Vivek Kaul
We are a funny country. We kept voting the Congress party back to power time and time again for a period of more than 65 years without asking any questions. The party made a mess, turning India into one of the most corrupt countries in the world, where governance has more or less collapsed.
And then comes a man, a former bureaucrat, an IITian, who promises to turn the system around. Arvind Kejriwal is his name. And he is—at least in terms of intentions—our best hope. But, ironically, we want him to be battle ready and give us answers for all that has been wrong with the country right-away.
Here are some doubts that I have seen appearing across the conventional as well as social media:
a) Kejriwal and India Against Corruption(IAC) are too obsessed with politics. It could be a movement if they dug up facts against municipalities, industries and others. (A status of a Facebook friend)
b) They don’t have the organisational strength to propose a viable alternative
c) If Kejriwal is starting a party I’d like to know his economic policy too. Shouldn’t just begin and end in catching thieves? (Another status of a Facebook friend)
d) What is new about all that he has pointed out? It’s just a rehash. (A favourite with newspaper editors. And something which The Economic Times suggests in its lead story today. And even if it is a rehash, does that necessarily make the issues being brought into the public domain by Kejriwal and IAC less important?)
e) What interest groups does the movement represent? What are its priorities, apart from radical transparency and a maximalist Lokpal bill? Where does it stand on religious minorities? What compromises would be unacceptable? (As an editorial in today’s edition ofThe Indian Express asks.)
While these are important questions that Kejriwal and IAC need to answer, but expecting them to answer them immediately and all at once is a tad unfair. If we Indians could give the Congress party 65 years, and still not get many answers from them, we can surely give Kejriwal and his team 65 weeks, if not months, to come up with the answers.
Let me paraphrase lines written by my favourite economist John Kenneth Galbraith (borrowed from his book The Affluent Society) to capture this cynicism against Kejriwal and what he is trying to do. “When Indians see someone agitating for change they enquire almost automatically: ‘What is there (in it) for him?’ They suspect that the moral crusades of reformers, do-gooders, liberal politicians, and public servants, all their noble protestations notwithstanding, are based ultimately on self-interest. ‘What’, they enquire, ‘is their gimmick?’” At the same time we Indians tend to ignore the absolute power enjoyed by the Congress party which has now led to a situation where the Congress leaders are simply not used to answering questions that are asked. As Salman Khurshid, the Union Law Minister, said a couple of days back “Wo (Kejriwal) kahte hain ki hum sawal poochenge tum jawab dena. Hum kehte hain tum jawab suno aur sawal poochna bhool jao.”
Getting back to Kejriwal in an earlier piece, I had equated Kejriwal’s decision (then Team Anna) to form a political party to a disruptive innovation. Clayton Christensen, a professor of strategy at Harvard Business School is the man who coined this phrase. He defines it “innovations that transform an existing market or create a new one by introducing simplicity, convenience, accessibility and affordability. It is initially formed in a narrow foothold market that appears unattractive or inconsequential to industry incumbents.”
The point being made here is that a disruptive innovation always starts small and appeals to a small segment of the market. It cannot be everything for everybody from day one simply because the resources are limited.
An excellent example of a disruptive innovation in an Indian context is the Nirma detergent which was created in 1969 by Karsanbhai Patel, a chemist with the Gujarat government’s department of mining and geology. Patel started making the detergent in a room in his house. On his way to office, which was some 15 km away, he sold 15-20 packets every day. Thus, started the great journey which within a decade would give sleepless nights to the top management at Hindustan Lever Ltd (now Hindustan Unilever Ltd).
But the point is that Nirma started small. Patel sold a few packets everyday and his area of operation was limited given the limited resources available to him. The focus was on making a detergent which was much cheaper than the Surf from Hindustan Lever, which dominated the market back then.
Amul, another disruptive innovation, started small in Anand in the Kaira district of Gujarat. But soon it would become very successful and move to other districts in the state as well. In the end it would also be responsible for making India a largely milk sufficient nation that it is today.
Another great example is that of Apple, which brought about a revolution in the personal computer market. Again Apple started small and focused on one section of the market. As Clayton Christensen told me in an interview I did for DNA, “Apple made a wise decision and first sold the personal computer as a toy for children. Children had been non-consumers of computers and did not care that the product was not as good as the existing mainframe and minicomputers. Over time Apple and the other PC companies improved the PC so it could handle more complicated tasks. And ultimately the PC has transformed the market by allowing many people to benefit from its simplicity, affordability, and convenience relative to the minicomputer.”
