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MONDAY, 21 AUGUST 2017
www.business-standard.com
20 pages in 1 section
MUMBAI (CITY) ~6.00
VOLUME XXII NUMBER 6
How markets performed last week Index on Aug 18, ‘17
Sensex Nifty Dow Jones Nasdaq Hang Seng Nikkei FTSE DAX
*Oneweek
31,525 1.0 9,837 1.3 21,675 -0.8 6,217 -0.6 27,048 0.6 19,470 -1.3 7,324 0.2 12,165 1.3
*Change (%) over previous week
% chg over Dec 30, ‘16
--————————————————————————————————————————————————————————
Local currency
in US $
18.4 20.2 9.7 15.5 22.9 1.9 2.5 6.0
25.4 27.3 9.7 15.5 21.9 9.1 6.9 18.5
Source: Bloomberg
ESSAR, ROSNEFT COMPLETE $12.9-BILLION DEAL
PERSONAL FINANCE P14
WHAT TO DO WHEN BUILDERS GO BANKRUPT
COMPANIES P2
BOLLYWOOD BIGGIES LOSING THE PLOT
PUBLISHED SIMULTANEOUSLY FROM AHMEDABAD, BENGALURU, BHUBANESWAR, CHANDIGARH, CHENNAI, HYDERABAD, KOCHI, KOLKATA, LUCKNOW, MUMBAI (ALSO PRINTED IN BHOPAL), NEW DELHI AND PUNE
Infy stares at turbulence Expertsseedepartureofkeyexecutives,clientchurn;competitorssmellgains
‘SIKKA’S EXIT NO SURPRISE’
AYAN PRAMANIK & RAGHU KRISHNAN Bengaluru, 20 August
Decks have been cleared for the biggest foreign acquisition ever in India. The completion of the $12.9-billion Essar Oil buyout by Russian government-owned Rosneft and other partners is expected to be announced on Monday. The deal, signed in October 2016, went through a lot of hiccups, with the lenders to the Ruia-controlled Essar group insisting on certain conditions. Among the last firms to approve the deal was Life Insurance Corporation of India, whom the Mumbai-based group owed over ~2,300 crore, part of which has been paid back. 3>
‘SITUATION NOT ALARMING, MONSOON TO IMPROVE’
K J RAMESH (pictured), director general of India Meteorological Department, tells Sanjeeb Mukherjee the monsoon is set to revive in 10-12 days in Vidarbha, Marathwada, Karnataka and Telangana. PAGE 4
ECONOMY P5
Notice to 9 phone makers over data security details Thegovernmenthassentnoticestonine moresmartphonemakersseekingdetailsof theirsecuritypracticesasitlookstoensure thateverysmartphonesoldinIndiais accountedforandthemakingofalldevices haveapropersecurityinfrastructureinplace. TheseincludeMotorola,Asus,Honor,Oneplus, Coolpad,Infocus,Blu,Oppo,Nubia.The governmenthadearlierasked21smartphone makers—amajorityofthemfromChina—to sharethesedetails.KIRAN RATHEE writes
ECONOMY P5
Utkal Express derailment: 4 Rly officials suspended Negligenceatthelocallevelappearedto havecausedthederailmentoftheUtkal ExpressonSaturday,oneofthedeadliest trainaccidentsinrecentyearsinwhich22 peoplewerekilledandover150injured, officialsindicatedonSunday.Crackingthe whip,theRailwayssentonleaveitsthree topofficials,includingasecretary-level RailwayBoardofficial,AdityaMittal, suspendedfourofficersandtransferredone.
BACK PAGE P20
IIT entrance exam to go completely online
The entrance examination for the Indian Institutes of Technology (IITs) will go completely online from 2018, the Joint Admission Board, which is the policymaking body on IIT admissions, decided at a meeting in Chennai on Sunday.
I
nfosys might have to prepare itself to lose clients and key executives who supported the software-plus-services model that former chief executive Vishal Sikka had pioneered, as they become easy targets for rivals to poach in an uncertain business environment, company insiders and experts said. The biggest challenge would be for Infosys to represent its digital technology strengths, which Sikka personally drove for pure digital projects in the US, its main market. Over the last few months, Infosys has lost several senior people in the “Infosys has been in leadership US, who were driving client relationships, including its America's limbo for many months, ever since head Sandeep Dadlani. This had the first public board spats, so Sikka pushed Sikka to engage with clients leaving will have a stabilising impact in the short and now his exit would open a front for com- OPINION 13 > term with clients. However, the firm’s petitors to exploit the EDIT: The way out image as an innovator situation. for Infosys is damaged, as this is “Clients want stability. The situation in BUSINESS LAW 10 > what Sikka had brought to the table,” said Phil Infosys, despite the India Inc fumbles Fersht, chief executive public posturing by the in succession officer, HfS Research. management, is one of THE SMART 18 > “I do see Accenture loss of confidence. You INVESTOR will see lots of poaching Infosys: Buyback won’t and IBM potentially gaining some advan(of both people and move the needle clients) happening from STRATEGY 16 > tage in deals where digital, automation and Infosys,” said a senior Lessons from artificial intelligence executive of a rival IT Infosys turmoil are significant, as Sikka firm. was the pioneer in drivAnalysts say that Sikka’s exit has tarnished Infosys’ ing these for the firm.” imageasaninnovator,andthiscould Turn to Page 8 > cost it people as well as clients.
ERIN GREEN, former head of immigration at Infosys who filed a lawsuit against the firm for unlawful sacking, says the resignation of Vishal Sikka from the post of managing director and chief executive officer was expected, as there was a clash of culture at the company. In an email interview with Raghu Krishnan, Green says only the loss of a big client could push Infosys to correct its internal corporate culture.
PAGE 2
WE’RE GOING TO SEE THIS THROUGH AND THE CLIENTS WILL NOT SEE A DISRUPTION. THE MANAGEMENT WILL GO ABOUT THIS IN A VERY SYSTEMATIC WAY AND A VERY SMOOTH WAY
VISHAL SIKKA Executive vice-chairman, Infosys
INFOSYS HAS BEEN IN LEADERSHIP LIMBO FOR MANY MONTHS... SO SIKKA LEAVING WILL HAVE A STABILISING IMPACT IN THE SHORT TERM WITH CLIENTS. HOWEVER, THE FIRM’S IMAGE AS AN INNOVATOR IS DAMAGED PHIL FERSHT Chief executive officer, HfS Research
Govt gears up to list IRFC, IRCTC by Jan “We expect a good valuation for IRFC. Though the Department of Investment and Public Asset Management (Dipam) is The government is gearing up to list looking into the day-to-day affairs, the Indian Railway Finance Corporation railways is expecting the listing of IRFC (IRFC) and Indian Railway Catering and by the end of November,” said a senior Tourism Corporation (IRCTC) by railway ministry official. According to November 2017 and January 2018, finance ministry sources, the red herring respectively, Business Standard has prospectus for IRFC is expected to be out soon. learnt. Dipam has already The two market debuts, appointedICICISecurities, through initial public The two market SBI Caps, IDFC, and HSBC offerings (IPOs), are part of debuts are part of as bid managers for IRFC, the Centre’s plan to list a the Centre’s plan while SBI Caps, IDBI and number of public sector to list a number YesBankwillbeinchargeof undertakings (PSUs) from of PSUs in view taking IRCTC to the boursrailways, defence, and of an ambitious es. IDBI will be the managinsurance in view of an disinvestment er for another ambitious disinvestment target of ~72,500 cr railway subsidiary Ircon. target of ~72,500 crore for for 2017-18 “Ircon is not on our 2017-18. immediate priority list. According to multiple sources close to the development, the IRFC is our priority because of its higher ministries of finance and railways are ratings,” the official said. The listing of IRCTC may face some targeting to launch the IPO of IRFC, the financing arm of the railways ministry, difficulty as the Centre has waived the in November. On the other hand, the service charge on online train ticket listing of IRCTC is likely to be in January, bookings through the IRCTC website. which will give officials enough time to This was done on November 23 last year sort out the issues related to service to boost online transactions after demonetisation. charge waiver. Turn to Page 8 > SHINE JACOB & ARUP ROYCHOUDHURY New Delhi, 20 August
6 months of Chandra: One Tata & more Swift hirings and consolidation of group companies are in the works ABHINEET KUMAR
Mumbai, 20 August
InApril,AustralianPrimeMinister MalcolmTurnbullvisitedTata ConsultancyServices’BanyanPark campusinMumbaitoexploretech partnerships.Turnbull’svisitcreateda buzzatTCS,butthere’smore.Thiscentre, forlongahubforIndia’slargestsoftware exportertoshowcaseitsdigital capabilitiestoglobalcustomers,is witnessing“muchmoretraffic”from withinthegroup.Topexecutivescutting acrosstheTataGroupcompaniesare visitingthecentrenowlikeneverbefore. Thatchangecamegraduallyafter NChandrasekaran,theformerTCSboss, tookoverastheTataSonschairmanon February21.Sixmonthslater,insiderssay it’sanoutcomeofthe‘One-Tata’focus thatChandra,asheispopularlyknown, hassetforthe$104-billionsalt-to-steel groupwithmorethan 100companies.Thisnewapproachisone ofthemainpillarsofthenewchairman's strategy—Thatis,nocompanyshould workinisolationandallofthemshould
NEW TATA BOSS’S WORK HIGHLIGHTS
IN THE PIPELINE
| Hired four seasoned bankers to restructure the group
| Consolidation in defence, infra and consumer business likely
| Put focus back on commercial vehicle business in Tata Motors | Focused on digital to get an edge for group companies | Appointed Tata Sons’ first group digital officer | Made efforts to cap pension liabilities for Tata Steel Europe
| Resolution of Tata Teleservices’ woes
N Chandrasekaran, chairman, Tata Sons harnesstheskillthatisavailableatthe groupleveltoavoidconfusionand duplicationofefforts. People in the inner circles point out that Chandra’s style of functioning in the first six months is a giveaway of how he would run the groupin future. The next six months would start showing results,
theybelieve. While it’s too earlyto look at financial numbers of the group companies to assess Chandra’s performance, though profits ofTCS (the jewel of the group) fell in the last quarter, his speed of execution is at the centre of it all. Turn to Page 8 >
INFOSYS ON LIC ‘BUY LIST’
Turmoil-hit Infosys is on the “buy list” of Life Insurance Corporation of India (LIC) for this month, according to a senior official at the insurance company. On Friday, the stock ended at ~923, down 9.6 per cent over its previous close of ~1,021. It had hit an intra-day low of ~884.4. More than ~7,600 crore worth of shares had changed hands on the NSE and ~750 crore on the BSE. A day later, Infosys’ board had approved a ~13,000-crore share buyback at ~1,150 per share. This was at a 24.6 per cent premium to its last closing price. SAMIE MODAK & SHRIMI CHOUDHARY write 2>
Firms better placed to service debt Interest coverage BETTER TIMES ratio improves to FOR LENDERS? Ratio for infra, metal and 3.95 times in Q1 power companies improves KRISHNA KANT
(Fig.forfiscalyearend&June2017)
Mumbai,20August
In what could be music to lenders’ ears, corporate India is showing initial signs of improvement in its debt-servicing capability. The combined interest coverage ratio (ICR) for 1,822 companies, excluding financial and oil and gas companies, improved to 3.95 times during the first quarter of 2017-18 from 3.85 times in the previous quarter. This means corporate India’s operating profit is now enough to cover nearly four quarters of interest payments. However, on a year-on-year basis, the ICR worsened. The ratio was 4.1 during the AprilJune 2016 period. The ratio of operating profit and interest obligation, the ICR indicates a company’s debt-servicing capability. The improvement in the ICR in the June quarter was led by infrastructure and the capital intensive sectors, such as power, telecom, metals, mining, and construction. This recovery has, however, come at the expense of other manufacturing and services sectors including exporters, most of whom are users of goods and services produced by the former sectors. The ICR
Source: Capitaline Compiled by BS Research Bureau
for these industries together declined to a nine-quarter low in the June quarter as profitability took a knock, hit by a combination of poor revenue growth, sticky raw material, and employee cost. “Thereisacaseforacyclical upturn in economic and corporategrowthinthecurrent fiscalyearledbyhighergovernment spending and a surge in commodities prices, such as metal, mining products and sugar. This is benefitting companies in sectors such as construction, infrastructure, metalsandminingsectors,”said Dhananjay Sinha, head of research, Emkay Global Financial Services. Turn to Page 8 >
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2 COMPANIES
1
MUMBAI | MONDAY, 21 AUGUST 2017
>
McDonald’s likely to challenge NCLT order on Bakshi
DGCA norms may hit expansion plans of carriers, says CAPA
US fast food chain McDonald’s is likely to move National Company Law Appellate Tribunal (NCLAT) this week against a National Company Law Tribunal's (NCLT) order that reinstated Vikram Bakshi as managing director (MD) of its Indian joint venture Connaught Plaza Restaurants Pvt Ltd (CPRL). With no signs of resolution of the conflict between the company and its JV partner in sight, 43 outlets in the Capital continue to remain closed. The NCLT had ordered reinstatement of Bakshi as MD of CPRL - a 50:50 joint venture between McDonald’s India Pvt Ltd (MIPL) and him. PTI<
DGCA’s new notice period norms for airline commanders may hit the expansion plans of the domestic carriers besides impacting the entry of potential strategic investors, according to experts. The new rules, put in place by the aviation regulator last week, make it mandatory for commanding pilots to serve at least a year notice period before they quit and join another airline. Earlier, a six-month notice period would suffice. The revised norms may not withstand legal scrutiny if challenged in a court, but they can also have major commercial outcome for some market participants, said aviation think-tank Coalition of Airline Pilots Association’s (CAPA’s) South Asia head Kapil Kaul. PTI<
Honda Cars gets green nod for ~1,577-cr project HondaCarshasreceived environmentalclearancefora ~1,577-croreexpansionproject atitsTapukaraplantinRajasthan.HondaCarsIndiaLtd (HCIL)wantstoexpandtheproductioncapacityattheTapukaraplantinAlwardistrictalongwithindigenisationofvariouscarpartstoreducethecost ofitsproducts.Thecompany’s proposalwasfirstexaminedby anexpertpanellastmonthand basedonitsrecommendations,theenvironmentministrygavethego-aheadtothe expansionproject.Theclearancehasbeengivensubjectto thecompliancewithcertain specificandgeneralconditions, theministrysaidinaletter issuedtoHCIL. PTI<
M&M tries options to regain grip on utility vehicle space Mahindraand Mahindra(M&M)is backtothedrawing board,workingona slewofmeasures, includingnewlaunchesand betterproductpositioning,in itsbidtoregainlostgroundin theutilityvehicle(UV)segment. FortheMumbai-basedauto major,thesalespushincludes launchofanall-newmultipurposevehiclethisfinancial year,besidesupgradingvariousmodels.“Wehavelostthe marketshareprimarilybecause theuniverseofUVisexpanding rapidlyandalsobecausethere aremanymorecompetitors thantherewerethree-four yearsagointhissegment,” M&MManagingDirectorPawan Goenka(pictured)said. PTI<
TruJet to expand fleet, increase number of flights RegionalcarrierTruJet,which hasbagged18routesunderthe CentreUDANscheme,aimsto raiseitsfleetsizetouptoeight aircraftbyMarch2018besides increasingthenumberof flightstonearly50perdayby thisyear-end,acompany officialsaid.PromotedbyTurboMeghaAirways,theHyderabad-basedairlinecurrently operates31flights,including fourunderUdeDeshKaAam Nagrik(UDAN)scheme,toeight destinationswithafleetoffive ATRplanes.UDANisaregional airconnectivityschemewhich seekstomakeflyingaffordable byconnectingunservedand under-servedairports. PTI<
Half of PV units to have AMT, says Tata Motors TataMotorsisbettingbigon automatedmanualtransmission(AMT)toboostsalesof itspassengervehicles(PVs), expecting50percentofthe productportfoliotohavethe technologyinfuture,according toaseniorofficial.IthasintroducedtheAMTtechnologyon themid-endvariantofits popularhatchbackTiago pricedat~4.79lakhtoaddto theexistingtop-endvariantof themodel.Besides,TataMotorsplanstolaunchanAMTequippedversionofcompact sedanTigorinthenextthreeto fourmonths,whiletheupcomingcompactSUVNexon willhaveitbeforetheendof theongoingfinancialyear. PTI<
