Tuesday, February 25, 2014

India's largest and most profitable airline!!!!!! INDIGO

Indigo Flight 6E354 from Kolkata to Hyderabad, departure 8.30p.m., February 24th 2014

At 6.30p.m. I got a message which said that the flight had been rescheduled to 11.15p.m.

There was no explanation for the rescheduling at the airport. There was no indigo staff at the airport who was designated to alleviate the concerns of the guests.

At 9p.m., two indigo kids [staff] came and asked the guests to collect dinner. Dinner was a cheese sandwich, a muffin, a kachori and buttermilk. I wonder what percent of the Indigo staff eat such sumptuous dinner! I beg ignorance, but I did not know that the four assorted, dumped, cold, dry, something, thrown together in a box, items could classify as dinner.

In the meanwhile, we got another message from Indigo saying that the flight was now rescheduled to 10.40p.m. There was a change in gate number, which was not announced.

The two kids who were distributing the so called dinner disappeared. While everybody waited for someone to come and announce boarding for 10.40pm departure, 10.40p.m. came and went and there was no sign of any indigo staff. The kids came back at 11p.m. and sat down and chatted and laughed, while the tired guests watched. A few of us had woken up at 4a.m. or 5a.m., had full day meetings, had kids waiting at home, were concerned about our safety upon arriving at Hyderabad airport and taking the cab home, the kids laughed and chatted.

A few guests had had enough and demanded that a supervisor come and explain the situation. Another kid came at 11.15p.m. (supposedly senior to the other two), and to silence the crowd, announced boarding and then made the guests wait in the bus.

Finally we boarded the aircraft at around 12.00 midnight. Airhostesses [kids again] were laughing away with absolutely no sense of the grim situation or the discomfort of the guests. The aircraft had mosquitoes. Not one, not two, but the aircraft was full of mosquitoes. The way you find them hovering over a drain or in slums. When a guest asked one of the airhostesses to spray the repellant, she just ignored. When the request was repeated again, she gave the logic that if she sprays the repellant, we will all breathe it and it’s not good for our health. While technically I agree with her, shouldn’t the airhostesses, or who-so-ever is responsible for preparing the aircraft, take care of such details earlier? Do we pay thousands of rupees to travel in such conditions?

The flight finally took off at 12.30a.m. and reached Hyderabad at 2.30a.m. A few other women and I made our journeys home, in cabs, alone. Does Indigo care? No. Did the incidence even register with the management? No. 

Friday, February 21, 2014

How India prevents money laundering

This article was first published in the business section of www.rediff.com on February 19, 2014; Co-author: Harkishn Mourjani (Quadrisk Advisors Pvt Ltd)

India has been classified as high risk zone in terms of money laundering. Out of 140 countries, India was ranked 70th in 2013 and 93rd in 2012, by the Anti Money Laundering (AML) Basel Index. 

This clearly shows that India, in the present-day scenario, is very vulnerable to money laundering activities. Many acts exist in India, which directly or indirectly curbs money laundering activities. 

A few of such acts are:
·         The Conservation of Foreign Exchange and Prevention of Smuggling Activities  Act, 1974 
·         The Income Tax Act, 1961 
·         The Benami Transactions (Prohibition) Act, 1988 
·         The Indian Penal Code and Code of Criminal Procedure, 1973 
·         The Narcotic Drugs and Psychotropic Substances Act, 1985 

They proved to be inadequate in the treatment of money laundering matters. To curb the instances of Money Laundering, the Prevention of Money Laundering Act (PMLA) was introduced in the Lok Sabha on 4th August 1998 and was ultimately passed on 17th January 2003.  

Apart from the PMLA, there are other steps taken by the government to ensure that the instances of money laundering are prevented. A few of them are discussed here:  

Financial intelligence Unit (FIU)
The Financial intelligence Unit (FIU) operates in the legal framework established by the PMLA. FIU performs the basic functions of receipt, analysis and dissemination of information in accordance with the international standards set up by the Financial Action Task Force (FATF) and Egmont Group of FIUs.
As prescribed under the PMLA, FIU receives reports on cash transactions, suspicious transactions, counterfeit currency transactions and funds received by non-profit organisations. 

These reports are filed by reporting entities i.e. banks, financial institutions and capital market intermediaries, casinos, private locker operators, registrar to an issue of shares and dealers in precious metals. 

FIU maintains a database and shares these reports with various agencies.

Know your Customer (KYC) Guidelines
The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. 

In order to prevent identity theft, identity fraud, money laundering, terrorist financing, etc., the RBI had directed all banks and financial institutions to put in place a policy framework to know their customers before opening any account.

The KYC guidelines were introduced by RBI in 2002, and all banks were instructed to be compliant by 31st Dec 2005. 

This involves verifying customers' identity and address by asking them to submit documents that are accepted as relevant proof. Mandatory details required under KYC norms are proof of identity and proof of address.