Another example is Sony. “In 1955, Sony introduced the first battery-powered, pocket transistor radio. In comparison with the big RCA tabletop radios, the Sony pocket radio was tiny and static laced. But Sony chose to sell its transistor radio to non-consumers – teenagers who could not afford big tabletop radio. It allowed teenagers to listen to music out of earshot of their parents because it was portable. And although the reception and fidelity weren’t great, it was far better than their alternative, which was no radio at all,” write Clayton Christensen, Michael B Horn and Curtis W Johnson in Disrupting Class — How Disruptive Innovation Will Change the Way the World Learns.
So like all other disruptive innovations, Arvind Kejriwal and IAC are small and do not have the necessary organisation to take on heavyweights like the Congress and the Bharatiya Janata Party (BJP). Also, their views on a whole lot of issues that plague India aren’t known.
But what Arvind Kejriwal and IAC have managed to do is focus on one issue – i.e. the nexus between politics and business, and the cosy relationship even between rival political parties. In the case of the Congress party, the nexus between Robert Vadra and DLF has clearly been brought out. And in case of the Bharatiya Janata Party, its businessmen President Nitin Gadkari has been accused of using his political standing to favour his businesses.
This focus has helped Kerjiwal to appeal to the so called “middle-class”. It has also managed to clearly rattle his biggest opponents, the Congress party and now the BJP. The Congress party unleashed a string of lawyer ministers to defend Robert Vadra. The BJP yesterday had both the leaders of opposition in Rajya Sabha and the Lok Sabha (Arun Jaitley and Sushma Swaraj) along with three party spokespersons defending Gadkari in a press conference.
Also right now is the time when Kejriwal and IAC are building their brand. And as marketing guru Al Ries keeps saying, “Focus is the essence of marketing and branding”. They are doing just that. There is no point in spreading their thin resources all over the place. Once the brand is built they can gradually start moving to other issues.
By then, hopefully, more people would have joined them also. Any disruption does not come as an immediate shift. Similarly, the IAC isn’t going to take India by storm overnight. It will need time. In a way Kejriwal and IAC are in a similar position like the Congress party was in 1885 when it was formed. The initial aim of the party was to get a greater share in the government for educated Indians. The party wasn’t opposed to British rule at that point of time. The point being the Congress party wasn’t clear from day one all that it would do in the years to come. As years went by, things evolved and the party led India to its independence and tried to come up with answers to questions that arose along the way.
The challenge for IAC will be to figure out how to hold the interest of the people once they start losing interest in the corruption issue. Also they might appeal only to a section of the voters initially, probably the urban middle class, like Apple PCs had appealed to children and Sony radios to teenagers. So they are likely to start off with a limited appeal. Chances are if they stay true to their cause their popularity might gradually go up over the years, as has been the case with disruptive innovators in business.
Any disruption does not come as an immediate shift. As the authors write, “Disruption rarely arrives as an abrupt shift in reality; for a decade, the personal computer did not affect DEC’s (Digital Equipment Corp’s) growth or profits.” Similarly, Kejriwal and IAC aren’t going to take India by storm overnight. They will need time. And as time goes by more questions will be asked of them and they will need to come up with answers.
As I had said on an earlier occasion, there are three things that can happen with this disruptive innovation. Kerjiwal’s party tries for a few years and doesn’t go anywhere. That doesn’t harm us in anyway. Kejriwal’s political party fights elections and is able to build a major presence in the country and stays true to its cause. That benefits all of us. Kejriwal’s political party fights elections and its candidates win. But these candidates and the party turn out to be as corrupt as the other political parties that are already there. While this will be disappointing, but then one more corrupt political party is not going to make things more difficult for the citizens of this country in anyway. We are used to it by now.
As far as Arvind Kejriwal and IAC go, they must well remember these famous lines from Majrooh Sultanpuri, the famous Hindi film lyricist and Urdu poet.
Main akela hi chala tha janibe manzil magar,
Log saath aate gaye aur karawan banta gaya.
(Loosely translated, it means this: I had started off alone towards my goal, people began joining and a huge caravan began forming!)