HOW THE TOP MOVIES IN 2017 FARED
Net earnings** (in ~cr )
TOP 10 MOVIES OF 2016
45 3.05
51.5 7.00
53.38 30.00
54 10.99
(JanuaryJuly)
21.69
(January-July) Movies Domestic NBOC (in ~cr) Sultan 300.45 Airlift 125 Housefull 3 110 Fan 85 Baaghi 76 Neerja 74 Sachin: Kapoor&Sons 72 Raees Tubelight Badrinath Jolly LLB Kaabil Hindi Half Jagga Mubarakan ABillion Dreams*** Udta Punjab 58 KiDulhania Medium Girlfriend Jasoos Notes: Baahubali 2 has not been added in the top 10 list as it a dubbed version and not produced in Bollywood Ki & Ka 52 *Domestic net box office collections (NBOC) excluding taxes; **Difference between the total cost of making and marketing a film with that of the share of producer/distributor of the domestic NBOC and revenue from selling Dishoom 70 satellite and digital rights, music and home video rights etc. Does not include income from overseas box office 64
Bollywood’sdreammerchantsarelosingtheirmagic touch. In the first seven months of this year, domestic net box office collections (NBOC) of the top 10 Bollywood movies in terms of revenues from theatres — excluding the dubbed version of Baahubali 2 — fell by over 19 per cent from ~1,022 crore in 2016 to ~823 crore in 2017. In 2016, producers forked out ~525 crore to make the top 10 movies but made up nearly double the amount from domestic NBOC. Of course, much of it was owing to the success of Salman Khan’s Sultan. In 2017, the total spent onthetop10filmswas~714crorebutthereturn shrunk, with no blockbusters. The only high point was the unprecedented success of Baahubali 2 that rustled up a new record of ~510 crore in the domestic NBOC — constituting for 40 per cent of the total collections for Hindi films in this period. If the movie is considered in the top 10 earners, although it was a Telugu film produced in Hyderabad and not a Bollywood production, the NBOC growth would go up by 26 per cent. The failure of big-budget Bollywood movies show that mega stars such as Salman Khan, Shah Rukh Khan, Hritik Roshan, Ranbir Kapoor and leading ladies such as Katrina Kaif and Anushka Sharma are struggling to impress the audience. DeepikaPadukone,AamirKhan,PriyankaChopra and Ranveer Singh, of course, have not opened their account this year. The country’s most bankable star, Salman, co-produced Tubelight after delivering a series of hits in the past few years. Experts say the principal distributors paid a staggering~131croretoacquirepan-India(exceptcen-
NBOC*
87 14.37
New Delhi, 20 August
110 7.90
SURAJEET DAS GUPTA
115 19.90
State-owned Indian Oil Corporation (IOC) will invest about ~52,000 crore in expanding Paradip refinery and setting up the petrochemical complex after the Odisha government agreed to restore part of its tax incentives, a source said. The state government has agreed to give ~700 crore per annum of interest-free loan for 15 years to make up for the withdrawn incentive of 11-year deferment on payment of sales tax on Paradip refinery products sold in the state. “IOC wanted ~1,000 crore per annum of interest-free loan but in the end settled for a ~700-crore loan over a longer 15-year period,” said the source who was privy to the negotiations between the company and the state government. PTI<
Revenuefromtheatresinthe7monthsthisyearfall19%to~823crorecomparedtothecorrespondingperiodlastyear
114 25.60
IOC to invest ~52k cr in Paradip after pact with Odisha govt
Bollywood biggies losing the plot
130 1.60
IN BRIEF
collections; ***Revenues from digital rights could be higher Source: Suniel Wadhwa and industry estimates. Figures are approximates
heavy losses. And Raees — which bombed in the domestic box office managing to barely collect backthe~130crorespentformakingthefilm—was savedbecauseShahRukhstillretainshismagicin theoverseasmarkets,whereitmade~50crore.He also sold the movie’s satellite and digital rights for a staggering ~54 crore. Perhapstheonlyconsistentsuperstarhasbeen AkshayKumar.HisJollyLLBmadeanetincomeof ~8 crore, while Toilet:EkPremKatha, made with a budget of ~24 crore, has raked in more than five times, with collections of ~105 crore. Suniel Wadhwa, independent distributor and boxofficeanalyst,saysthatwhilethesizeofthedomestic box office is shrinking, budgets of big movies are going through the roof (most hit ~100 crore),makingitthatmuchmoredifficulttobreak
tralIndia)distributionrightsforthefilm.Butwith a poor show (NBOC of ~114 crore), distributors managed to make up just ~49 crore as their share of the collections (about 50 per cent of box office collectionsgoestotheexhibitor).TheKhanscompensated the distributors to the tune of ~32.50 crore, but they still lost a substantial ~50 crore. The story was similar for the other Khan. Both of Shah Rukh’s movies in 2017 — Raees and Jab HarryMetSejal—facedadrubbing.JabHarryMet Sejal,producedbythestarthroughRedChillies,is still struggling in the second week of its release, withdomesticNBOCofonly~64crore.Themovie was sold to the lead distributor for ~80 crore, who inturnpre-solditterritoriestosub-distributors.But with the share of the distributors of box office collection at only ~30 crore, they face the spectre of
Source: Suniel Wadhwa and industry estimates. Figures are approximates
even. The soaring price of tickets, with the implementation of the goods and services tax, also discouragedmoviegoers.Ofcourse,tent-polemovies did not live up to the expectations. The situation worsened when two big movies were released in the same week (like Raees and Kaabil), adversely impacting the box office of both. Yet, in this mayhem, there were some surprises that had nothing to do with star power. They were movies with good content and performance and were backed by reasonably-controlled budget. Irrfan Khan’s HindiMedium made with a budget of ~23 crore topped the list by earning ~21 crore for its makers and distributers, the highest for a movie in 2017 till now. It was followed by Varun Dhawan and Alia Bhatt’s Badrinath Ki Dulhaniya at the second spot.
TOUGH TIMES
Infy on LIC ‘buy list’ ‘Sikka’s exit no surprise’ SAMIE MODAK & SHRIMI CHOUDHARY
Mumbai,20August
T
urmoil-hit Infosys is on the “buy list” of Life Insurance Corporation of India (LIC) for this month, according to a senior official at the country’s largest insurance company. “We have a process-driven investment approach. Infosys has made it to our ‘buy list’ for this month. We will continue to buy shares of the company,” the official said. He said LIC bought “a few thousand shares” on Friday, when the stock dropped as much as 13 per cent due to the uncertainty created by the resignation of Vishal Sikka from the post of managing director and chief executive officer. On Friday, the stock ended at ~923, down 9.6 per cent over previous close of ~1,021. It had hit an intra-day low of ~884.2 and more than ~7,600 crore worth of shares had changed hands at the NSE counter and another ~750 crore at the BSE. A day later, the Infosys board approved a ~13,000-crore share buyback at ~1,150 per share. This was at 24.6 per cent premium to Infosys’ last closing price. The LIC official said the buyback price is “attractive” and they “would soon take a decision” on how many shares the company would want to tender in the repurchase programme. The buyback timeline will be announced after the resolution is put for shareholder voting. LIC is the largest institutional shareholder in Infosys with a seven per cent stake, followed by OppenheimerFunds, which has 2.16 per cent stake and Singapore government’s GIC, with 2.11 per cent stake, according to the June quarter shareholding data provided by the BSE. HDFC Mutual Fund and ICICI Prudential Mutual Fund, the country’s largest fund houses, hold two per cent and 1.5 per cent, respectively. Most investors Business Standard spoke to said they were closely monitoring the developments. Being a large stock in the benchmark Sensex and the Nifty indices, the stock is owned by a large number of institutional shareholders and exchange-traded funds. “We are yet to hear from the Infosys management. In the interest of all the shareholders, we want the issue to be resolved at the earliest. We are not happy with the way things have been handled at Infosys. However, it is too early to decide if we would switch our investment to other technology companies,” the LIC official said. Shares of rival Tata Consultancy Services (TCS) had gained 1.32 per cent on Friday as some investors switched from Infosys, according to
ERIN GREEN
Former head of immigration, Infosys
ERIN GREEN, former head of immigration at Infosys, who filed a lawsuit against the firm for unlawful sacking, says the resignation of Vishal Sikka from the post of managing director and chief executive officer was expected, as there was a clash of cultures at the firm. In an email interview with Raghu Krishnan, Green says only the loss of a big client could push Infosys to correct its internal corporate culture. Edited excerpts: bably extremely difficult for him, because unfortunately it would have to be decided by the board members who were in India.
Whatisyouropinionofwhat hastranspiredwithSikka resigning?
‘AT STAKE’
Infosys is one of the most diversely-held companies in thecountry Top institutional shareholders Stake (%) LIC 7.03 OppenheimerFunds 2.16 GIC Singapore 2.11 HDFC 2.00 ICICI MF 1.50 Vanguard 1.36 CATEGORY WISE FPIs 37.53 Insurers 11.01 MFs 8.95 Source: BSE; Data for quarter ended June 2017
some market players. “After the latest correction, the stock has become attractive on the valuation front. We might consider buying shares from the open market and tendering some in the buyback. Given the uncertain phase the IT industry is going through, we cannot expect a big bounce in the shares. The buyback is a good opportunity to cash out some of our existing holdings,” said a fund manager. The acceptance ratio for non-retail shareholders is likely to be tiny as the buyback amounts for only 4.96 per cent of the paid up equity share capital of the company. Retail shareholders (those holding less than ~2 lakh worth of shares) can expect a better acceptance ratio as they would have reservations for 15 per cent of the buyback amount.
What is going on now does not surprise me. We (Americans) were very optimistic when Sikka washired.HelivedintheUSand was a Silicon Valley executive who could potentially understandthedynamicsbetweentwo contrastingbusinesscultures.He stood for transparency, opendoor communication and seemedlikehewantedtoengage with the US employee population. This was something new at Infosys.Butduringhisshortstint, it seems like Sikka had so many issuesandfrustrationswiththose that hired him.
DoyouseetheexitofSikka impactingtheimageofInfosys amongclientsintheUS?
The hope with Sikka — at least for US employees and I assume thoseinpowerinIndiawhohired him — was that he would represent a shift for Infosys from the completely India-centric model ofgovernance,decision-making, toamorewesternised,American approach. Of course, as we saw, thatjustbecameabattle,withnot such a great ending. I can relate, as similar struggles were experienced in my group. The issues we felt, as employees on the immigration team and in HR in Texas at Infosys,werejustamicrocosmof how the company was being run on a broader scale. For nonIndians, especially, there were no raises, no promotions, no identity, no career path. I thought it was a joke that I was the highest-ranking member in global immigration — and cer-
ThreeUSlawfirmsaresaying theywouldfileaclass-action suitagainstInfosys.Howwould thisimpactthefirm?
tainly the most-experienced US immigration subject matter expert — yet lower-level employees in India, or those with no US immigration background, were setting immigration policy and making immigration decisions. My bosses in India consistently felt that our duties could easily be copied and performed by non-subject matter employees at the US immigration team in Bengaluru. DoyouseepeoplewhoSikka hiredmovingout?
I know he brought in (David) Kennedy as legal head, and he left a while ago. Kennedy was professional, experienced and knowledgeable. He visited our office and met me when he was hired. I think he may have genuinely cared about our situation. But for a new general counsel, especially an American, to facilitate an employment change that was much needed for our group was pro-
I do not know about the situation surrounding the Panaya deal that is surfacing now, but there is a class-action lawsuit filed in Minnesota in support of American workers, and my lawsuit. Both uncover a blatant culture of discrimination and retaliation that is widespread at Infosys. Companieswillstartrealising how Infosys discriminates and retaliates against its own Americanemployees.Especially, the ones Infosys (by their own internal whistle-blower policies) was supposed to protect by encouraging them to speak out and report such behaviour. American companies will make this an issue in their choice of vendors.Unfortunately,Ifeelthat the loss of a big client, who takes an interest into what goes on within Infosys on US soil, is the onlywayInfosyswillcorrectand changeitsinternalcorporateculture. DoesInfosyshavewhistleblowerpoliciestoprotect againstdiscriminationand peoplewhocomplain?
Ohsure,theydo.Theyencourage employeestoreportsuchthings. Theypromiseprotectionandsay that they take harassment, discrimination, even ‘unfair treatment’seriously.Whattheyreally do is investigate you, the complainer.
Rising rupee hurting leather exporters as competing countries benefit Depreciation in currency of competing countries hurting players further
EXPORT OF LEATHER AND LEATHER PRODUCTS Finishedleather
An appreciating rupee is bad news for the domestic leather industry, which has already seen a 50 per cent drop in business owing to the Centre’s ban on the sale and purchase of cattle for slaughter. Exporters say the country has lost competitiveness to the extent of 10-15 per cent in the past two years due to the exchange rate alone. The industry is already dealing with a situation where there is no substantial increase in orders, month-on-month, due to an increase in competition, espe-
108
572 1,090
2012-13 1,094
2,067
564 1,181
2015-16 1,046 cially from Vietnam and Bangladesh. The $12-billion Indian leather industry is among the top five in the world’s leather market. It is the world’s second-largest producer of footwear and leather garments and accounts for nine per cent of the world’s footwear production. The sector is also a significant contributor towards overall manufacturing employment and holds huge potential for job creation.
Leathergoods
2,079
2014-15 1,329
Chennai, 20 August
Leathergarments
2011-12 1,025 2013-14 1,285
T E NARASIMHAN
Footwear
2,558 2,946 2,738
India’s export of leather and leather products for the financial year 2015-16 (FY16) recorded a fall of nearly 10 per cent, touching $5.85 billion, against $6.49 billion in FY15. Estimates suggest that exports of leather and leather products were down 6.08 per cent during AprilOctober FY17 to $3,157 million from $3,362 million in the corresponding period of FY16. According to Rafeeque Ahmed, president of All India
596
Saddlery&harness Total % Growth 4,874
22.8
5,015
2.9
5,938 163 1,453 6,495 146 1,369 5,854
18.4
110 1,354
604 554
(in $ mn)
146
9.4 -9.9
Skin and Hide Tanners and Merchants Association, the rupee’s appreciation against the US dollar has led to an increase in the cost of a pair of shoes by ~20-25. In comparison, the cost of a pair of shoes from the competing countries dropped by ~1520 owing to the depreciation of their currencies against the US dollar. “Overall, our product (a pair of shoes) is costlier by ~30-40 (compared to products from compet-
3,157
3,362
Apr- Oct 2015-16
Apr- Oct 2016-17
-6.1%
ing countries). This is a huge difference, and we cannot pass on such a cost increase to the customers,” said Ahmed, who is also one of the major exporters of leather products, especially shoes, from the country. Ahmed said that companies were not able to say no to fresh orders, fearing they would end up losing customers to the competition. “If the current trend continues, exporters will have a major problem,” he said.