There have been many instances of KYC norms being flouted and there is need for the RBI to make the system more robust. 

A few examples of such instances are:
An individual investor, Roopalben Panchal, opened as many as 6,315 demat accounts with the National Securities Depository Ltd (NSDL) in benami names. 

She received 150 shares each from 6,315 allottees through off-market transactions, 9,47,250 shares in aggregate, which were subsequently transferred to six accounts, five of which sold the shares on listing to make a handsome profit of Rs 1.37 crore.

Similar modus operandi was used by certain investors during the IPO of Infrastructure Development Finance Company (IDFC).

Recent Changes in Prevention of Money Laundering Act (PMLA)
Definition of “Activities of Terrorism” was not present in PMLA 2002, however the same was included in 2010 as “Transaction involving financing of the activities relating to terrorism includes transaction involving funds suspected to be linked or related to, or to be used for terrorism, terrorist acts or by a terrorist, terrorist organisation or those who finance or are attempting to finance terrorism.” 

Until 2010, the enactment allowed protecting identity of beneficial owners, who could be represented by lawyers and accountants. However, it has been abolished as a part of the recent amendments made to the act in 2013.

RBI and IRDA did not have any provision to address cases for filling Suspicious Transaction Report to Financial Monitoring Unit. Circulars have been issued by both institutions to address the deficiency.

The earlier provisions of the Act lacked the prowess for due legislative action. Hence, the scope was broadened in 2013 to include concealment, possession, acquisition or use of property, and projecting or claiming it as untainted property. Commodity future brokers have also been included within the scope of the Act now.

The recent changes in the PMLA are welcome as a report from Global Financial Integrity, published in December 2013, reported that the total black money outflow from India was nearly $343 billion during 2002-2011. 

Thursday, February 20, 2014

BITS of Success: Inspiring stories of BITS Pilani alumni

The book review was first published by yourstory.com on February 19, 2014

BITS of Success: edited by Harsh Bhargava, Kinnera Murthy, Anu Khendry
Universities Press (India) Private Limited
3-6-747/1/A & 3-6-754/1 Himayatnagar
Hyderabad 500 029
Rs 190 (paperback)

What does it take to be successful? Grit, guts and gumption, some would say. Dream, passion and perseverance, the others would vouch for. Educational Institution? That’s what the fifty alumni of BITS Pilani include as an important factor which helped then achieve success.

BITS of success is a book which compiles the stories of fifty successful alumni of BITS Pilani from various fields; as diverse as scientists and artists, politicians and teachers, technologists and skiers. A few names are very familiar household names like Sabeer Bhatia (founder of Hotmail), Prithviraj Chavan (Chief Minister of Maharashtra), Mani Shankar (Film maker) and Vivek Paul (Wipro Technologies). The others instill a desire to know more about them.

D Balasubramanian, Director-Research at L V Prasad Eye Institute, recipient of the Padma Shri, one of the oldest alumnus of BITS Pilani profiled in the book,  talks about the contribution of his teachers at BITS in inculcating the love for Chemistry and Music in him. The importance of good teachers cannot be demonstrated better than in his case. The early interest in the subject subsequently led to sustained learning and eventually path breaking innovations.

In an era where the public at large are in general disgusted by the politicians in India, Prithviraj Chavan is an outlier. The current Chief Minister of Maharashtra has a pleasing personality and is an efficient administrator. In the words of Babasaheb Neelkanth Kalyani, the Chairman and Managing Director of Bharat Forge, which might be true for most of the alumni of BITS Pilani, “I think the years that I spent at Pilani prepared me to face the challenges of life”.

Abraham Lincoln once said, “I’m a success today because I had a friend who believed in me and I didn’t have the heart to let him down.” The importance of friendship and the contribution of educational institutions in forging those ties also comes out in the book. B C Jain, Chairman of Ankur Scientific, and recipient of the Bio-Energy Man of the Year 2011–2012, apart from many other accolades, says, “This [BITS] gave me a large number of great friends and also led to development of excellent analytical and interpersonal skills”.

A common trait which is observable through the profiles of all the alumni is the desire to make the world a better place to live in. Whether it is the socially relevant movies made by Mani Shankar or the work being done by B C Jain in the bio-energy segment or the Janaagraha movement of Ramesh Ramanathan.
Innovation is another common thread which weaves the lives of these luminaries. Sabeer Bhatia founded the first free web-based email service in the world, hotmail. Sarathbabu Elumalai founded Foodking which serves good food at nominal prices and offers employment to illiterate and semi-illiterate people.

The selection of people profiled is commendable. While each of the story is fascinating, the book just touches upon the lives of a few of them and leaves the readers with the urge to read more about the person. This could very well be a strategy that the editors wanted to adopt.

The book must be read by the younger lot, who are disenchanted by the education system and the value that it adds. At times, the value is not tangible and not in marks received!