The article originally appeared on www.firstpost.com on October 18,2012. http://www.firstpost.com/politics/we-need-to-give-kejriwal-time-he-is-testing-the-waters-494970.html
Vivek Kaul is a writer. He can be reached at [email protected]
Month: October 2012
Vadragate: Stench of funny business gets stronger
Vivek Kaul
Salman Khurshid must be a relieved man today. Robert Vadra is back in the news. And this has happened thanks to three good stories that have appeared today in The Hindu, Business Standard and Financial Express. Read together these stories throw up some several interesting questions that need to be answered.
a) How did a land bought at Rs 7.5 crore rise in value to Rs 58 crore in a very short period of 65 days? At the heart of the DLF-Vadra controversy is 3.5 acres of land which was bought by Sky Light Hospitality Private Ltd a company in which Vadra owns 99.8% stake. Sky Light Hospitality bought this piece of land in Manesar, Gurgaon for Rs 15.38 crore (as per its balance sheet) and sold it to DLF for Rs 58 crore pretty soon. DLF gave an advance of Rs 50 crore to Vadra’s Sky Light Hospitality against this sale. Sky Light Hospitality used this money received from DLF to buy a slew of flats from DLF and land plots in Haryana and Rajasthan. The company also parked a part of this interest free money in bank fixed deposits and earned an interest on it. And it also gave loans and advances to other Vadra owned companies.
The Hindu points out that this plot of land was bought by Vadra’s Sky Light Hospitality as on February 12, 2008, and mutated in its favour the very next day. Mutation refers to the recording in the revenue record of transfer of title of the property from one person to other.
“A little more than a month later, on March 28, 2008, the Town and Country Planning Department issued Mr. Vadra’s company a licence to develop 2.701 acres of the land into a housing colony. ….the enquiry found that Mr. Vadra had “entered into an agreement to sell within 65 days of the issue of the first licence.” By October 2009, he had received Rs. 50 crore out of the total sale consideration, the first instalment of which was made on June 3, 2008,” The Hindu points out.
So what this means is that Vadra went to DLF within 65 days of having got the necessary clearances from the Town and Country Planning Department of the Haryana government. What is interesting that The Hindu says that “the sale deed of this land shows that it was bought by Sky Light Hospitality for Rs. 7.5 crore”.
The balance sheets of Sky Light Hospitality as on March 31, 2009, March 31, 2010 and March 31, 2011, put the cost of this land at Rs 15.38 crore.
DLF valued this 3.5 acres of land at Rs 58 crore. What had changed in a period of 65 days that led to the company giving the land such high value vis a vis the price Vadra’s Sky Light had bought it at? “Haryana officials familiar with the deal say that the sequence of transactions — in which the land’s value went up from Rs. 7.5 crore to Rs. 58 crore in just 65 days because of the licence given to it — raises questions about whether DLF had entered into business with Mr. Vadra in order to get clearances for land that may not have been forthcoming through regular methods,” suggests The Hindu.
Quid pro quo?
b) Does DLF normally give three year interest free advances? DLF gave Vadra an advance of Rs 50 crore against the land it valued at Rs 58 crore. The Financial Express points out that “DLF says that for the…land, which it valued at Rs 58 crore, the advance of Rs 50 crore was paid to Vadra in three instalment of Rs 5 crore, Rs 10 crore and Rs 35crore crore during 2008-09. The first was when Vadra got the letter of intent from the Haryana government, second instalment was paid when Vadra got the actual licence from the state government to develop the land and the final instalment when all the other approvals and clearances were procured.” The first instalment was paid on June 3,2008, but the sale deed of this land for Rs 58 crore to DLF was registered only on September 18, 2012, says The Hindu.
In legal terms the process of registering a sale deed is referred to as conveyance which essentially means, the transfer of ownership or interest in real property from the seller to the buyer by a document, such as a deed, lease, or mortgage.
DLF had said in an earlier statement that “Skylight Hospitality Pvt Ltd approached us in FY 2008-09(i.e. the period between April 1, 2008 and March 31, 2009) to sell a piece of land measuring approximately 3.5 acres…DLF agreed to buy the said plot, given its licensing status and its attractiveness as a business proposition for a total consideration of Rs 58 crores. As per normal commercial practice, the possession of the said plot was taken over by DLF in FY 2008-09 itself and a total sum of Rs 50 crores given as advance in instalments against the purchase consideration.”
So what took DLF more than three years to conveyance this property even though they took possession of it in FY 2008-2009? As the Financial Express writes “The delay in getting the land registered has surprised experts who track the sector and have audited the account books of real estate firms. “Normally, conveyancing of land gets done very quickly, especially for big developers. However, if one legally challenges the delay, both sides can cite several reasons for it,” experts Financial Express spoke to said.”
DLF also had an explanation for the delay in getting the land conveyance. “DLF sources say the delay in getting the land registered in its name was deliberate since the market at that time was going through a slowdown. “Had we got the land conveynanced in our name during 2008-09 we would have to pay the balance Rs 8 crore to Vadra immediately, plus another around Rs 4 crore towards registration charges,” DLF officials told Financial Express. Also 2008-2009 was a time of slowdown and the company was not looking to launch any project then, DLF added.