Companies are now looking Dilip Kapur, president and at the domestic markets, despite founder of Hidesign that manuthe fact that it is not lucrative. factures and sells premium “We need to run the units for the leather products, said that such sake of not becoming sick and to small changes affect exporters of show our lenders that the units contract manufacturing — the are running,” said another mainstay of Indian exports — as exporter. the business is extremely price Exporters said that sensitive. Kapur added that unless the government branded business, such as intervened and took steps Hidesign’s, does not get to save them and the secaffected by such minor tor, which has been recochanges. Of the total gnised as a ‘Focus Sector’ leather exports from the under the ‘Make In India’ country, 65-70 per cent was scheme, there was no quein US dollar denomination. stion of achieving the CenAhmed noted that even PART-IV tre’s ambitious target of customers from major European countries, excludLEATHER garnering $27 billion by 2020 from the industry. ing the UK, were buying in For FY18, Vietnam, a US dollars. relatively new entrant in the A leading exporter said that his space, has set a target of $18-bilcompany operates at one-two per lion export revenue from its cent profit margin. If one takes the leather and footwear industry rupee appreciation into account, it alone, an increase of 10 per cent translates into erosion in margins compared to FY17. between six per cent and seven per cent. “There is no question of profit,” the exporter said. Series concludes
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COMPANIES 3
MUMBAI | MONDAY, 21 AUGUST 2017
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Essar, Rosneft complete $12.9-billion deal JYOTI MUKUL
New Delhi, 20 August
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ecks have been cleared for the biggest foreign acquisition ever in India. The completion of the $12.9billion Essar Oil buyout by Russian government-owned Rosneft and other partners is expected to be announced on Monday. The deal, signed in October 2016, went through a lot of hiccups, with the lenders to the Ruia-controlled Essar group insisting on certain conditions. Among the last to approve the deal was Life Insurance Corporation (LIC) of India. The Mumbai-based Essar group owed over ~2,300 crore to LIC, part of which has been repaid. Around ~1,200 crore is said to be pending. The Essar group had in October 2016, The Essar group had in October 2016, signed a deal with Rosneft, United Capital PHOTO: REUTERS signed a deal with Rosneft, United Capital Partners and Trafigura Group to sell 98 per cent equity in Essar Oil Partners and Trafigura group to sell 98 per cent equity in Essar Oil. The proceeds from admitted an insolvency petition against Controlling shareholders of Essar Oil the sale were expected to help the group the firm. The Reserve Bank of India iden- — Essar Energy Holdings and Oil Bidco reduce its debt, which stood at around tified the firm among top 12 stressed (Mauritius), both companies incorporat$13.5 billion at the time of signing the deal. assets and asked the bankers to file for ed and managed in Mauritius — had The deal was expected to close by insolvency against the firm. The steel entered into separate definitive agreeMarch 2017 but dragged on because of firm has about ~45,000-crore debt on its ments for the stake sale. The first sale the US sanctions on Russia, besides books with non-performing assets of and purchase agreement included the lender approval. ~32,000 crore in 2016-17. sale of 49 per cent to Petrol Complex Pte. Lenders to the group include ICICI, The Essar Oil deal is valued at $10.9 bil- Ltd (a subsidiary of PJSC Rosneft Oil IDBI Bank, Punjab National Bank, lion for acquisition of the 20 million tonne Company); the second envisages the sale Syndicate Bank, Indian Overseas Bank Vadinar refinery in Gujarat and also the of the remaining 49 per cent to Kesani and IFCI. downstream business of petroleum retail- Enterprises Company (owned by a conEssar Steel, another group company, ing, including some 2,700 outlets. The sortium led by Trafigura and United is undergoing insolvency proceedings three-way consortium is paying an addi- Capital Partners). after the Ahmedabad bench of the tional of $2 billion for the acquisition of The deal is also Russia's largest outNational Company Law Tribunal (NCLT) Vadinar Port. bound deal.
Retailers grow sales but battle with profits in June quarter RAGHAVENDRA KAMATH Mumbai, 20 August
Listed retailers have struggled with their bottom line in the first quarter despite rising sales, as discounts were advanced to clear stocks before the goods and services tax (GST) was introduced. Revenues of top retail firms grew an average 23 per cent, year-on-year, in April-June. But except for Future Retail, Avenue Supermarts and Trent, other retail companies posted losses during the quarter. Aditya Birla Fashion & Retail posted revenue growth of 25 per cent during the quarter but a loss of ~20 crore. Shoppers Stop posted sales growth of 22 per cent but a loss
THE RETAILERS’ PERFORMANCE (~ crore) Future Retail Aditya Birla Fashion Future Enterprise Shoppers Stop Trent Provogue (India) Avenue Supermarts
Net sales Q1 % FY18 chg* 4,705 18.2 1,760 24.6 1,041 13.0 941 21.9 499 24.9 35 -45.3 3,598 35.7
PBIDT Q1 % FY18 chg* 212 73.4 82 7.9 262 -55.0 35 14.0 75 49.5 -37 Loss 326 36.1
Net profit Q1 % FY18 chg* 148 109.6 -20 Loss -45 Loss -4 Loss 38 63.7 -43 Loss 175 47.6
*%change over previous year Compiled by BS Research Bureau
Source: Capitaline; All data are standalone
of ~4 crore. Abneesh Roy, senior vicepresident, institutional equities, Edelweiss Securities, said sales might decline in the second quarter due to the advanc-
ing of discounts. A K Prabhakar, head of research, IDBI Capital, said, “Retailers have cleared stocks with discounts before the GST, which seems to have affected their bottom line.”
Profit before interest, tax and depreciation margins of retailers showed a mixed trend. Future Retail, Avenue and Trent posted improvements but Shoppers Stop and Aditya Birla Fashion posted declines. Same-store sales growth of the top retail companies grew by an average 16.2 per cent during the quarter, one of the best performances in the last several quarters. Shoppers Stop posted 19.8 per cent same-store sales growth during the quarter while Future Retail’s Big Bazaar posted 15.9 per cent, one of the best for the chain. Future Retail’s net profit more than doubled to ~147.85 crore while its revenue rose 18.22 per cent to ~4,704.93 crore during the quarter.
Anti-dumping duty should not hurt power firms, says Fortum India MD SHREYA JAI
New Delhi, 20 August
With the Indian government taking a strong stand against imports in the renewable sector, Finnish energy major Fortum believes that power developers should be protected against any impact. “I am sure both the proponents of those who support anti-dumping duty (ADD) and those who don’t, would have good amount of ammunition to fight it out and there is regulatory mechanism to decide on that. Amidst all of this, the developer should not be put in an unfair position. There should be a grandfathering for the past bids that anti-dumping should not apply to them,” said Sanjay Aggarwal, managing director, Fortum India. India recently initiated an investigation into the dumping of solar panels coming from China, Malaysia and Taiwan — for the second time in the past three years. Fortum imports solar panels from Malaysia which, Aggarwal said, undergo strict quality tests. “I can’t build in a duty now in my tariff. So, I don’t want to be unfairly targeted because of that. Clearly, it’s unfair that a developer needs to take a call on the ADD. There has to be a mechanism, by which the developer should be exempted. I would leave that to the authority but my project should not be impacted,” said Aggarwal. The government is also bringing in a quality policy to filter inferior quality imports in the power sector Aggarwal, however, said the policy should be for both imports and indigenous products. “DGAD (directorate of anti-dumping and allied duties) will decide how much reduction in tariff and its cascading effect helps the country vis-à-vis creation of this ADD. If we want to do 100 Gw, we have to add 20 Gw every year. We don’t have the manufacturing capacity to do that. Out of a capacity of 5 Gw, 1 Gw is cells, so the balance anyway comes from outside. Whether that ~1 tariff increase because of ADD creates ancillary, manpower and cascading effect versus how much advantage, if you were
IN A FREE MARKET ECONOMY, IT CAN’T BE THAT ALL PROFITS SHOULD GO TO PRIVATE AND LOSSES TO THE GOVERNMENT. THE PACE OF GROWTH OF SOLAR IN INDIA SEEMS TO BE DRIVEN BY FINANCIAL ENGINEERING AROUND LOW BIDS AND THEN TECHNOLOGY FOLLOWS, WHILE IT SHOULD BE THE OPPOSITE” SANJAY AGGARWAL
Managing director, Fortum India
to start producing here, that is to be evaluated,” said Aggarwal. Fortum has close to 225 Mw of solar projects in India and has distanced itself from free fall of tariff. Aggarwal said the company would put a bid only when it is financially viable. “In a free market economy, it can’t be that all profits should go to the private
sector and losses to the government. The pace of growth of solar in India seems to be driven by financial engineering around low bids and then technology follows, while it should be the opposite,” he said. Emphasising that there is no focus on how the plant would be built in India, he said, falling tariffs have put such companies to the fore that design a project after the bid. “There is a need to put in an effort to construct a plant that would live for 25 years. People are randomly going for the cheapest quality to match their bids. A company with a utility DNA would always make sure that technical solution comes first and financial engineering comes later. The plant needs to be good before I do all fancy structures,” he said. Fortum entered the Indian market in 2013 and is targeting an addition of 200 Mw energy every year in India. The company manages its South Asian affairs from India, making it the second-most important market after its home country. In 2016, it was the first company to take the solar bids below sub ~4.5 per unit for a 70 Mw project in Rajasthan. But it has slowed down participation in subsequent bidding rounds. “Power market has changed and for the good. Disruption has come in but solar is here to stay. We are not clear on the pace, as the hiccups are already visible from this year,” said Aggarwal, citing the latest incidents of states backing out of renewable projects or renegotiating power-purchase agreements. Fortum acquired two solar power plants in India but would focus on only green-field projects. Aggarwal said the private equity investors that are backing the renewable companies putting ultra-low bids would exit once they get their returns. He believes that there would be another round of consolidation in the sector with the utility companies with strong financials surviving. “These are warning pangs of the industry. There would be casualty. We have gone around looking for plants but none matched to our criteria,” he said.
Two fixed deposit holders take Jaiprakash Associates to NCLT VEENA MANI & SHREYA JAI New Delhi, 20 August
Two fixed deposit (FD) holders have filed insolvency proceedings against Jaiprakash Associates Limited (JAL) in the National Company Law Tribunal (NCLT) in Allahabad. One of them has a deposit of ~56,000 and the other has that of ~64,000 for three years. In response to Business Standard’s query sent to Manoj Gaur, executive chairman, JAL, the company stated that it has received a copy of the application addressed to the tribunal in Allahabad. The company, however, denied receiving any notice from the NCLT. “Since the application served upon us does not bear any number, we are not aware whether thesamehas beenfiled or not as yet, what to talk of acceptance/admission thereof by the Hon’ble NCLT,” said a spokesperson of JAL. He also said, “We strongly
Treat buyers on a par with banks: Assocham to insolvency tribunal With thousands of homebuyers of Jaypee Infratech languishing with stuck projects, industry body Assocham has said the government and the National Company Law Tribunal (NCLT) must treat flat owners on a par with banks under the insolvency law. An ordinance, if needed, should be brought to amend the Insolvency and Bankruptcy Code (IBC) for protecting the right of homebuyers, it said. All
efforts should be made to revive the housing projects of Jaypee Infratech whose 32,000 customers have not got possession of their flats, it said. Assocham said in a statement that the government, the NCLT and the IBC should “treat homebuyers in real estate projects on a par, if not above banks in the pecking order, by providing a separate carve-out for those stuck in the incomplete construction”. PTI
feel that such baseless and frivolousapplicationsarenot maintainable and deserve to be dismissed with heavy cost.” The emailed reply also said that cheques were sent to both the deposit holders along with the interest payable, but they went undelivered. In July this year, the compa-
nyrepaidits outstandingtoover 85,000 FD holders. It paid ~1,275 crore to these holders. And also initiated payments to the tune of ~13,000 crore to lenders. JAL reported a standalone net profit of ~765 crore in the quarter ended June, on higher income and lower expenses, against a loss of ~603 crore, in
the corresponding quarter of the previous year. The company, which has verticals in cement, real estate, power and hospitality, also approved a proposal for raising of funds up to ~2,000 crore through equity-related instruments for meeting capital expenditure, reduction of debt, general corporate purposes and working capital requirements for its businesses. This year in June, the company shed the title of a nonperforming asset after the sale of its cement business. Jaiprakash Associates sold six integrated cement plants and five grinding units of Jaypee Cement with a total capacity of 21.2 million tonne to Aditya Birla-promoted UltraTech at a value of ~16,189 crore. According to the deal, operating cement plants in Himachal Pradesh, Andhra Pradesh, Madhya Pradesh, Uttar Pradesh and Uttarakhand were sold for a consideration of ~16,189 crore.
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4 ECONOMY
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MUMBAI | MONDAY, 21 AUGUST 2017
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Composition scheme picks up pace after deadline leeway
About 1 mn traders opt for window under GST regime
and service providers, barring restaurants, were keep out. Besides, a composition dealer is not allowed to avail input tax credit. Such a dealer cannot issue a tax invoice as well. Thereby, someone buying from a composition dealer will not be able to claim input tax on such goods, limiting the popularity of the scheme. In addition, reverse charge mechanism will not be covered under the scheme. Finance Minister Arun Jaitley and Revenue Secretary Hasmukh Adhia have been claiming that the composition scheme would benefit small businesses, but these entities do not seem to be convinced. But, a composition dealer only needs to furnish one return, GSTR-4, on a quarterly basis and an annual return in form GSTR-9A, against three forms on a monthly basis by a normal taxpayer. Pratik Jain of PwC India said it was difficult to compare and assess the response to the scheme. It would have been better had it also been extended to small service providers. “Besides retailers, it is mostly restaurants that appear to have opted for the scheme as they do not have much of input tax credit to avail,” he said. The composition scheme is not available on inter-state supply of goods. M S Mani of Deloitte said a person supplying to another state needed time to strike a supply deal with a normal taxpayer in his own state who can supply to another state.
