to have a tangible “brand equity” there needs to be consistency in the message delivered to the aimed market segment. With the end consumer’s needs and desires changing from day to day, the product marketing also changes accordingly. This causes disruption in uniformity of message delivered, leading to a weaker “brand” perception.

Uniformity of message is also very difficult to maintain in a country like Indian which is culturally very diverse[7]. Thus the second reason for weak brand development in India is the different needs and mental makeup of Indians residing in different parts of the country. If a glamorous product appeals to the more materialistic north India, it loses its sheen in the more conservative South India. Similarly, while local handicrafts are still preferred in the east, there is a very conscious following of western fashion in west India. Food habits, lifestyles, intellectual curiosity are all different in this country of over 300 languages. Thus western brand building concepts cannot be used in India and we Indians need some more time to develop a branding system that works within our cultural diversity and sensitivities.

While it is true that a country which has seen a plethora of brands only in the last two decades, will take some time to develop its own unique marketing and brand building framework, a very important third reason for underdevelopment of “brands” in India is the shareholder attitude. Majority of Indian firms are family run with controlling stakes and management say vesting with the family, who are very conscious of the cash flows. Brand development requires significant investment into researching the target audience attitude, analysing varied marketing strategies and then finally undertaking a thought through long term marketing campaign. In the absence of the desired investment happening, the “branding” exercise is half hearted and hence the outcome is similar.

Substantiating the longetivity and stability of campaign and the investment are the two leading “brands” of the mentioned survey. Coke and Tata have had consistency of logo and experience for the consumer in their marketing despite customisation to address the local audience suitably. On the flip side, it can be seen by the experience of the Indian IT industry that lacklustre effort in brand development leads to non recognition. Globally India is the most known today for its ITeS[8] industry, however, only 2 of the respondents thought of an Indian IT company as a brand[9]. And if one comes to think of it, there is nothing that can actually be described about the Indian IT players except for their low cost base. Given that now even eastern European economies are proving to be equally cost effective with a significant workforce capable of managing outsourcing, Indian IT firms are facing competition. Thus in the absence of another quality associated with Indian outsourcing, the industry is threatened in losing its cash cow status.

Most developed economies are home to some of the most globally recognised brands. As India is progressing on its growth path, Indian companies also need to pay more attention to the “brand” awareness that they create; especially when they enter the overseas markets. India Inc’s brand awareness will improve its own revenue stream, build investor confidence in the country and support India Brand Equity Foundations’ attempts to promote the nation as the Fastest Growing Free Market Democracy.

[1] FMCG = Fast Moving Consumer Goods
[2] Source: Wikipedia
[3] Of course the reasons for BJP’s defeat were much more complex than just their marketing campaign
[4] Literally translated as “Do not forget to get an ECE bulb”
[5] Details in Appendix 1
[6] Titan and Taj
[7] Madhukar Sabnavis had a very interesting column in Business Standard on this topic. The article can be found on http://www.business-standard.com/india/news/madhukar-sabnavis-culture-sensitive-marketing/351047/
[8] IT enabled Services (IT = Information Technology)
[9] Surprising, given that almost 13% of the respondents are or have been IT professionals.