DLF had valued the land at Rs 58 crore. They had already paid Vadra an advance of Rs 50 crore. So they needed to pay him the balance Rs 8 crore after they had conveyanced the property. By delaying the conveyance till September 2012, the company made savings on interest costs, DLF feels.
But what about the Rs 50 crore they had paid as an advance to Vadra in instalments, starting in June 2008? Wasn’t the company losing out on interest on this money? An advance unlike a loan is made interest free for a short period of time. This meant that Vadra had access to a part of the Rs 50 crore advance for a period of more than four years, given that the first instalment was paid in June 2008. And he had access to the entire advance of Rs 50 crore for around three years.
DLF in its statement refers to giving advances as normal commercial practice. But the question that crops up here is whether it is regular practice for the company to give advances for such long periods of time? “DLF has not been able to cite other instances of where interest-free advances have been given, and over such long periods of time,” writes the Financial Express.
c) Where did the initial money to buy land come from? The balance sheet of Sky Light Hospitality as on March 31, 2008 shows that the paidup capital of the company was Rs 1 lakh. The company had no reserves or surplus neither did it have any secured or unsecured loans on its books. So how did a company with Rs 1 lakh of capital available for business by a piece of land worth Rs 7.5 crore(as per the sale deed) or Rs 15.38 crore(as per the balance sheet of Sky Light Hospitality as on March 31, 2009)?
The answer might lie in what Business Standard has to say today. “Chartered accountants say the only other possibility is the company issued cheques far in excess of the money it had in its account,” the paper writes.
What this means is that Vadra’s Sky Light Hospitality issued cheques to pay the seller of the land without having enough money in the bank account. But wouldn’t that lead to the cheques bouncing? “That cheque, if presented, would have been dishonoured for want of funds and it would have been a criminal liability under the Negotiable Instruments Act. This also means that actually the person to whom the cheque(s) was/were issued was not at all paid and there were no arrangements with the bank to pay,” said a senior chartered accountant. He said full scrutiny of the bank accounts could reveal the actual transactions that happened. “My hunch is — it is only a hunch as there is no proof — the agreement would have been executed between the seller and the company and in the agreement they would have mentioned cheque details but those cheque(s) were not deposited with the bank immediately as that would have been agreed,” writes the Business Standard.
So Vadra’s Sky Light bought the land, issued cheques to pay for it and at the same time ensured that the seller did not deposit those cheques. So how as the seller eventually paid? “It is also possible that when money from DLF would have come in during the next financial year, these cheques were presented,” the Business Standard points out.
To conclude, it is well established by now that there are too many inconsistencies in Vadra-DLF deals. It is very clear that Vadra benefitted from his dealings with DLF. What is difficult to establish that there was a quid pro quo involved as well. Hopefully, the newspapers will have more breaking news on this issue in the days to come.
The article originally appeared on www.firstpost.com on October 16, 2012. http://www.firstpost.com/business/vadragate-stench-of-funny-business-gets-stronger-492351.html
Vivek Kaul is a writer. He can be reached at [email protected]
Will Vadragate turn out to be Sonia’s Bofors?
Vivek Kaul
“Roti tawa par, janta party hawa main” was one of the slogans going around in the Lok Sabha elections that happened after the assassination of Indira Gandhi. Riding on the honest image of Rajiv Gandhi (Indira’s son and a former Indian Airlines pilot) and a sympathy wave due to the assassination of Indira Gandhi by her bodyguards, the Congress party won more than 400 seats in the lower house of Indian parliament.
This was an unprecedented majority for the Congress party, something it had not managed to achieve even under the leadership of Jawahar Lal Nehru, Rajiv’s grandfather and India’s first Prime Minister. Neither had it managed such a huge mandate from the people of India under the leadership of Indira Gandhi.
But Rajiv would soon squander away these gains. As Aarthi Ramachandran writes in Decoding Rahul Gandhi “The Rajiv Gandhi government was bogged down by allegations of kickbacks to the tune of Rs 64 crore paid to middlemen in the purchase of Swedish Bofors guns. The government’s ‘stonewalling’ of demands to bring guilty to book in the Bofors case and other corruption scandals destroyed Rajiv’s image as Mr Clean. Ramchandra Guha in India After Gandhi says the ‘stonewalling prompted speculation that the middlemen were somehow linked to the prime minister himself’.”
The impact of this on the Congress party was huge. It lost the 1989 election to an alliance of Janata Dal and the Bhartiya Janta Party (BJP). Rajiv Gandhi had to become the leader of the opposition. A party which had more than three fourths of the seats in the Lok Sabha was thrown out of power.