DILASHA SETH
New Delhi, 20 August
A
bout a million taxpayers have opted for a scheme that will benefit small businesses in the goods and services tax (GST) regime by allowing easier compliance and a flat rate of tax. After a muted response initially, interest in the composition scheme has increased. As of August 16, the last date to apply for the scheme, 938,165 entities had registered, against about 100,000 as of July 21, the earlier deadline. In other words, about 11 per cent of GST taxpayers have opted for the composition scheme. Those with an annual turnover of up to ~75 lakh are eligible to apply for the scheme, which allows them to pay one per cent tax if they are traders, two per cent if they are manufacturers and five per cent if they are in the restaurant business. “Response picked up after we extended the deadline as it gave time for businesses to plan better and take a decision,” said a government official. “For businesses that failed to register under the composition scheme now, an opportunity willariseonlynextyear.Itisdifficult to compare the data as a scheme of this scale and uniformity was not
ABOUT THE SCHEME
| Composition scheme is for traders, manufacturers and restaurant owners | Those with an annual turnover of up to ~75 lakh are eligible | Under this scheme, traders to pay 1%, manufacturers 2% and restaurant owners 5% GST, respectively | Input tax credit not available
| Those engaged in inter-state supply not eligible | Not strictly comparable with VAT regime, since it was mainly applicable to work contracts | System was different from state to state under VAT | Earlier deadline was July 16; only 100,000 had opted for it | Extended by a month now; 938,165 have registered for it
available under the earlier tax regime.” The composition scheme under the value-added tax regime varied from state to state. The eligibility condition for the composition scheme in June was raised to up to ~75lakhannualturnoverbytheGST Council, from ~50 lakh earlier. A
dealer registered under the composition scheme is not required to maintain detailed records, which a normal taxpayer will have to keep. Response to the scheme could have been better had the conditions notbeenthisstringent,expertssaid. Those dealing only in goods can opt for the composition scheme
‘Monsoon in active phase; things will improve in 10-12 days’
Ordinance to increase luxury car cess likely this week ARUP ROYCHOUDHURY New Delhi, 20 August
The Narendra Modi government is likely to promulgate an ordinance as early as this week to increase ceiling on cess to 25 per cent from the present 15 per cent over the peak rate of 28 per cent goods and services tax (GST) on luxury cars and sports utility vehicles (SUVs). The ordinance will amend the Schedule to Section 8 of the GST (Compensation to States) Act, 2017, forthecesstobeincreased.Business Standard has learnt from senior government officials that the ordinance has been drafted and has been checked by Finance Minister Arun Jaitley’s office. It is expected to be available for President Ram Nath Kovind’s consideration very soon, said an official. This could happen as early as
the current week. The ordinance hastobethenratifiedbyParliament in the upcoming winter session. Earlier this month, the GST Council had recommended an amendment to increase the cess on all passenger vehicles above four metres and with an engine capacity of 1,500cc and above to a peak of 25 per cent. Such vehicles currentlyattractGSTof28percent,anda15 per cent cess. Even after the ordinance,the increaseincess wouldbe finalised by the GST Council and total tax and cess may not go beyond 50 per cent. The move adversely impacts Mahindra & Mahindra, Toyota, and luxury carmakers such as Mercedes, BMW, Audi and JLR. The decision has upset the growth
THE NEW RATES
plans of the luxury car industry, which had seen a flat performance in 2016, owing to demonetisation and the ban on 2,000cc diesel cars in the National Capital Region for the first eight months of the year. The decision to increase the cess was taken after the Council found the taxes on these cars were lower under the GST regime than the indirect taxation system.
| On passenger vehicles above 4m and with an engine capacity of 1,500cc and above | GST: 28% | Proposed cess rate: 25% | Present cess rate: 15%
Toyota’s Fortuner had turned cheaper by ~2.17 lakh after GST
STATSGURU State of the world economy
IN THE LATEST economic outlook, the International Monetary Fund (IMF) maintained the global growth projection of 3.5 per cent for 2017. As Chart 1 shows the Fund has upped its growth forecast for emerging markets and developing economies to 4.6 per cent in 2017, from 4.3 per cent earlier, largely on the back of stronger Chinese growth. It has lowered the US growth estimates on the grounds that the fiscal policy of the country is likely to be less expansionary than anticipated. For India, the forecast remains unchanged. The Fund has also upped its forecast for global trade growth, as shown in Chart 2. Global trade is now expected to grow at a faster pace than growth in 2017, reversing the trend seen in the previous years. The headline inflation rate has softened across both advanced economies and emerging markets, as shown in Chart 3. This is largely because the commodity price rebound seen in the second half of 2016 has faded. Crude oil prices are unlikely to trend upward (Chart 4), due to the dynamics of the shale market. With the inflation rate well below its target of two per cent, the US Federal Reserve kept rates at 1-1.25 per cent in its latest meeting. The expectation is that the Fed will now raise rates in December. And while the US and Chinese yields have firmed up over the past year or so, Indian G-sec yields have fallen, as shown in Chart 5. Equity prices have remained strong in both advanced and emerging markets, as shown in Chart 6, signalling continued optimism. But a faster than expected winding down on the Fed balance sheet could tighten global financial conditions. As a consequence of the uncertainty over Brexit, the pound has fallen 10.6 per cent against the dollar as shown in Chart 7, while stronger than anticipated growth in the eurozone has pushed up the currency (euro) against the dollar. ISHAN BAKSHI
After being fairly normal in the first two months of this season, there was a break in the Southwest Monsoon from early August, triggering fears of aggravating farm distress in some parts of the country. K J RAMESH, director general of India Meteorological Department (IMD), tells Sanjeeb Mukherjee the monsoon is set to revive in the coming 10-12 days in Vidharbha, Marathwada, Karnataka and Telangana. Edited excerpts:
K J RAMESH Director General, IMD
The Southwest Monsoon has been unusually weak in August, with some even predicting the shortfall to be as big as 25 per cent below the normal. Is the situation alarming?
If you see the all-India picture, the overall accumulated monsoon deficit has been five per cent (till August 19). Though there are pockets of distress, the good news is the Southwest Monsoon has entered into an active phase and in the next 10-12 days things will improve in a big way, especially over those parts which have received less rains. What changed in August, because your predictions said rains would be 99 per cent of the long-period average (LPA)?
After July 30, the Southwest Monsoon witnessed two weak spells. I won’t call it a break in the classical sense as there were intermittent rains in between. The reason for the break was the monsoon trough moved towards the foothills of the Himalayas. An independent way of judging the impact of the break is to look at week-on-week kharif sowing data. The data clearly show there has been a progression even during the period when the monsoon was weak over some parts. If the rainfall was so insufficient, why then was week-on-week kharif sowing progressing? The data as of August 18 show this year’s total kharif acreage is just marginally less than last year's. Farmers in Maharashtra’s Beed district have filed complaints against the IMD for wrong forecasts. Your take?
In our advisories, we have clearly said don’t start sowing unless the field has received minimum 75mm of rainfall. Despite that, why did the farmers start sowing? Also, after that, they got good rains which stopped after a few days — all of which was captured by the weekly agriculture advisories sent by our Pune arm. The advisories are prepared by eminent scientists from Vasantrao Naik Marathwada Krishi Vidyapeeth in Parbhani district of Maharashtra, which is one of the best in the region. Also, most farmers who have complained against the IMD planted rain-fed cotton, a risky crop.
IN OUR ADVISORIES, WE HAVE CLEARLY SAID DON’T START SOWING UNLESS THE FIELD HAS RECEIVED MINIMUM 75 MM OF RAINFALL. DESPITE THAT, WHY DID THE FARMERS START SOWING?”
We have forecast normal monsoon for the entire country, not for any specific region, because we don’t have the capability to give districtwise seasonal forecast.
Projections
World economy Advanced economies United States Euro area Japan Emerging markets & developing economies China India
2017 2018 3.5 3.6 2.0 1.9 2.1 2.1 1.9 1.7 1.3 0.6
But, there are crops such as soybean, arhar and groundnut where the acreage has been less than last year's, right?
Yes, there are; but has the acreage fallen because of insufficient rains? It could also be because farmers have shifted to sugarcane and cotton in a big way. But, what about east and west Madhya Pradesh; Vidharbha and Marathwada in Maharashtra; north, south interior and coastal Karnataka; western UP; and Telangana, where the seasonal deficit has been more than 20 per cent till August 19?
In east and west Madhya Pradesh, rains were good till July and then there was a break; in other parts which are seeing more than 20 per cent rainfall deficit, including Vidharbha and Marathwada and
4.8
0.1
0.0
6.7 7.1
6.7 7.2
6.4 7.7
0.1 0.0
0.2 0.0
*Difference from April 2017 WEO Projections
2: WORLD TRADE EXPECTED TO GROW 4% IN FY17 Higher than the GDP growth
2017 2018 0.0 0.0 0.0 –0.1 –0.2 –0.4 0.2 0.1 0.1 0.0
4.6
Projections
2016
2017 2018
(% y-o-y)
Difference*
2017 2018
World trade volume (goods and services)
2.3
4
3.9
0.2
Advanced economies
2.3
3.9
3.5
0.2 –0.1
Emerging markets & developing economies
2.2
4.1
4.6
0.1
0.0
0.3
*Difference from April 2017 WEO Projections Source: IMF World Economic Outlook, July 2017
Note: For India, data and forecasts are presented on the basis of financial year, and GDP from 2011 onward is based on GDP at market prices with FY2011/12 as a base year. Source: IMF World Economic Outlook, July 2017
3: RETAIL INFLATION RATE SOFTENS ACROSS ADVANCED AND DEVELOPING WORLD
In June and July, monsoon was normal and according to our prediction. As far as August is concerned, the month hasn’t passed yet and we are seeing a reversal of the situation in the last 24 hours. Whether we went wrong with the monthly prediction, I will judge at the end of the season. What forecast we gave for August was based on best possible inputs at that point of time. I’m not defending the forecast, but what I’m saying is my benchmark is September 30 and that has not come yet. All my predictions, forecasts etc. are meant to improve agriculture planning, which to me hasn’t been impacted in any form. What we are seeing are seasonal lulls which happen in any normal monsoon year. At the start of this season, Madhya Pradesh and Gujarat were in deficit, which was wiped off by July-end. For Marathwada and Vidharbha, rainfall will improve as systems are developing. Plus, any given year, monsoon is deficient in 25-30 per cent of the country’s geographical area.
Do we have a commercial product to sell that we will give wrong or misleading forecasts?
Difference*
4.3
You don’t concede that you failed to anticipate the August break and your prediction for this month was wrong?
What about the allegations that IMD connived with seed and fertiliser companies to mislead farmers?
1: WORLD ECONOMIC GROWTH PROJECTED AT 3.5% IN 2017 (GDP growth % y-o-y) 2016 3.2 1.7 1.6 1.8 1.0
also Karnataka, they should see good rains in the next 10-12 days. In fact, as we speak, it has started raining in Vidharbha and Marathwada for the last 24 hours. I am confident things would improve. In MP also, rains are going to restart in the next few days.
But, the main complaint is IMD predicted a normal monsoon, while in their region, the rains were not adequate.
4: CRUDE OIL OFF ITS LOWS, REMAINS RANGE-BOUND Brentcrude spot ($/BBL)
(% y-o-y)
6: INDIAN MARKETS OUTPERFORM OTHERS
(Base= 100)
Sources: IMF, World Bank
Source: Bloomberg
5: US YIELDS FIRM UP, INDIAN YIELDS FALL
7: EURO AND RUPEE STRENGTHEN AGAINST THE DOLLAR, POUND AND YUAN WEAKEN
10-year G-sec yield
Source: Bloomberg
StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines
(%)
% change against $ since April 1, 2016
Source: Bloomberg
(%)
Source: Bloomberg
Compiled by BS Research Bureau
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ECONOMY 5
MUMBAI | MONDAY, 21 AUGUST 2017
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Education fund gets Parliament immunity SUBHOMOY BHATTACHARJEE New Delhi, 20 August
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bout a third of the public money raised by the government for investments cannot be voted upon by Parliament. Last week, the Cabinet added a little more to that purse — the secondary and higher education fund, known as the Madhyamik and Uchchtar Shiksha Kosh (MUSK). It makes good government expenditure a bit more opaque without necessarily making the quality of spending better. It is also against its instinct when raising revenue to finance some of these schemes. At the same meeting, the Cabinet approved a transparent means to raise ~9,020 crore to finance key irrigation projects in 2017-18 under the Pradhan Mantri Krishi Sinchayee Yojana. Both decisions sit well with the changes happening in the Budget, with more emphasis on expenditure management, while revenue raising becomes more predictable. There were already seven schemes that the government shields from Parliament scrutiny by placing these outside the Consolidated Fund of India, as government Budget papers show. MUSK will be the eighth on the list. Article 266(2) of the Constitution allows the government to provide this cover. At one time, this cover, known as
Public Accounts, was mostly meant to levied on all taxes was channelled only house small savings schemes such as into spending for secondary education. the Public Provident Fund and postal But the finance ministry had pointed out that aggregate spending savings schemes where the on the sector was already government basically acts like more than what the cess a banker. So the shield from could raise. Plus, a Parliament voting to, say Parliamentary oversight reduce rates, was necessary would plainly help. This was to ensure people had the conoverruled by the Cabinet last fidence to invest in those week. funds. This will ensure that the In recent years, this cover finance ministry will have a has expanded massively to little monitoring role in the include mega schemes such spending on MUSK from now. as the Central Road Fund, The finance The human resource develClean Energy Fund, Rashtriya ministry will opment ministry can also add Swachhata Kosh, and Krishi have a little more areas to what it feels Kalyan Fund. monitoring role would qualify as secondary or In the previous financial in the spending as higher education. year, the aggregate money on Madhyamik At the same time, the govthat travelled through these and Uchchtar ernment has made transparfunds was ~1,19,334 crore — a Shiksha Kosh ent the rationale for Nabard big sum when compared with from now to borrow ~9,020 crore from the ~3,75,402.83 crore the government allocated for all of its other the markets to finance projects under major expenditure schemes, excluding the Accelerated Irrigation Benefits defence capital expenditure and subsi- Programme. It is a mega programme dies. This financial year, the Budget esti- expected to irrigate 7.6 million hectares mate for the seven sequestered schemes of agricultural land. The states will borwas much lower. But that is sure to be row at 6 per cent from Nabard to finance breached later when the actual the projects. To make it possible for Nabard to service the loans, the Centre demands surface. The finance ministry had in 2010 will provide interest-free funds. It is a advised against making MUSK a part of large commitment, almost triple the size Public Accounts. The department of sec- committed in the previous financial ondary and higher education had year. But the operational details are argued that the sequestering was need- minute. The expenditure projects could ed to ensure that the 1 per cent cess do with more of the same.
BoI puts bad loans worth ~3,169 crore on sale ABHIJIT LELE
Mumbai, 20 August
Public sector lender Bank of India (BoI) plans to sell bad loans worth ~3,169 crore to clean up its balance sheet. The Mumbai-based lender has sought bids from asset reconstruction companies (ARCs), finance companies, banks and financial institutions for sale or assignment of non-performing assets (NPAs). The sale comprises 67 accounts with a principal bal-
CLEANING UP BAD LOANS Puts67NPAaccountsonsale GrossNPAsat 13.05% in June2017 Provisioncoverforbadloans 63.48% inJune’17 was6
ance of about ~3,169.08 crore, according to the notice for sale. But, BoI did not elaborate on the nature of accounts, such as their names or the sectors. These NPAs were being offered for sale
LenderusingSDR;S4Ato recaststressedloans Lenderhas36cases (~12,139 cr) atNCLTfor insolvencyresolution
on “cash basis” or “cash plus securities receipts (SR) basis” and on “as is where is and as is what is” basis. The lender has appointed Special Situation Advisors (India) Pvt Ltd as the
financial advisor to assist with this transaction. While the bank continued to face asset quality pressures, its GNPA ratio improved in the 12 months ended June. Gross NPAs were down at~51,019crore(13.05percent)at the end of June 2017 from ~51,874 crore (13.38 per cent). Its provisions for NPAs were down to ~2,156 crore in Q1FY18 from ~2,452 crore in the year-ago period. The provision coverage ratio stood at 63.48 per cent at the end of June 2017, up from 53.06 per cent in June 2016.