It is often said that ‘perception is reality’. Rajiv Gandhi losing the 1989 Lok Sabha election because people ‘thought’ he was involved in the Bofors scandal and may have received a part of the kickbacks. And this perception was formed after his government stonewalled all attempts of bringing the guilty to book.
A similar situation seems to be now brewing up in the Robert Vadra-DLF case. A string of lawyer ministers from the Congress have jumped into the ring in order to defend Robert Vadra and would like the world at large to believe that there is no truth in accusations being hurled at Vadra (and indirectly Sonia Gandhi) by Arvind Kejriwal and his associates.
Let us sample some of the statements that have been made by these lawyer ministers. Kapil Sibal, one the country’s top practicing lawyers before he became a full time politician and currently the Minister of Human Resource Development and Minister of Communications and Information Technology recently came to the defence of Vadra. “Allegations are happening 24×7. It is a daily phenomena just like 24×7 television news channels,” he said.
On television Vadra has been defended by Jayanthi Natrajan who other than being the Union Minister for Environment and Forests also happens to be a lawyer having got her law degree from the Madras Law College. Vadra has also been defended by Manish Tewari, a Congress spokesperson, and a lawyer. Tewari felt that prima facie the charges made by Kejriwal and company were found to be ‘untruth, innuendos and lies’.
HR Bhardwaj, currently the governor of Karnataka, and a former law minister also came to the indirect defence of Robert Vadra. “Many allegations were levelled against the Gandhi family even in the past. Indira Gandhi was also attacked. But she had a towering personality and fought back. Morarji Bhai (late Prime Minister Morarji Desai) made so many cases against her but they fell like nine pins,” he told reporters,” he recently told the media. And I thought governors were meant to be above politics and political parties.
Rashid Alvi, one of the spokespersons of the Congress Party on one occasion brushed aside the accusations hurdled at Vadra by Arvind Kejriwal and company as a “part of a well-planned conspiracy not against an individual but against the Congress and its leadership.”
On another occasion on live television he dubbed Kejriwal’s accusation as a publicity stunt and questioned the veracity of the documents put out by Kejriwal by saying “who will decide that the documents shown by Kejriwal are genuine or fake.”The website of the Parliament of India lists his profession as an advocate in the Supreme Court.
P Chidambaram, the Union Finance Minister who also happens to be a lawyer said “All I can say is at this moment these allegations pertain to transactions between two private persons or entities…. The individual (Vadra, son-in-law of Sonia Gandhi) has disclosed all these transactions in his income tax and other returns, and perhaps in the returns of the company.”
Veerapa Moily, another Lawyer and who is the Union Minister for Corporate Affairs as well as Power, jumped to Vadra’s defence by saying “ I have already verified these allegations and no wrongdoings have been found in any of the six Robert Vadra-owned companies.”
What is surprising is that so many Congress lawyers have jumped to the defence of a “supposedly” private individual, Robert Vadra, and ruled out any wrong doing on the part of Sonia Gandhi’s son in law. The only thing that this ‘stonewalling’ has done is that it has built the perception among people that something must be wrong otherwise why are so many lawyer ministers and Congressmen jumping to Vadra’s defence.
In some cases the defence has looked very shaky. Let’s look at Alvi’s insinuation that the documents might be fake. And this comes from a man whose profession is listed as a Supreme Court lawyer. It is very easy to download balance sheets of even unlisted companies these days. This writer spent the whole of last week doing that by logging on to www.mca.gov.in and paying a Rs 50 charge for every Vadra company for which details were needed. So all one needs to know is the name of the company and it’s possible to get the details of that company. And in Vadra’s case it was pretty well known that he operated through Sky Light Hospitality Private Ltd a company in which he owned 99.8%.
Also Alvi should remember that Kejriwal is being advised by Shanti and Prashant Bhushan, two of the best lawyers in the country. Shanti Bhushan was even the law minister of the country at a certain point of time. Other than this Kejriwal himself must understand a thing or two about balance sheets having been an Indian Revenue Service officer till a few years back. He is also an IIT Kharagpur passout from the pre coaching schools era and that definitely means he is smart. And more than anything else why would anyone who is raising a serious banner of revolt against the incumbent government choose to do so on “fake” documents?
P Chidambaram wanted us to believe that the dealings were between a private company and a private individual. If that is the case why are so many lawyer ministers coming to the defence of Vadra?
Veerapa Moily jumped to Vadra’s defence by saying that there was nothing wrong in any of Vadra’s six companies. If he had read through the memorandum of association of Vadra’s Sky Light Hospitality carefully enough he would have realised that the company claims that it will carry out business as hotels, restaurants, lodges, ice-cream merchants, sweet meat merchants, milk manufactures, bakers, wine and spirit merchants etc.