UTKAL EXPRESS DERAILMENT
Four Rly staff suspended, death toll rises to 22 AGENCIES
Muzaffarnagar/New Delhi, 20 August
Negligence at the local level appeared to have caused the derailment of Utkal Express near Muzaffarnagar, one of the deadliest train accidents in recent times in which 22 people were killed and over 150 injured, 26 of them grievously, officials said on Sunday. A probe has been ordered to ascertain the exact cause of last evening's derailment, with Railway Minister Suresh Prabhu directing Railway Board Chairman to fix responsibility on “prima facie evidence by the end of day”. Cracking the whip, the Railways sent on leave its three top officials, including a secretary-level Railway Board official, Aditya Mittal, suspended four officers and transferred one. Member (Engineering) in the Railway Board, Northern Railway General Manager and Divisional Regional Manager (Delhi) have been sent on leave in the wake of the derailment in Muzaffarnagar district of Uttar Pradesh, the Railways said. The Railways also suspended four of its officials — Senior Divisional Engineer, Assistant Engineer, a Senior Section Engineer (Permanent Way), responsible for track maintenance and a Junior Engineer. Chief Track Engineer, Northern Railway, was transferred as part of the action by the Railways. The train, which was on its way from Puri in Odisha to Haridwar in Uttarakhand, had 23 coaches, of which 13 derailed, said Divisional Railway Manager, Delhi Division, R N Singh. Six coaches of the train, which was running at a speed of over 100 kmph, were severely damaged, he added. One coach crashed into a house. The railways have deployed high-tech cranes and scores of workers to clear the
A mangled coach of Utkal Express train being hauled of the tracks by a crane at the accident site in Khatauli near Muzaffarnagar on Sunday. A preliminary probe has found that maintenance work was being carried out on the tracks which might have caused the derailment PHOTO: PTI
tracks near Khatauli. Two 140-tonne cranes were being used since early this morning to clear the derailed coaches, from which survivors had been rescued and bodies pulled out till late last night. Rescue operation by the National Disaster Response Force got over at around 3 am. The death toll in the accident went up to 22, with one more person identified as Sushil Kumar succumbing to injuries in a hospital in Ghaziabad, according to District Magistrate of Muzaffarnagar G S Priydarshi. Of them, 15 bodies have been identified. Principal Secretary (Information) to the UP government Awanish Kumar Awasthi said 156 people were injured in the derailment and many among them remain critical.
Zinc can build corrosion-free infra: HZL CEO Pitching for corrosion-free infrastructure for the Railways, Hindustan Zinc Chief Executive Officer Sunil Duggal on Sunday said galvanising tracks could help achieve zero fatalities. According to estimates, India loses about 4 per cent GDP annually on account of corrosion of such infrastructure.
PTI
Notice to 9 more smartphone makers over data security details KIRAN RATHEE
New Delhi, 20 August
The government has sent notices to nine more smartphone manufacturers seeking details of their security practices as it looks to ensure that every smartphone sold in India is accounted for and the making of all
devices have a proper security infrastructureinplace. TheseincludeMotorola,Asus, Honor, Oneplus, Coolpad, Infocus, Blu, Oppo, Nubia. The government had earlier asked 21 smartphone makers — a majority of them from China — to share the security practicesandarchitecturetheyfollow,while
making devices. The move by the Ministry of Electronics andIT(MeitY)wastostrengthenandsecure cyberspace and digital infrastructure in the country. According to a MeitY official, everyone who sells or makes phones in the country will have to share the details of security architecture to the government.
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12 ISSUES AND INSIGHTS
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MUMBAI | MONDAY, 21 AUGUST 2017
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The puzzle over the 10 per cent drop The decline in non-individual returns and the rising cost of collections are trends that need to be examined
RAISINA HILL A K BHATTACHARYA he Narendra Modi government has reasons to compliment itself on the way it has succeeded in bringing more people under the direct tax net. The indirect tax net is also getting wider because of a rise in the number of entities getting registered under the goods and services tax (GST). But the full impact of the GST initiative on widening the tax net will become clearer perhaps by the end of this year. For the present, however, the latest numbers released by the finance ministry are ample testimony to how more direct taxes are being paid and
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more people are filing tax returns. For the 2016-17 financial year, the number of tax returns filed by the end of the last date of submitting such documents jumped by about 24.6 per cent to reach an impressive number of 28.3 million. Similarly, the latest direct tax collections for 2016-17 are estimated at ~8.5 lakh crore, marginally higher than what was presented in the Revised Estimates in the last Budget. However, a closer reading of these numbers pertaining to the returns filed and the taxes collected reveals trends that have not yet been highlighted either by the government or any tax analysis. Indeed, these trends provide a new perspective on the government’s claims on widening the direct tax net. One, individual tax returns did go up by 25.3 per cent by the end of August 5, the last date for filing returns this year. But returns filed by non-individuals (which will include firms, companies, associations of persons, bodies
of individuals and Hindu undivided families) saw a drop of about 10 per cent during the same period. What led to this drop even as individual filing of returns went up by 25 per cent? Granular data are not yet available. But it appears that the crackdown on shady or non-operating companies, used largely for engaging in questionable transactions, has had an impact on this segment of the economy. The cancellation of over a million duplicate or multiple permanent account numbers belonging to the same person or entity may have also led to the disappearance of many of those who used to file returns earlier, but now no longer exist. But there is need for greater clarity on how there was a 10 per cent drop in filing of returns by non-individuals. The latest tax collections data for 2016-17 have some more surprises in store for those tracking public finance. Yes, personal income tax collections rose by 21 per cent, compared to eight
per cent in the previous year. Corporation tax collections too rose by seven per cent, compared to six per cent in 2015-16. But the surprise comes from the states that saw the highest growth in collections. Remember that 2016-17 was the year of demonetisation and the spurt in personal income tax collections was attributed to a great extent to the annulment of 85 per cent of high-denomination currency in circulation on November 8, 2016. Among the major states with big towns, Haryana, with Gurgaon under it, accounted for a rise of 21 per cent, followed by Karnataka and Tamil Nadu each with a growth of 19 per cent. West Bengal showed a rise of 18 per cent, followed by Gujarat at 14 per cent. In sharp contrast, Maharashtra and Delhi that together account for almost half of the country’s total direct tax collections grew their contribution last year by only nine per cent and seven per cent, respectively. Is it only a base effect or are there other
reasons that need to be explored? Finally, there are two areas of concern. One, direct taxes as per cent of total tax collections reached a 10-year low of 49.66 per cent in 2016-17. The declining trend has been noticed since 2009-10, when it peaked at 61 per cent. But the sooner the trend is reversed, the better it would be for the health of India’s public finance. Two, tax deduction at source contributes about 35 per cent and advance taxes account for about 41 per cent of total gross direct tax collections. Taken together, they account for more than three-fourths of total direct tax receipts of the Centre. This raises the obvious question on the cost of collections estimated at 0.66 per cent in 2016-17, marginally higher than what it was in 2015-16 and measurably higher than 0.57 per cent in 2013-14. Of course, the collection cost has declined from 1.36 per cent in 200001, but with the rapid spread of digitisation and technology, there is every reason to expect a further drop in the collection cost. Questions, therefore, need to be raised on the effectiveness of the 73 per cent increase in manpower strength for the direct taxes department last year.
> CHINESE
Coal, energy and development
WHISPERS
On tenterhooks over dress code Officials in the Ministry of Information and Broadcasting are on their toes these days. There have been several changes in the ministry after Smriti Irani took over from M Venkaiah Naidu. If Naidu was generous to a fault, Irani is a hard taskmaster. One of the first instructions to the ministry bureaucracy was that they should dress appropriately. The minister let it be known that she didn’t want to see officials attired in casuals such as jeans, or turn up with their shirts not tucked in. After being ticked off by the minister, the word has spread. Irani also holds the charge of the Ministry of Textiles.
Renewables may be the future, but are they the present? IMPLIED TRAJECTORY OF COAL AND RENEWABLES
ARVIND SUBRAMANIAN hree important features define the background for discussions on renewables and coal. First, under the leadership of the Prime Minister, India led the initiative to launch the International Solar Alliance at the Paris meeting in December 2016, underpinned by an enhanced domestic effort to dramatically increase renewable capacity to 175 gigawatts by 2022. Second, this renewables push comes against the recent history of dramatic over-expansion in thermal capacity fuelled by the growth optimism of the mid-2000s. This combined with financial stress in discoms has led to plummeting capacity utilisation (plant load factors or PLFs), and raised the spectre of stranding thermal power and coal assets. As power prices are renegotiated because the discoms are themselves financially strapped, this stress is extending to renewables themselves. The health of the banking sector, especially public sector banks, and in turn that of the economy, already afflicted by the Twin Balance Sheet (TBS) challenge, have been adversely impacted. Third, coal is located predominantly in the poor, eastern hinterland while the potential of renewables is mostly in richer, peninsular India. Coal provides livelihoods for millions and fiscal revenues for many states. But coal also cre-
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ates several development pathologies — corruption, crime, mafias, insurrection — the so-called “resource curse.” Ten propositions: We offer 10 propositions for public deliberation. Coal and renewables must be the joint focus of policy; Proper social costing suggests that, for India, renewables will achieve true parity with coal only in the future; The social cost of coal should include all its domestic externalities, but at least for some time, not the international externalities; The social cost of renewables should include the costs of stranding thermal power and coal assets; Current bids on renewables are not especially revealing or informative about their true costs because of extensive subsidies (implicit and overt) and strategic behaviour by producers; Subsidising renewables at a time when its social costs are above those of coal is a double stress for the government, which then also has to pick up the tab for the resulting stranded assets; There is a not-so-wide window, until
renewables become truly viable, for accelerating expansion of coal, and driving up PLFs in thermal power; This strategy will raise two dynamic implementation challenges, one on the social side and one on the economic side; We must beware “carbon imperialism” of advanced countries, which risks biasing our judgements about energy; and Rapid growth in energy demand and collective international efforts towards developing technologies for cleaning coal will minimise tensions between coal and renewables. Costing and policy implications: For coal, social costs must distinguish domestic from international. The former includes the negative impact on air pollution, disease, water contamination, water use in coal power production, and the human displacement associated with newer explorations. However, social costs of thermal power may be overestimated to the extent that worse forms of energy are replaced. Social costs also include the international externality of thermal power contributing to global warming. But
Some kids don’t want the stuff of ageing parents Young adults acquire household goods they consider are temporary, disposable TOM VERDE
As older adults start moving to smaller dwellings, assisted living facilities or retirement homes, they and their kin will have to part with household PHOTO: iSTOCK possessions that the heirs simply don’t want simply don’t want. “We went from a 3,000-squarefoot colonial with three floors to a single-storey, 1,400-square-foot living space,” said Tena Bluhm, 76, formerly of Fairfax, Virginia. She and her 77-year-old husband, Ray Bluhm, moved this month to a retirement community in Lake Ridge, Virginia. Before the move, their two adult children took a handful of items, including a new bed and a dining table and chairs. But Bluhm could not interest them in “the china and the silver and the crystal”, her own generation’s hallmarks of a properly furnished, middle-class home. The competitive accumulation of material goods, a cornerstone of the American dream, dates to the postWorld War II economy, when returning veterans fled the cities to establish homes and status in the suburbs. Couples married when they were young, and wedding gifts were meant to be used — and treasured — for life.
This is an edited excerpt of the 16th Darbari Seth Memorial Lecture delivered at TERI by the chief economic advisor on August 17. Rangeet Ghosh and Navneeraj Sharma, who are members of Subramanian’s team at the Ministry of Finance, contributed to this report
What keeps the President busy President Ram Nath Kovind (pictured) is busy making himself at home at his new residence, the Rashtrapati Bhavan. On Saturday, Kovind visited the apiary on the President’s Estate on the occasion of World Honey Bee Day. At present, there are 200 bee boxes, which will increase to 500. The President has followed in the footsteps of his predecessor, Pranab Mukherjee. But Mukherjee would take four rounds of the park; Kovind, over a decade younger, is yet to match that record.
Whose coin is it? Infosys founder N R Narayana Murthy’s aggressive posture that led to the exit of CEO Vishal Sikka has given social media users enough fodder to comment and crack jokes on. One of the wisecracks being circulated goes like this: “Even Infosys proved that Sikka kitna bhi Vishhal ho, uska sthan Murthy ke charno mein hi hota hai! Narayana Narayana!” (Infosys has proved that however big a coin may be, its place is at the feet of Murthy). The other joke doing the rounds is, “Ratan Tata ka Mistry kharab nikla, Narayana Murthy ka Sikka khota.”
> LETTERS
BUSINESS LIFE
Mothers and daughters talk about all kinds of things. But there is one conversation Susan Beauregard, 49, of Hampton, Connecticut, is reluctant to have with her 89-yearold mother, Anita Shear: What to do — eventually — with Shear’s beloved set of Lenox china? Beauregard said she never uses her own fine china, which she received as a wedding gift long ago. “I feel obligated to take my mom’s Lenox, but it’s just going to sit in the cupboard next to my stuff,” she said. The only heirlooms she wants from her mother, who lives about an hour away, in the home where Beauregard was raised, are a few pictures and her mother’s wedding band and engagement ring, which she plans to pass along to her son. So, in a quandary familiar to many adults who must soon dispose of the beloved stuff their parents would love them to inherit, Beauregard has to break it to her mother that she does not intend to keep the Hitchcock dining room set or the buffet full of matching Lenox dinnerware, saucers and gravy boats. As baby boomers grow older, the volume of unwanted keepsakes and family heirlooms is poised to grow — along with the number of delicate conversations about what to do with them. According to a 2014 United States census report, more than 20 per cent of America’s population will be 65 or older by 2030. As these waves of older adults start moving to smaller dwellings, assisted living facilities or retirement homes, they and their kin will have to part with household possessions that the heirs
India should internalise the international marginal cost only progressively. That is the way to achieve equity in climate change actions, with advanced countries bearing the full costs early both because of their greater contribution to the problem and their greater ability to address it. Proper costing of renewables should incorporate intermittency and storage needs, lower capacity utilisation, land acquisition, and building and upgrading transmission grids to equip them for renewables, and should exclude subsidies. Long-run decisions on renewables must consider investments already incurred in the energy forms they will displace — thermal power and coal. Hence, the social costs of renewables must consider the social and economic impact of stranding thermal and coal assets, especially since exit will be politically difficult. Our provisional assessment is that for India and for some time, the social costs of renewables are likely to exceed those of thermal. Broadly, CO2 emissions have to be priced at $50 per ton for renewables to achieve parity with coal-
based power. India’s current valuation — revealed in the government’s coal cess — is about $10 per ton. Even in Europe, CO2 emissions are trading at around $7 per ton. A plausible strategy going forward — illustrated in the chart — is to accelerate thermal generation in the window when coal remains socially less costly than renewables, and phasing it down thereafter, consistent with providing the base load. Reforms of the coal sector and discoms to ramp up production and efficiency in coal production and thermal power generation are urgent. Another corollary is to reduce subsidies for renewables, which create a double burden for the government which also has to bear the burden of the losses from stranded thermal and coal assets. India needs coal in the short-medium term. Renewables are part of the answer but they also come with hidden costs that must not be overlooked. India cannot allow the narrative of “carbon imperialism” to impede rational, realistic planning for the future. Technological progress in cleaning coal will minimise the tensions between coal and renewables. However, this cannot be achieved by India alone. The world needs to collectively embark on a programme to green and clean coal. That, rather than unconscionable calls to phase out India’s cheapest form of energy, would best reconcile the domestic imperative of universalising energy access with international efforts to combat the existential threat posed by climate change.
“Americans spent to keep up with the Joneses, using their possessions to make the statement that they were not failing in their careers,” wrote Juliet B Schor, the Boston College sociologist, in her 1998 book, The Overspent American: Why We Want What We Don’t Need. But for a variety of social, cultural, and economic reasons, this is no longer the case. Today’s young adults tend to acquire household goods that they consider temporary or disposable, from online retailers or stores like Ikea and Target, instead of inheriting them from parents or grandparents. This represents a significant shift in material culture, said Mary Kay Buysse, executive director of the National Association of Senior Move Managers, a professional organisation of moving specialists who help older people downsize. © New York Times News Service
Reconstitute Infy board
Biased narrative
Business Standard has devoted several pages to the resignation of Infosys CEO Vishal Sikka and the ensuing battle between the founders, in particular N R Narayana Murthy. The overall sense one gets after reading most of the coverage is that of a CEO being unfairly ousted on account of alleged transgressions in corporate governance. As these issues were raised sometime back and were supposedly put to rest after internal and external investigations, they did not merit the continued attack by Murthy. One significant question being ignored is that if indeed there were no transgressions in corporate governance, why is the board squeamish about releasing the inquiry reports? Or, is the board’s approach to corporate governance like that of switching from Coke to diet Coke when faced with obesity? The other key issue being glossed over is that governance does not rest at the CEO’s doorstep; the larger failure is that of the board, which has oversight and fiduciary responsibility on all issues raised by the founders. The strategic challenges facing Infosys, as said by one and all, are around technological innovation and staying ahead of the curve on advancements in software practices, while at the same time steering a 200,000-people behemoth under stellar governance norms. If that be so, the question is, how many of the members of the current board, including the chairman, are equipped with the knowledge and skills required for providing guidance and oversight in these areas. Most of them might have great track records as CEO or top executives but do not seem to tick the box on strategic imperatives currently facing the board. This is possibly the best time for Infosys to radically reconstitute its board and, as with corporate governance, apply the principle that there are no holy cows grazing the board. Dilip James Bengaluru
What nobody dared to say, Congress VicePresident Rahul Gandhi did. He was correct when he said the Rashtriya Swayamsevak Sangh (RSS) was infiltrating every institution in the country — be it the bureaucracy, the media, the army or the judiciary. Most civil servants are from the upper crust of society and their support to the Bharatiya Janata Party (BJP) is to be expected. Large sections of the media treat the Narendra Modi government with kid gloves and sing paeans to him. One only needs to watch prime-time TV programmes and panel discussions to understand what Gandhi said. The army is brought in to justify the nationalist narrative and instil patriotism. Anyone critical of the army is dubbed anti-national. The judiciary betrays where its sympathies lie through its rulings and observations. Its handling of triple talaq and love jihad cases proves the point. Gandhi is caricatured as a leader without the winning formula because of his opposition of the RSS and its politics of polarisation. He is more principled and pro-poor than his father and grandmother. G David Milton Maruthancode
Lesson in imbroglio The imbroglio at Infosys reminds one of the blinding insights of the management savant, Peter Drucker, who said that culture eats strategy for breakfast in the corporate context. After the founders had run through their terms as managing directors and chief executives at Infosys, the world’s most reputed and expensive headhunter was tasked with selecting the successor. The headhunter came up with tech wizard and then SAP rising star, Vishal Sikka (pictured). No one, not even the founders, had any doubt about Infosys continuing its journey under Sikka. Did the best brains in the business ignore the dictum that unless a CEO and the company he leads are a perfect culture fit, the experiment has little chance of success? The situation at Infosys proves the dictum even more. K K Krishnan Greater Noida
> HAMBONE
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Volume XXII Number 6
MUMBAI | MONDAY, 21 AUGUST 2017
ILLUSTRATION BY AJAY MOHANTY
The way out for Infosys Sebi or the corporate affairs ministry should intervene
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hough the skirmishes have been going on for some months, the real war at Infosys may have just begun. After adopting a placatory stance initially, the company’s board on Friday launched a frontal attack on co-founder N R Narayana Murthy, blaming him for putting Vishal Sikka, former managing director and chief executive officer, under a “continuous assault”, which led to his abrupt exit. This is a serious allegation against an individual whose voice still carries a lot of weight as far as public perception is concerned. Predictably, Mr Murthy hit back, saying while he would give a detailed response, he did not want the Infosys board to drive the institution “to death”. Such strong positions mean that the face-off between the board and the company’s founders is likely to continue and Mr Sikka’s exit (regrettable, because he had done well for the company) may not end the story. While Mr Murthy’s constant barbs against the board and the management can be unsettling for any company and suggestions have been made that he should not have made a public spectacle of his angst, it would seem that there are still unanswered issues about proper disclosure, and the board may be divided on the matter. This becomes evident from conflicting statements made by a board member who first said a formal role for Mr Murthy in Infosys was welcome and then took a U–turn just a few days later by saying there was no such proposal. At the centre of the storm is the $200-million acquisition of Panaya in 2015. In February this year, anonymous whistle-blower complaints claimed that the acquisition was overvalued. It was also alleged that the unusually high severance package to former chief financial officer Rajiv Bansal, who was not in favour of the acquisition, was not disclosed at that time, and that the company's legal head had withheld information from the board. Under pressure, the board had halted Mr Bansal’s severance payment. Infosys has indeed published the conclusion and summary finding statement of the investigation by Gibson Dunn & Crutcher in June, where the law firm said it found no evidence to support the whistleblower’s allegations. The disclosure of the full investigation report, as demanded, may be impossible because this might violate confidentiality agreements, but it’s hard to see why the board wouldn’t want to put some more evidence in the public domain in order to firmly kill the issue. Equally, Mr Murthy’s lack of faith in the entire Infosys board, and in the law firms that have gone into the issue, implies a sweeping denunciation that is not warranted. It is hard for any company to continue in this situation for long. For instance, given the widening trust deficit between the board and the founders, it is being suggested that only an insider can become the next CEO. This is not a good position to be in. With the principal players having drawn lines in the sand, and acrimony having developed, someone from outside must intervene to get this sorted out, instead of letting the conflict fester. Either the Securities and Exchange Board of India or the ministry of corporate affairs could step in, or nominate someone, to take a look at the full facts and report to the company’s shareholders. Things can’t be allowed to remain the way they are as Mr Murthy and his strained relations with the board have become a big risk factor for Infosys, as the company alluded to in a statutory filing. Infosys is too valuable a company to become a victim of personal egos, or a war between the board and the founders.
Leverage trade Export-oriented policies can relieve farm distress
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gricultural exports have traditionally outstripped imports by handsome margins. But a sharp 21 per cent decline in exports and a much sharper 65 per cent rise in imports of farm goods in the past four years have virtually eroded the positive trade balance. Going by the latest official data, farm exports have dwindled from $43 billion in 2013-14 to below $34 billion in 2016-17, while imports have surged from $15 billion to over $25 billion during the same period. The blame for this unwarranted trend lies largely with ill-advised agricultural pricing and trade policies, though the softening of the global commodities prices, too, seems to have contributed to it. The government’s policies often favour imports of even those products whose indigenous production can easily be raised to meet the growing demand; pulses and oilseeds are two such examples. The fear is that such imprudent policies may perpetuate agri-trade deficit. The negative trade balance has wide-ranging ramifications for agriculture. While excessive imports depress domestic prices to the detriment of Indian farmers, the shrinkage of the export window deprives growers of an additional outlet for the disposal of their surplus produce that cannot be absorbed in the local market. Frequent bans on exports or changes in the minimum export prices — in a bid to restrain food inflation — coupled with curbs such as stock limits and movement restrictions ultimately hurt the interests of the growers, exacerbating their economic hardships. In fact, the anti-exports bias in the agricultural trade policy goes back to the early 2000s. A study by the Indian Council for Research on International Economic Relations and the World Bank showed that the domestic prices of key farm products generally ruled below the export-parity levels during most part of the 2004-14 decade. However, this opportunity could not be gainfully exploited to the advantage of local farmers due to restrictive trade policies. Even the export opportunities offered by the global food crisis of 2007-08, when the international prices shot up substantially above the Indian prices to make exports highly lucrative, were frittered away for want of favourable policies. Several recent studies, including one by the Centre for Environment and Agriculture in association with the Tata Strategic Management Group, have pointed to the need for raising agri-exports four-fold to $100 billion in the next five years in order to boost farmers’ earnings. Better marketing facilities and prices for commodities in which India excels in production, such as milk, fruit, vegetables, fish, and eggs, would benefit small and marginal farmers involved in producing them. However, such an export boost by 2022 would necessarily require policies that leverage trade. Knee-jerk reactions to prices should be avoided. The Commission for Agricultural Costs and Prices (CACP), too, has emphasised stable external trade policies for farm goods in many of its reports. There is a need also to create necessary supportive infrastructure and a quality assurance mechanism for agri-exports. These aspects need to be addressed without further delay if the government is serious about relieving farm distress and doubling farmers’ incomes by 2022.
Should we recapitalise the banks? Our priority should be to address the policy failures that gave our banking crisis, not to paper over the problem with taxpayer money s the banking crisis unfolds, banks will be short of equity capital. There will be calls for taxpayers to invest in private or public banks. The exchequer is unable to absorb such a shock, and it is a bad use of money. We have the luxury of time, and the opportunity to address this at the root cause. Banks in India have a leverage of 20 times. That is, they use ~5 of equity capital and ~95 of deposits to create a pool of ~100, which is then invested in various assets. A loss of over ~5 gives a bankrupt bank. If we estimate that NPA recoveries average 20 per cent, a bank is bust when its true NPAs are 6 per cent of the total assets. Many banks in India are in this state. There will be a clamour to use taxpayer money to give new equity capital to these failed banks. Is this a good use of fiscal resources? Public finance is not ready for this shock. Nobody knows how much money is required, but estimates range from 4 per cent to 10 per cent of GDP. Medium-term fis- AJAY SHAH cal planning has not geared up for this in the last few years. Given the infirmities of how the government borrows in India, it is hard to greatly increase borrowing (https://goo.gl/eYwNF6). We are some years away from setting up the Public Debt Management Agency (PDMA), scaling back financial repression,
A
SNAKES & LADDERS
BOOK REVIEW HEATHER BOUSHEY Earlier this year, when the Republican pollster Glen Bolger sat down with Donald Trump voters who had previously voted for Barack Obama, one Wisconsinite summed up his reason for favouring Trump this time around: “I think they all lie, but Trump was more — is more obvious.” This statement presents quite a puzzle. Why would any voter think that being a known liar is an asset? Insight into this conundrum comes from an unlikely source, the life’s work of the economist James McGill Buchanan — who happens to be the subject of a new book, Democracy in Chains: The Deep History of the Radical Right’s Stealth Plan for America, by the historian Nancy MacLean. Buchanan,
The writer is a professor at National Institute of Public Finance and Policy, New Delhi
Home loans loot: Whose side is RBI on? A few days ago all newspapers carried a story headlined “RBI not satisfied with MCLR (marginal cost of funds based lending rate), asks banks to lower rates further”. Many were probably impressed that the Reserve Bank of India (RBI) was trying to give a fair deal to consumers. Those with loans may have looked forward to reduced equated monthly instalments (EMIs). Well, the facts on the ground are quite odious and this is proved by the fact that headlines like this are frequent. Banks run a business that is essentially ‘heads I win, tails you lose’. As mentioned in my previous piece, when interest rates go up, banks are super quick to revise the rate upwards but when interest rates go down, borrowers have to go to the bank branch and haggle about reducing their rates. Only deposit rates are reduced immediately. Each bank, arbitrarily and capriciously, charges borrowers for the favour of reducing the rate. It is clear as daylight to anyone that a charge or a cost to simply the reduce interest on a floating rate DEBASHIS BASU loan is extortion, but this is exactly what the RBI has officially sanctioned. Under a circular issued in 2010, banks could not charge customers for changing the rate. In April 2016, the RBI dropped this clause, allowing each bank what it wanted. Is it because bankers, not customers, have the RBI’s ear all the time? Will banks oblige a “dissatisfied” RBI by correcting rates? So far, I have researched only on the home loan loot and not the pillaging of small businesses, which are forced to buy insurance if they need bank loans, apart from being regularly overcharged on
interest. The RBI says that it is considering a new market-linked benchmark to ensure a better transmission. Viral Acharya, the new deputy governor, was quoted as saying “the experience with the MCLR system introduced in April 2016 for improving monetary transmission has not been entirely satisfactory” and that the RBI has constituted an internal study group across several clusters on “various aspects of the MCLR system and to explore whether linking of the bank lending rates could be made direct to market determined benchmarks going forward”. Remember, the RBI here is concerned with only business lending, since cutting rates has not pushed up economic activity, as expected. It is not bothered about the actual banking practices regarding retail loans, which affect a large swathe of hardworking people. Here are some facts that Mr Acharya and the internal study group may like to know if they are interested in how banks have treated home loan borrowers. The March 2016 RBI circular on the MCLR stated that its directions would come into effect from the day it is put on its website. Earlier circulars of the RBI had introduced the concept and modalities of the new MCLR regime from October 2015, so banks should have been equipped to implement it almost instantly. Shriniwas Marathe, a retired banker, has spent hundreds of hours digging into the user-unfriendly websites of the RBI and public sector banks, followed by Right to Information (RTI) applications to get a picture of how banks loot home loan borrowers. His interactions with
IRRATIONAL CHOICE
The long game of the radical right who was born in 1919 and died in 2013, advanced the field of public choice economics into politics, arguing that all interest groups push for their own agenda rather than the public good. According to this view, governing institutions cannot be trusted, which is why governing should be left to the market. In the US, promising and then delivering services and protections for the majority of voters provides a path for politicians to be popularly elected. Buchanan was concerned that this would lead to overinvestment in public services, as the majority would be all too willing to tax the wealthy minority to support these programmes. So Buchanan came to a radical conclusion: Majority rule was an economic problem. “Despotism,” he declared in his 1975 book The Limits of Liberty,“may be the only organisational alternative to the political structure that we observe.” Buchanan therefore argued for “curbing the appetites of majority coalitions” by establishing ironclad rules that would curb their power. As he was known for
and setting up a modern borrowing arrangement. In the short term, a large jump in the deficit is not a choice for policymakers. Even if this were feasible, is it advisable? The Marginal Cost of Public Funds in India is roughly 3 (https://goo.gl/JdKvi6), which means that the cost to society of ~1 of government expenditure is roughly ~3. Should we impose a cost of ~30 trillion (~1 trillion = ~1 lakh crore) upon society in order to give ~10 trillion to banks? This seems like a poor use of money. For a sense of scale, the first three phases of the Delhi Metro added up to an expenditure of ~0.7 trillion. It is argued that a large banking system is integral to prosperity and we should just hold our nose and write these cheques. This position is questionable at several levels. Imagine a country where the state capacity for air traffic control was lacking, so that planes regularly crashed. Would we insist that air travel is integral to modernity, buy a new plane after every crash, and start over each time? No. We would say that air traffic control is essential, and clean up the state capacity before the planes start flying. In similar fashion, our priority should be to address the policy failures that gave our banking crisis, not to paper over the problem with taxpayer money. We are lucky to have a small banking system.