But instead of doing all that Sky Light Hospitality primarily seems to be in the business of real estate having accumulated a slew of properties on the basis of a so called Rs 50 crore advance it got from a plot of land from DLF. As has been repeatedly pointed out Firstpost and other places in the media the dealings between DLF and Vadra appear murky. (You can read about it completely here, here and here). Sky Light Hospitality owns a 50% stake in Saket Courtyard Hospitality Ltd through which it runs one hotel in Saket, New Delhi, in parternship with DLF.
Vadra’s Sky Light Hospitality bought 3.5acres of land sometime in 2008-2009 (period between April 1, 2008 and March 31, 2009) at Rs 15.38 crore. In the same period DLF bought this land from Vadra for Rs 58 crore. The question is how did the value of the land go up nearly 3.7 times in such a short period of time?
Against this sale DLF gave Vadra an advance of Rs 50 crore. An advance is typically given for the short term and needs to be returned within a year. But this advance was sitting on Vadra’s balance sheet even as on March 31, 2011. So the advance given by DLF to Vadra was with Vadra for a period of greater than two years. This doesn’t sound like an advance at all. It seems more like an interest free loan being passed off as an advance.
DLF also said in its 6 October statement that “we wish to categorically state that DLF has given no unsecured loans to Mr Vadra or any of his companies.” The balance-sheet (dated 31 March 2010) of Real Earth Estates Pvt Ltd, another company owned by Vadra, shows a clear entry of Rs 5 crore as a loan from DLF.
Vadra used all these loans from Vadra to go on a property buying spree. Estimates made now suggest that the value of this property now runs into hundreds of crores. He also benefitted from parking this largely interest free money in fixed deposits and earning an interest from them.
Congress Party’s over defence of Vadra has not helped it at all. It has built the perception among people that there must be some hanky panky involved in the entire business. That being the case no other response could have been expected from a party that doesn’t really stand for anything except the Nehru-Gandhi family. Kejriwal has hit the Congress party where it hurts the most.
As Ramachandran writes “the Nehru-Gandhi family remained relevant within the Congress. In fact, it became more powerful as it was only the centre around which the entire Congress edifice could hold together. It was now an amalgam of pressure groups which were interested in power, and their one-way ticket to it was through proximity to the Nehru-Gandhi family.”
And it’s in times like these Congress leaders have to go through their agni parkiskha and show their loyalty to the Nehru Gandhi family. That’s precisely what they are doing. Their reactions are a clear case of Catch 22. They are dammed if they try to come to the defence of Vadra and they are dammed if they don’t. However, in the process Vadragate may turn out to be Sonia Gandhi’s Bofors.
The article originally appeared on www.firstpost.com on October 16, 2012. http://www.firstpost.com/india/will-vadragate-turn-out-to-be-sonias-bofors-492019.html
(Vivek Kaul is a writer. He can be reached at [email protected])
Biyani, Mallya, Suzlon, DLF: Easy money screwed up India Inc
Vivek Kaul
George Orwell the author of masterpieces like 1984 and Animal Farm once said “whoever is winning at the moment will always seem to be invincible”. The big Indian businessmen went through this phase between 2003 and 2008. They were invincible and the world seemed to be at their feet.
One impact of this was diversification or entrepreneurs following the age old adage of not having all the eggs in one basket. And so the Indian entrepreneurs went on a diversification spree. Vijay Mallya thought running an airline, a cricket team and an FI team was just the same as selling alcohol. DLF thought running hotels, generating wind power, selling insurance and mutual funds would be a cake walk after they had created India’s biggest real estate company. Deccan Chronicle saw great synergy in selling newspapers and running a cricket team and a chain of bookshops. Hotel Leela thought running a business park would be similar to running a hotel. Kishore Biyani thought that once he got people inside his Big Bazaars and Pantaloon shops, he could sell them anything from mobile phone connections to life and general insurance. Bharti Telecom thought that mutual funds, insurance and retail were similar to running a successful telecom business.
Banks were more than happy to lend money to finance these expansions. And if money couldn’t be raised domestically it could always be raised internationally by issuing foreign currency convertible bonds (FCCBs). The beauty of these bonds was that the rate of interest on these bonds was almost close to zero. Hence, the companies raising money through this route did not see their profits fall because of interest payments.
So everybody lived happily ever after. Or at least that’s how it looked till a few years back.