Non-food lending by all banks is ~76 trillion. Compared with this, the equity capital — in only the top 2,429 companies — is ~127 trillion. In countries like Japan and China, a banking crisis is a more intractable problem, as bank credit is a dominant player. India is a market-dominated financial system, and that gives us the room to manoeuvre. In the long Indian historical experience, a healthy rate of growth of non-food credit has been 11 per cent in real terms. At the inflation target of 4 per cent, this translates into a required nominal increase of 15 per cent per year of non-food credit. If we put banking in the ICU, we would get growth of roughly 0 per cent nominal in non-food credit. This is a shortfall of ~1.15 trillion per year of capital going into the economy. Are there levers through which this shortfall can be made up? There are ample opportunities for policymakers to get more capital moving through non-bank finance. This includes building the equity market, building the bond market, liberalising market-based capital flows, liberalising NBFCs (non-bank finance companies), and creating the space for the ‘fintech' revolution with new technology-intensive players in finance. It is not difficult to find the reforms which will generate additional ~1.15 trillion per year flowing through these channels, and thus offset the stagnation of bank credit while banking is in the ICU. India is a market-dominated financial system, and the gap in bank credit growth is not an alarming one. We can survive 0 per cent growth in bank credit by pushing five levers of policy that yield an additional ~1.15 trillion per year of capital for the economy. The banking crisis is a problem, but it will need not overwhelm the macroeconomic situation. With this fear out of the way, now let us think about what to do with the patient once he is in the ICU. Look back at our success stories. We had a problem in UTI in 2001. What did the Ministry of Finance do? Half (but not all) the cost was borne by the taxpayer; the UTI Act was repealed; the viable part of UTI was privatised and placed under Sebi regulation; Sebi regulations were strengthened to put an end to the things that the old UTI was doing wrong. There has been no mutual fund crisis after 2001. We had a problem in stock exchanges in 2001. What did the Ministry of Finance do? The old badla trading was shut down; it was replaced by derivatives trading, which required an amendment to the Securities Contract (Regulation) Act; the BSE was demutualised so as to achieve a three-way separation between shareholders, managers, and trading members of stock exchanges. There has been no stock market crisis since 2001. We did not merely use taxpayer money and get back to business as usual; we solved the problem at the root cause. This scale of work is required at the Ministry of Finance. When trillions of rupees are lost, there needs to be a reckoning. What went wrong? How do we make sure this never happens again?
saying, “the problems of our times require attention to the rules rather than the rulers.” In 1986, he was awarded the Nobel Memorial Prize in Economic Science for “his development of the contractual and constitutional bases for the theory of economic and political decision making.” Buchanan, however, also had what MacLean calls a “stealth” agenda. He knew that the majority would never agree to being constrained. He therefore helped lead a push to undermine their trust in public institutions. This is the sordid tale that MacLean lays out in Democracy in Chains. She starts with Buchanan’s early engagement in policy work in the late 1950s, when he offered to help the state of Virginia respond to the federal mandate to desegregate public schools. After the Supreme Court ruled in Brown v. Board of Education that public school segregation was unconstitutional, Buchanan and a fellow economist called for the state to issue tax-subsidised vouchers to any parents who wanted to send their children to
private schools. What these economists were calling for was essentially the privatisation of public education. In the ensuing years, Buchanan sought to lead an economic and political movement in which he stressed that “conspiratorial secrecy is at all times essential” to mask efforts to protect the wealthy elite from the will of the majority. In September 1973, Buchanan held the inaugural meeting of the International Atlantic Economic Society, arguing for the need to “create, support and activate an effective counterintelligentsia” to reshape the way people thought about government. He believed the centre-left controlled academia and “effectively indoctrinated political actors in both parties,” MacLean writes. To fight back, conservatives needed to develop new surrogates who could be “indoctrinated” in turn with right-wing ideas, and then “mobilised, organised and directed” to disseminate them. We know all of this because MacLean found documentation of Buchanan’s plans — including correspondence, meeting minutes and personal papers — in his previously unexplored archives. She came upon her biographical subject
bankers revealed that many banks did not implement the guidelines till June 2016 and some may have implemented them only by September 2016. However, when he filed RTI applications with seven banks to know the exact date of implementation of the MCLR regime, he was stonewalled. If some banks have taken six months to implement the RBI’s circular, does it not amount to overcharging and criminal breach of trust on the part of these banks? If the RBI does not bother to act against them, what should we conclude? In a more unfair anti-consumer action that the RBI seems to be unaware of, some banks have also inserted a clause to say that they will reset “floating” interest rates only once a year for home loan borrowers. There was no such clause when interest rates were rising steadily. There is more to this subterfuge. Mr Marathe found that despite a specific format designed by the RBI for obtaining acceptance from borrowers to lower the rates, most of the banks did not communicate the change in interest rates to the borrowers. Some privately claimed to have published these guidelines on their respective websites. Mr Marathe sat with a few bankers and asked them to show him where in the banks’ websites this information was put up; bank officials themselves were unable to locate it. Since banks have got away with fooling home loan borrowers all this while, can we conclude that either the RBI is either unaware of the ground realities, or is batting for the banks? There are many more dimensions to the home loan issue. In my next piece I will go into detail as to how there was enough room for banks to fix the MCLR itself, in their favour.
The writer is the editor of www.moneylife.in Twitter: @Moneylifers
“by sheer serendipity,” she writes. Seeing the name of an unfamiliar economist eventually led her to rooms full of documents that made clear how “operatives” had been trained “to staff the far-flung and purportedly separate, yet intricately connected, institutions funded by the Koch brothers and their now large network of fellow wealthy donors.” Buchanan’s papers revealed how, from a series of faculty perches at several universities, he spent his life laying out a game plan for a right-wing social movement. MacLean doesn’t hide her antipathy to Buchanan’s goals. As a historian of American social movements, she brings this expertise to her study of Buchanan, showing how his work helped to sow doubt that anyone — whether individuals, groups or institutions — can act in the public good. Nevertheless, her overt moral revulsion at her subject can sometimes make it seem as if we’re getting only part of the picture. American democracy was unprepared to defend itself against the agenda of Buchanan and conservative benefactors. Buchanan may not have been the only actor in this movement, and the role of conservative donors and econo-
mists has been documented elsewhere, but we are now living in a world he helped shepherd into reality. Public choice economists argue that those with the most to lose from change will pay the most attention, which has certainly been the case with Charles and David Koch. They and their friends have invested enormous sums in organisations that have changed the national debate about the proper role of government in the economy. Our politically polarised and increasingly paralysed government institutions are the result. Still, “Democracy in Chains” leaves me with hope: Perhaps as books like MacLean’s continue to shine a light on important truths, Americans will begin to realise they need to pay more attention and not succumb to the cynical view that known liars make the best leaders. © 2017 The New York Times News Service
DEMOCRACY IN CHAINS The Deep History of the Radical Right’s Stealth Plan for America Nancy MacLean Viking 334 pages; $28
https://telegram.me/TheHindu_Zone
https://telegram.me/PDF4EXAMS
18 THE SMART INVESTOR BSE 200: TOP 5 GAINERS OF LAST WEEK August 11
BSE price in ~
Tata Global Beverages GMR Infrastructure DLF Reliance Communications National Aluminium
164.0 15.5 155.4 20.8 62.6
MUMBAI | MONDAY, 21 AUGUST 2017
“IN ORDER FOR THE (BULL) CYCLE TO END THERE NEEDS TO BE A CATALYST — EITHER A MAJOR POLICY MISTAKE OR A SIGNIFICANT ECONOMIC DISRUPTION IN ONE OF THE WORLD’S MAJOR ECONOMIES”
QUICK TAKE: GRANULES INDIA SHINES ON MULTIPLE TRIGGERS
August 18 % chg
194.5 18.3 183.5 24.2 69.9
The Granules India stock gained 23 per cent last week, on good June quarter results and clearance by the US Food and Drug Administration for its Hyderabad facility. Analysts expect the company’s margins to improve on higher top line growth and ramp-up in operations
18.6 18.1 18.1 16.6 11.7
KRISHNA MEMANI, chief investment officer, OppenheimerFunds <
Infosys: Buyback won’t move the needle Vishal Sikka's exit and the spat between promoters and board will weigh on the stock despite the attractive buyback offer price ANALYSTS REDUCE TARGET PRICE
RAM PRASAD SAHU
Mumbai, 20 August
I
nfosys’ first-ever buyback programme of ~13,000 crore at a price of ~1,150 per share is at a whopping 24.6 per cent premium to its Friday’s closing price of ~923. Normally, a buyback of this nature would be welcomed by investors, given that the company has been very rigid in the past on returning cash back to shareholders and also in acquiring companies. Further, it is expected to boost the company’s return ratios following efficient use of its $6-billion (~38,000-crore) cash pile. However, despite the positives, the buyback is unlikely to move the needle much as far as investor sentiment is concerned. For one, the offer is in line with the Street expectations. Experts say the tussle between the founder-promoters and the company board, which led to the resignation of the company’s managing director (MD) & chief executive officer (CEO) on Friday, will weigh on the stock. The uncertainties could also have an impact on the company’s performance. Ravi Menon of Elara Securities, in an August 19 report, said, “With the board of directors accepting Vishal Sikka’s resignation, we expect Infosys to lose confidence of investors as well as clients. Under Sikka, the strategy of building differentiation through Infosys-developed intellectual property and constant innovation had helped the company improve its incremental organic revenue market share (among Tier-1 India peers) to 18.3 per cent over FY16, from the low point of 9.9 per cent in FY15.”
Brokerage
Action
Rating
Target#
Dolat Capital Market Emkay Share & Stock Brokers Equirus Securities IDFC Securities Axis Capital Investec Haitong International ICICIdirect.com Credit Suisse Phillip Securities Reliance Securities BNP Paribas Equity Research SBICAP Securities
D D D D D D M M M M M M M
Sell Reduce Reduce Neutral Hold Hold Sell Hold Neutral Buy Buy Buy Buy
850 910 919 990 996 1,018 750 975 1,025 1,060 1,080 1,130 1,150
D: Downgrade; M: Maintained; # 12-month target price in ~; Revisions on Aug 18; Compiled by BS Research Source: Brokerages
He further noted, “Despite near-term support from the company’s buyback plan, we do not see this bolstering investor confidence.” Menon, while lowering his earnings estimates for FY18 and FY19 by one-eight per cent, has cut his rating on the stock to reduce (from buy) as well as target price to ~960 (from ~1,250 earlier). Other analysts also pointed to the concerns that could emerge going ahead. “The more important issue for Infosys is the uncertainty and new issues cropping up, which will keep a lid on the stock price,” said an analyst at a domestic brokerage, referring to the possible lawsuit against the company for securities fraud by a few US-based investors. With busi-
ness challenges mounting due to muted growth in key sectors such as retail and BFSI (banking, financial services and insurance), distractions for the top management will take a toll on the stock. Another analyst, who did not want to
Worth raising a toast few years ago. It is that time of the year when one is The paper trio: lost so deeply in the Who would have papers while thought paper comappraising quarterpanies would do a ly results that even Lazarus (rise from when the wife says, the dead)? I have “I am going to be since emerged as an away at my parents admirer of JK for a month”, all Paper, West Coast you can absentPaper and Ruchira mindedly respond MUDAR PATHERYA Papers. JK Paper with is a “good”. reported an Ebitda These are some of the quarterly results worth (earnings before interest, tax, depreciation and amortisation) raising a toast to: of ~160 crore for the first quarter, Avenue Supermarts: I have a with an interest cover that home-grown theory when strengthened from two-plus to appraising the results of non- four, even as market capitalisacyclical companies: If the profit tion (m-cap) is a mere ~1,700 of a quarter is considerably crore. West Coast Paper’s posthigher than the corresponding tax bottom line more than treone of the previous year and, bled during this period to ~54 when annualised, higher than crore; interest cover strengththe profit reported in the past ened to around 11, outstanding financial year, there is traction for a capex-heavy sector, against worth taking seriously. So it is an m-cap of ~1,250 crore. Ruchira with this company. Standalone Papers reported a pre-tax profit profit before tax of ~268 crore in of ~18 crore (~11 crore in the first the first quarter of the current quarter of last year), with a stunyear, from ~183 crore in the first ning interest cover of 12, against quarter of last year and ~747 an m-cap of ~335 crore. crore for all of last year —that’s a pre-tax profit average of Techno Electric: I am in love almost~3 crore a day, in a sector with this company. It reports a people gave up as impossible a pre-tax profit of ~94 crore in the
MARKET MIND
first quarter, compared to ~66 crore in the immediately preceding quarter, with a net interest income. The company completed a buyback a few months ago. There is a case that the mcap of ~4,100 crore is a trifle on the lower side for a company that possesses a large order book, is perpetually cash-rich and looks like a ‘happily forever’ kind of story, as long as the country keeps expanding its power transmission network. Prakash Industries: Even as the company has been in the news for the wrong reasons, it would serve to see what it has achieved — turnover sequence of ~501 crore, ~469 crore, ~627 crore and ~650 crore in the past four quarters, respectively, corresponded by an earnings before interest and taxes (Ebit) sequence of ~31 crore, ~37 crore, ~63 crore and ~82 crore, respectively. Interest cover has doubled during this period, to a shade more than four. Will track this company closely. The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed
be named, said, “Despite management assurances, foreign investors, who were largely responsible for the sharp fall in the company’s stock on Friday, could look at alternatives (Tata Consultancy Services or TCS among others), as the new CEO search could end up being a protracted one and the transformation programme would take time to bear fruit.” All these uncertainties are also rubbing off on valuations of the Infosys’ stock . While most analysts have not yet cut their earnings estimates for the company, quite a few have lowered their ratings for the stock on Friday. These downgrades were more on account of the analysts lowering their price-to-earnings multiple (de-rating the stock), given the
EMERGING MARKETS ON A ROLL While most global equity markets have done well in 2017, emerging markets (EMs) have decisively outperformed. On a year-to-date basis, the MSCI EM index, a gauge for the performance of 24 developing nations, is up 23.3 per cent, against a 10.6 per cent gain in the MSCI World, an index dominated by the developed markets. EMs’ performance comes after years of underperformance against the developed markets. Between 2013 and 2015, the MSCI World gained 24 per cent, while the EM index was down 26 per cent. Both gauges ended 2016 with single-digit gain. Experts say EMs have done well on the back of improved risk sentiment, amid dovish stances by global central banks. About $60 billion had gone into most major EMs this year, fuelling gains in their stock prices and currency. Within EMs, India has been a standout performer, with dollar gains of 25 per cent this year. Some experts said developing nations could offer further upside in the next few years. “While areas of risk remain, our view is that we are still in the early innings of EM earnings growth upturn. We also believe valuations and sentiment continue to be supportive,“ said Mark Mobius, executive chairman, Templeton Emerging Markets Group, in a note earlier this month. “Taking a long-term view, the structural investment case
JOHN PRAVEEN MD & Chief Investment Strategist, Pramerica International Investments
Markets globallyhave corrected recently.Doyouseea further decline?
Global stock markets sold off in early August amid heightened geopolitical tensions between the US and North Korea. Additionally, US President Donald Trump’s political troubles have increased, which has raised doubts about whether his reflation agenda might get delayed or derailed. Further, equity valuations are expensive in most markets. Finally, June to September is seasonally a slower period for stock markets. Global stock markets have also posted strong gains in 2017. Thus, investors appear to be taking some profits. Stocks have since rebounded and are back close to end-July levels as geopolitical tensions appeared to ease. We still expect bouts of volatility in stock
markets, especially with the US and South Korea expected to hold their joint war games in late August. However, we expect the increased tensions to gradually ease as the US works with China in de-escalating the situation in the Korean peninsula. Easing tensions should help stock markets to remain in an uptrend, supported by strong earnings growth, improved global GDP growth, QE (quantitative easing) buying by Bank of Japan (BoJ) and rate cuts in some emerging markets (EMs). There are contrasting viewsonhow US Federal Reserve rates will move.Your take?
There is no reason to believe the Fed is going to be more aggressive in raising rates. There is no need, as their inflation is still quite low and below its two per cent target. We expect one more Fed rate hike this year and some balance sheet reduction or normalisation but at
a very gradual pace. It’s not that they are not buying bonds anymore, but they are not reinvesting the bonds/papers that are maturing. So, it’s more of a passive approach towards normalisation. The ECB is also talkingof reducing QE. Puttogether,what impactdoyousee on the markets?