In the prevailing euphoria these entrepreneurs did not realize that all the money they were raising in the form of debt would have to be returned. Even if they did, they were confident that all these expansions into unrelated territories would soon start making money and would generate enough profits to pay off the debt.
Other than unrelated diversifications companies also borrowed to fund their expansion into their core areas at a very rapid pace. As Nirmalya Kumar, a professor of marketing at the London Business School explained to me in an interview I did for the Daily News and Analysis a few years back “capacity never comes online at the same time as demand because you have to add capacity in chunks, whereas demand goes up as a smooth function. Capacity comes in chunks and people generally add capacity at the top of the cycle, rather than at the bottom of the cycle because at the bottom of the cycle, everybody is hurt and nobody knows when things will turn around.I cannot set up a cement plant every time there is a 100-tonne more demand in the country, because when I set up a cement plant, I set up a 2 million tonne cement plant. There will be times when there will be a shortage and there will be time when there will be lots, right? So this boom and bust always takes place.” (You can read the complete interview here).
Telecom companies raised a lot of debt to establish their presence all over the country only to realize that the consumer had too much choice leading to the telecom companies having to cut calling and smsing rates to ridiculously low levels(I have a sms pack which costs Rs 25 and gives me 15,000 messages free per month. If I exhaust that limit one sms costs one paisa). At one point of time the Mumbai circle had a dozen odd operators competing.
The wind energy company Suzlon raised a lot of money through the FCCB route to expand at a very past pace and became the darling of the stock market. DLF raised a lot of debt to build a land bank.
So during the boom businesses just expanded into related and unrelated areas. NDTV, a premier English news channel, tried getting into the entertainment channel business with NDTV Imagine. It lost a lot of money on it and finally sold out. Even the selling out did not help and the channel has since been shutdown. Peter Mukherjea a successful manager launched News X, which he had to sell off. Satyam, an IT company tried to diversify into real estate and infrastructure as Maytas (Satyam spelt backwards).
With all the easy money going around Biyani soon had major competition in the organized retail space with the Tata group, Birla group, Ambani group and even Sunil Bharti Mittal deciding to enter the organized retail space. Then there was also Subhiksha which expanded so fast that it soon had 1500 stores all over the country. This was also the era where media companies got into the real estate business. They also wanted to set up power and cement plants, and buy coal mines.
And most of this expansion was funded by companies by taking on more and more debt. Banks also got caught on to the euphoria that prevailed and gave out loans left, right and centre. The boom period has now run out. What we are seeing right now is the bust.
Businessmen now seem to be coming around to the realisation that they have ended up raising too much debt too fast and need to bring it down. Some of them like Subhiksha and Kingfisher have had to shut down their operations. Others are facing huge losses. As Sreenivasan Jain wrote in a recent column in DNA: “Last year, Reliance Fresh posted a loss of Rs 247 crore, Bharti posted a loss of Rs 266 crore, and Aditya Birla group, which runs the chain of More supermarkets, posted a loss of Rs 423 crore. Some retail chains have actually shut down, like Subhiksha which at one time had almost 1,500 outlets,” writes Jain. (You can read the complete article here)
The realisation also seems to have come around among businessmen that they need to sell of what they are now calling their “non-core assets”. Deccan Chronicle recently tried selling its Deccan Chargers IPL team but found no buyers willing to pay more than Rs 900 crore. Over the weekend BCCI cancelled its franchise. So all the debt that was raised to get the cricket team up and going has now gone down the drain. There are next to no assets to sell against it. DLF sitting on top of more than Rs 25,000 crore debt has been trying to sell its wind power business for a while now. Media reports also suggest that it is in the process of selling off Aman Resorts its foray into luxury hospitality business. The hotel DLF set up with Robert Vadra is also reported to be on the block. A couple of months back DLF managed to sell off its 17.5 acre land plot in Mumbai’s Lower Parel area to Lodha Developers for Rs 2750 crore. The company also managed to sell off Adone Hotels and Hospitality for Rs 567 crore.
Hotel Leela has been trying to sell its business park. Vijay Mallya managed to sell a stake in his F1 team to Sahara. Media reports suggest that Mallya has been in talks with the British company Diageo to sell United Spirits. There are also rumors that he is trying to sell real estate that he owns in Bangalore to pay off all the debt on Kingfisher Airlines. In the meanwhile no one seems to be interested in buying Kingfisher Airlines even though the government has allowed up to 49% foreign direct investment in the aviation sector.