We have had liquidity tailwinds with QE by the ECB (European Central Bank) and BoJ in recent years. Though the Fed has stopped QE, there was a low interest rate environment. These were supporting the financial markets. The Fed has now started to raise rates and then will do balance sheet normalisation. The ECB is probably going to start QE tapering later this year, while BoJ is likely to continue QE. So, the tailwinds are not going away, but we will have less of these. In contrast, EMs’ central banks are still cutting rates, as inflation is under control. So, there are still liquidity tailwinds, from the EMs and BoJ. Look at other factors. US growth is improving. Recent China data was a positive surprise. For India, the demonetisation impact is fading and
EMs V/s WORLD MARKETS
Change (%)
2013 2014
MSCI EM MSCI World
-4.9 -4.6 -16.9 24.1 2.9 -2.7
‘EARNINGS GROWTH EXPECTATIONS ARE A BIT ON THE HIGHER SIDE AT 15-16%. SO, THERE MAY BE SOME DISAPPOINTMENT, WHICH IS A RISKAS WE HAVE HAD A BIG RALLYAND MARKETS ARE SOMEWHAT EXPENSIVE
2015 2016 2017* 8.6 23.3 5.3 10.6
HEAVYWEIGHTS IN EM INDEX
YTD gain FII # M-cap (%) ($ bn) ($ bn)
China South Korea Taiwan India Brazil
9.6 22.9 18.8 25.4 17.5
33.9 7.3 8.3 7.9 3.2
7,187 1,475 1,129 2,048 846
Weight (%) 27.9 15.6 12.5 8.8 6.6
YTD: Year-to-date; # net equity investment so far in 2017; M-cap: Market capitalisation; *As on August 18 Sources: MSCI, brokerage reports
for EMs continues to centre around demographics, including a rising middle class, and domestic consumption. We think it’s also important to recognise there have also been fundamental shifts in the corporate landscape.“
once GST (goods and services tax) hiccups go, its growth should pick up. After a long time, Europe and Japan are growing at above-trend pace. So, the global growth picture is quite positive and, hence, you don’t need so much of central bank stimulus. As rates rise and QEs are wound up, will liquidity flows continue into EMs?
Liquidity is becoming less but in the past couple of years, earnings were quite weak across all markets. So, it was a liquidity-driven rally. It looks like the markets are transitioning from a liquiditydriven to an earnings-driven rally. Because you have good growth, you will have good corporate profits. So, the markets will continue going up. However, fund flows are going to be driven much more by earnings than pure liquidity. Corporateearnings growth in India has disappointed in recent
SIGNS
Sebi to boost IPO division
The Securities and Exchange Board of India (Sebi) plans to strengthen its corporate finance division (CFD), which is responsible for vetting and clearing of initial public offerings (IPOs). The move comes after many companies have filed for big-ticket offerings. Some of the recent filings include HDFC Standard Life, Reliance Nippon Asset Management, General Insurance Corporation, New India Assurance and Godrej Agrovet. “The workload on the CFD has increased. To ensure there is no slowdown in the IPO clearing process, Sebi is considering some intra-divisional restructuring,“ said a source. Investment bankers say IPOs worth more than $5 billion (~32,000 crore) will hit the market in the next four-six months. SAMIE MODAK
MFs bullish on Hindustan Unilever
Mutual fund (MF) houses have been increasing their exposure to Hindustan Unilever for quite some time now. From holdings of less than one per cent in June 2015, they held 1.78 per cent in the company in June 2017. A chief executive officer with a fund house says many fund managers have been acquiring the stock in the past few quarters, as there were fears of a correction in the market. “In such times, it is a good strategy to buy such old favourite defensives and hold them for a longer period,“ says the CEO. JOYDEEP GHOSH
Pain and gain in Infosys
The country’s two biggest fund houses were seen taking divergent views on Infosys in the June quarter. According to data, HDFC Mutual Fund added five million shares of the technology major, while ICICI Prudential MF sold around 1.75 million shares. Overall, mutual fund shareholding in Infosys rose 60 basis points to nine per cent at the end of the June quarter. According to Value Research data, HDFC MF had total exposure of ~5,216 crore through 45 schemes in Infosys, while ICICI Prudential MF had an exposure of ~3,286 crore through 48 schemes. The average share price of Infosys during the June quarter was ~955, compared with Friday’s closing price of ~923. SAMIE MODAK
> EVENTS
‘Market rally transitioning from being liquidity-driven to earnings-driven’ JOHN PRAVEEN, managing director and chief investment strategist at Pramerica International Investments, tells Vishal Chhabria the recent stock market correction is due to high valuations, strong year-to-date market gains, geopolitical tensions and profit-booking by investors. However, the trend remains positive. Edited excerpts:
lack of a stable management team and the ongoing battle between the founderpromoters and the company board over corporate governance issues. However, despite the near-term worries, analysts also do not expect the stock price to fall below the ~840 levels. This is because even after the Lehmann crisis, the stock has not traded below 12 times one year price-to-earnings (P/E) ratio. Given FY19 earnings per share of about ~70 and conservative one-year forward P/E estimates of 12-13 times analysts expect the stock to find support in the ~840-910 zone. The stock is currently trading at 13 times its FY19 estimates. Given the wide gap between the current market price and buyback price, the offer is expected to receive a good response from investors, leading to low acceptance ratio. While the overall acceptance ratio is being pegged at about five per cent, analysts say the number of retail shareholders, who will participate, is expected to be much higher than was the case with other buyback offers such as the one by TCS or Wipro. Further, the proportion of small shareholders (individual shareholding less than ~2 lakh), in the case of Infosys is 6.3 per cent, while that of Wipro is only two per cent. Says an analyst, “Typically, long-only investors and some small investors do not tender but given the situation and the higher retail base, a large number will look to tender the shares, pushing down the acceptance ratio.” Even then, most analysts are advising investors to tender the shares given the near term worries.
STREET
COMPILED BY PAVAN BURUGULA
years. This year also, they are high at over 15 per cent. Your take?
The demonetisation impact is probably behind us and if GST is not going to lead to major disruptions in the supply chain and in economic activity, we should probably see earnings recovery. Maybe the earnings expectations are a little on the higher side, at 15-16 per cent. So, there might be some disappointments, which is a risk because we have had a big rally and the markets are somewhat expensive. In that case, we could see some profit-taking and some consolidation in the market.
THIS WEEK
Date Particulars 21-Aug US - Chicago Fed national activity index Japan - all industry activity index 22-Aug Eurozone - ZEW survey expectations AGM: L&T, Tata Motors 23-Aug US - Markit US manufacturing, services & composite PMI, new home sales data Eurozone - Markit Eurozone manufacturing, services & composite PMI, consumer confidence data Japan - Nikkei Japan manufacturing PMI, machine tool orders AGM: Tata Power 24-Aug US - initial jobless claims, continuing claims, existing home sales data UK - GDP figures 25-Aug US - durable goods orders US - Yellen speaks at Fed conference in Jackson Hole Japan - national & Tokyo CPI data
Source:Websites,exchanges CompiledbyBSResearch
> COMMODITY
PICKS
RED CHILLI 5,680
(~/Qtl)
5,510 5,340 5,170
Jul 18
2017
Aug 18
5,000
RedchillipricesintheGunturmarketarecurrently tradingat~5,533aquintal.Demandisexpected toremainsteadyinthecomingdaysandlower acreagewouldpushpriceshigher.Pricesare expectedtoincreaseoverthecomingdaysto ~5,600aquintal.
MUSTARD SEED 3,918
(~/Qtl)
3,896 3,874 3,852
Jul 18
2017
Aug 18
3,830
Mustard seed prices in the spot market are trading at ~3,911 a quintal. Weak demand from processors due to negative margins might weigh on prices in the coming days. Orices are expected to head towards ~3,875 per quintal. Prerana Desai, V-P (research), Edelweiss Agri Services and Credit, Edelweiss Agri Value Chain
20
https://telegram.me/TheHindu_Zone
https://telegram.me/PDF4EXAMS
1
MUMBAI | MONDAY, 21 AUGUST 2017
>
Border Roads’ financial powers boosted to improve connectivity
INDIA’S TOP FIVE CITIES BY START-UP DEALS
Concern at tardy road building on northern border, while China races on AJAI SHUKLA
New Delhi, 20 August
W
ith the Border Roads Organisation (BRO) far behind schedule in constructing 73 approved “Indo-China Border Roads” along the northern borders, the defence ministry on Sunday empowered BRO officials with enhanced financial powers. The chief engineers, key officials who head BRO projects spread across the border states — with project names such as Himank (Ladakh), Vartak (Arunachal Pradesh) and Beacon (Kashmir) (pictured) — will now enjoy enhanced financial powers that are 5-10 times more than their earlier financial limits. The defence ministry states this will “avoid delays on account of references between the Chief Engineer and HQ DGBR (Headquarters, Director General Border Roads) and also between HQ DGBR and the Ministry”. BRO’s road building has lagged, while China has constructed a widespread network of roads that allow their troops to reach the border quickly on vehicles. In contrast, Indian foot patrols must march long distances to reach the same areas. With only 27 roads completed of the 73 “strategic
DECENTRALISED FINANCIAL POWERS FOR BORDER ROADS
(in ~) Administrative approval of works Execution of contracts Outsourcing of consultancy Procurement of indigenous construction equipment Procurement of imported construction equipment
CHIEF ENGINEER
Earlier 10 cr* 10 cr
Now 50 cr# 100 cr
ADG BORDER ROADS Earlier 20 cr* 20 cr
Now 75 cr# 300 cr
10 lakh -
2 cr -
50 lakh -
5 cr -
-
-
-
-
DG BORDER ROADS
Earlier Now 50 cr# 100 cr# Above Above 20 cr 300 cr 2 cr Above 5 cr 7.5 cr 100 cr 3 cr
100 cr
*Only for departmental works #For departmental and contractual works
roads” approved for the SinoIndian border, the defence minister assured Parliament on July 28 that the balance roads would be completed by December 2022. The earlier financial powers permitted a chief engineer to approval “departmental works” up to ~10 crore, and the ADGBR (Assistant Director General
Border Roads) up to ~20 crore. All “contractual works” had to be referred to the DGBR, who could sanction expenditure only up to ~50 crore. Enhancing financial powers at all levels, the defence ministry “has now approved that for both departmental and contractual mode of execution, a Chief Engineer of BRO
can accord administrative approval up to ~50 crore, ADGBR up to ~75 crore and DGBR up to ~100 crore”. For regular contracting, a chief engineer’s powers have been enhanced 10-fold from ~10 crore to ~100 crore; the ADGBR’s powers 15-fold from ~20 crore to ~300 crore; and the DGBR’s powers for contracts
above~300crore.“Withthisdelegation, the entire tendering process including acceptance of bids would be completed at the level of Chief Engineer/ADGBR for a majority of the contracts,” stated the defence ministry. In a useful departure from the earlier policy, the DGBR has been granted full powers to determine the usage norms and life span of construction equipment, which was hitherto done by the defence ministry. For example, if the DGBR assesses that a bulldozer operating at 16,000feetaltitudeintheDaulat Beg Oldi sector would have a reduced life span compared to one operating at 11,000 feet near Leh, he is now empowered to introduce the new norm. In 2015, the BRO was transferred from the Ministry of Road Transport and Highways to the defence ministry to improve functioning. On May 6, 2013, the defence minister told Parliament that the Cabinet had approved raising the BRO’s manpower strength to 42,646 personnel. Despite attempts at reform, the BRO remains a divided organisation, with friction between BRO cadre officers, and army officers posted on deputation. The BRO cadre resents a large number of top executive and command positions going to the army.
IIT entrance exam to go completely online from next year PRESS TRUST OF INDIA Chennai, 20 August
The entrance examination for the prestigious Indian Institutes of Technology (IITs) will go completely online from 2018, the Joint Admission Board (JAB) said on Sunday. The JAB, which is the policy-making body on IIT admis-
sions, took the decision at a meeting here. In a statement, director of IIT-Madras, and chairman of JAB 2017 Bhaskar Ramamurthi, said, “It has been decided that the JEE (Advanced) will be conducted in online mode from 2018 onwards. Further information regarding the examination will
be provided by the JAB in due course.” The human resource development ministry had earlier introduced the option of taking the Joint Entrance Examination (JEE)-Mains online. The JEE-Mains is the entrance examination for admission to engineering courses offered across the
country and a qualifying exam for JEE-Advanced which is required for admission to the prestigious IITs and National Institutes of Technology. “In order to make logistics and evaluations easier, it was decided today (Sunday) that the JEE-Advanced should be made online,” a JAB member said. “The concept was being
discussed for many years, but it was necessary to have adequate infrastructure to conduct the exam online,” the member added. More than 1.3 million students took the JEE-Mains this year, with less than 10 per cent of them going online. Around 0.22 million students were eligible to write the JEE (Advanced).
Bengaluru, the capital of Karnataka and the Silicon Valley of India, has attracted the largest number of venture-backed start-up deals compared to any other city in the country over the past five years. Accounting for 30 per cent of the start-up funding deals in the country, Bengaluru justified its position as India’s start-up hub, but only barely. The National Capital Region, having more unicorns than Bengaluru, was at its heels with 29 per cent share, according to a CB Insights Report on Asia Tech Investments. Mumbai came third with 20 per cent share of deals
COMPILED BY ALNOOR PEERMOHAMED
BENGALURU DELHI-NCR
30%
29%
Deals
No. of unicorns: Top companies:
4
Flipkart, Ola, Quikr, InMobi Largest fundraiser: Flipkart
Deals
6
Paytm,Snapdeal, OYO Rooms, Hike Messenger Paytm
$7.15 bn $2.77 bn
MUMBAI
PUNE
20%
4%
Deals
0
CarTrade, Pepperfry, Meru Cabs CarTrade
CHENNAI
3%
Deals
Deals
0
0
FirstCry
BankBazaar
FirstCry, Faasos
$230 mn $103 mn
BankBazaar, Caratlane
$79 mn
Source: CB Insights — Asia Tech Investment Report
Punjab to have point-of-sale machines at fair price shops PRESS TRUST OF INDIA
Chandigarh, 20 August
Punjab’s food and civil supplies department is in the process of acquiring point-ofsale (PoS) machines for fair price shops to bring transparency in distribution and check pilferage under the public distribution system (PDS). The machines are handheld devices which would allow Aadhaar authentication at the moment of distribution, ensuring that beneficiaries receive their allocated ration, a spokesperson said. The PoS machine also has a scale, which will ensure that the beneficiary receives their full amount of ration. Additionally, these PoS machines allow real-time location information, allowing the
department to track the move- inbuilt fingerprint scanner ment of foodgrains from designed for PDS and all godowns to the receipt of Aadhaar-based transactions, ration beneficiary at the PoS, the spokesperson said. It was based on charge couthe spokesperson said. The spokesperson said the pled device fingerprint and device related to the comput- comes with connectivity options like erisation of operations at fair price shops is PoS terminal GSM/GPRS, CDMA and Ethernet, he said. based on Aadhaar comes with PoS supports interauthentication. inbuilt faces with all types of All fair price shops fingerprint payment gateways and (FPSs) would be scanner equipped with PoS ter- designed for Aadhaar server with related logical interminals for the purpose PDS and all faces for magnetic of authenticating and Aadhaarstripe reader and smart verifying beneficiaries based before commodity dis- transactions cardreaderforAadhaar authentication. tribution, he said. Spokesperson said it would One crucial feature of the process is that the closing bal- reduce diversion, besides ances are updated in database ensuring transparency in the through all PoS transaction movement of wheat from decentralised procurement from FPS. PoS terminal comes with godown to the PoS.