Kishore Biyani managed to sell off Pantaloons and Future Capital in order to pare down his debt. The Bharti group got out of the education business by selling Centum Learning to Everonn education. Also some of the big companies that had got into organized retail have either closed their stores or scaled down the level of their operations. Suzlon is in major trouble. Its FCCB loans amounting to $221million(Rs 1,160 crore) are set to mature later this month and the company is in no position to repay. Its request to extend the repayment has been rejected by the bondholders. It is now being speculated that the company will default on these loans and go in for liquidation.
The learning out of all this is that it is easy to expand when the money is easily available and the going is good. But selling out when the tide turns around is not so easy.
But what businesses should have hopefully learnt more than anything is that in this day and age it pays to focus on a few businesses instead of trying to do everything under the sun just because money to expand is easily available.
In the past things did not change in business. An interesting example is that of the Ambassador car. The car had the same engine as of the original Morris Oxford which was made in 1944. And this engine was a part of the Ambassador car sold in India till 1982. The technology did not change for nearly four decades.
Given this lack of change, the businessmen could focus on multiple businesses at the same time. That is not possible anymore with technology and consumer needs and wants changing at a very fast pace. Even focused companies like Nokia missed out on the smart phone revolution in India.
Look at the newer businesses some of the big-older companies have got into over the years. The retail business of Ambanis hasn’t gone anywhere. Same is true with that of the retail business of the Aditya Birla group. The telecom business of the Tatas has lost a lot of money over the years. Though, they finally seem to be getting it right.
Hence it’s becoming more and more essential for businesses to focus on what they know best. To conclude, in the movie English Vinglish one of the characters who goes by the name of Salman Khan says “entrepreneur, shabd na hua poori ghazal ho gayi”. For the Indian entrepreneurs the expansions they thought would be as soulful as ghazals have turned into headache inducing heavy metal. Hopefully they have learnt their lessons.
The article originally appeared on www.firstpost.com on October 15, 2012. http://www.firstpost.com/business/biyani-mallya-suzlon-dlf-easy-money-screwed-up-india-inc-490747.html
(Vivek Kaul is a writer. He can be reached at [email protected])
Napier sees all equity markets falling
Stock markets and economies do not always go together. Take the case with India right now. The stock markets have done reasonably well this year. The economy clearly hasn’t with economic growth slowing down to around 5.5%.
As Russell Napier a consultant with CLSA and a financial historian of repute puts it “I maintain a very positive long term view on India and the Indian economy and how it develops. But, and it’s a big but, that financial history tells you that economic growth and return from equities are not linked at all.” Napier is also the author of the bestselling Anatomy of the Bear – Lessons from Wall Street’s Four Great Bottoms.
The most important thing is to buy equities when they are cheap because when they are cheap that’s when you make good return, feels Napier.
So how cheap are Indian stocks? “Indian equities haven’t been cheap for a very very long period. And the best measure of cheapness that I look at is the cyclically adjusted price to earnings (PE) ratio because it has been a good guide in America for future returns. In India the cyclically adjusted PE is now at 24. If you look at the history of America that is right at the top end of the range. And suggests that we are going to have pretty poor lowish returns from India over a prolonged period of time,” says Napier. Cyclically adjusted PE is calculated by using ten year rolling average earnings. India is now on 24 times cyclically adjusted PE.
This number has to fall if Indian stocks are to become attractive investment propositions. “The volatility of the market though is great, and I think and I hope we will get a chance to buy Indian equities cheaper, and get them cheaper sometime soon,” feels Napier. “Certainly if they ever get below 15 times cyclically adjusted PE you should be looking to buy some of them. And there is every reason to think that they will go lower than that, and then you should be buying a lot of them,” he adds.
Napier is looking at a global deflation shock and the stock markets falling all over the world. As he says “I see all the markets global equity markets coming down to the extent of this global shock.”
Despite the fact Napier feels that Indian stocks are expensive he would rather buy Indian stocks than Chinese. “Chinese are stocks probably at very viable sort of valuation levels. But I wouldn’t buy any of them because I don’t consider them to be corporations. I don’t consider the management to wake up in the morning and seek to push up the return on capital to the benefit of shareholders. And therefore those equities are cheap I don’t fundamentally want to buy,” explains Napier.
And how is India different? “Not every Indian company as you are also aware is going to do the best for all its shareholders. But because Indian companies come from the private sector so it is more likely you are going to find companies in India who work to benefit there shareholders and not just the small family unit in the company,” says Napier. “Hence when it comes to buying stocks cheaply I want to do that in India and not in China. But in India at the minute they remain still very expensive,” he concludes.
The article originally appeared in the Daily News and Analysis (DNA) on October 15, 2012. http://www.dnaindia.com/money/report_russell-napier-sees-all-equity-markets-falling_1752478
Vivek Kaul is a writer. He can be reached at [email protected]