Thursday, February 13, 2014

The Complications of Easy Money

The interview was first published by the Global Association for Risk Professionals on February 06th 2014

An Indian writer dives deep into the history of money and concludes that government interventions rarely end well

Although he is not by formal training an economist – and perhaps because he is not – Vivek Kaul has established a reputation as a provocative, clear-voiced economic commentator for Firstpost and other publications in India. One article about Kaul’s recently published history, “Easy Money: Evolution of Money from Robinson Crusoe to the First World War,” paid Kaul the compliment of being “readable.” In response, Kaul explained that he devotes considerable study to “break things down. If a child cannot understand what I am writing, it is pointless.”

Though perhaps understandable to the younger population, Kaul’s extensively researched, 300-page volume speaks to a very different, highly educated audience. He delves into the origins and evolution of monetary systems and finds in them pointed, cautionary lessons for the central bankers who manage the modern-day money supply and for policymakers concerned about the risks and stability of financial systems.

“One of the lessons from history is that money printing has never really ended well,” Kaul says in this recent interview conducted by Dr. Nupur Pavan Bang of the Insurance Information Bureau of India. “It has inevitably led to disaster. We don't seem to have learned that lesson at all.”

Why is “Easy Money” your title?
I use the term 'Easy Money' in the context of money being created out of thin air by kings, queens, rulers, dictators, general secretaries and politicians. The practice was regularly resorted to by kings of Rome and has been abused ever since. As the Roman Empire spread, it needed more and more money to keep its huge army all over the world going. But gold and silver could not be created out of thin air. Also, as Romans grew richer, luxury and showing off became an important part of their lives. This also increased the demand for precious metals. This meant more plunder of the territories Rome had captured in battle. But plunder could not generate gold and silver beyond a point. Hence, the Roman kings resorted to debasement.

How did debasement work?
A metal like copper was mixed with the gold or silver in coins, while keeping their face value the same. So let’s say a coin which had a face value of 100 cents had silver worth 100 cents in it. After it was debased, it only had 80 cents worth of silver in it. The remaining 20 cents was pocketed by the ruler debasing the currency. Once the Romans started this, the rulers who followed also debased various forms of money regularly. And that is a practice that has continued to this day. These days, governments print paper money and pump it into the financial system by buying government bonds. Actually, most of this money is created digitally and resides in bank accounts, but “printing paper money” is a simple way to explain this.

How and where has that history repeated?
Governments at various points in history have worked toward destroying money and the financial system. The Romans under Nero were the first to do it systematically by lowering the silver content in the Denarius coin. The Mongols, Chinese, Spaniards, French, Americans and Germans followed, at various points of time. When gold and silver were money, the governments destroyed money by debasing it, i.e., lowering the content of precious met­als in the coins they issued. When paper currency replaced precious metals as money, the governments destroyed it simply by printing more and more of it.

Today, in the U.K., for example, the government does not print money on its own. It sells securities to the central bank, which prints money to buy them. This started with the Bank of Eng­land being tricked into lending endless money to the government in the late 1790s by Prime Minister William Pitt. This al­lowed the government to borrow as much money from the Bank of England as it wanted to, without having to get clearance from the Parliament. Governments all over the world continue with this practice of borrowing unlimited amounts from their respective central banks. The practice has only increased over the last few years, since the advent of the financial crisis.

The first volume of your planned trilogy covers “from Robinson Crusoe to the First World War”. Do you think some earlier practices like barter were actually better?
Not at all. In fact, if barter was better, we would have probably stayed with it, and money and the financial system wouldn't have evolved. Barter had two fundamental problems. The first was the mutual coincidence of wants. I have some eggs and I want to exchange them for salt. So, I need to find someone who has salt and, at the same time, wants to exchange it for eggs. What if the person who has the salt does not want eggs, and wants sugar instead? To complete the transaction, I need to find someone who has sugar and is ready to exchange it for eggs. A simple, straightforward transaction could become fairly complicated.

In a barter system that has four goods to be exchanged, there are six ratios of exchange. But imagine a situation where there are 1,000 goods to be exchanged under a barter system. There will be 499,500 exchange rates.

And the second problem with barter?
Indivisibility. Let us say I have a potter’s wheel and want to exchange it for some basic necessities like eggs, salt and wheat. One way would be to find someone who has these three things and is ready to do an exchange. If I am unable to find such a person, then barter does not work for me.

That demonstrates the utility of money.
The evolution of the concept of money, where a standardized commodity could be used as a medium of exchange, did away with the problems of barter. Also, money allowed people to specialize in things they were good at. People can work in areas they feel they are most suited to without having to worry about how to go about getting the other things that they might require to live a decent life. This specialization, in turn, leads to discovery and invention. The concept of money is at the heart of human progress.

You write that gold, which historically backed the value of coins or currency, “is valuable, because it is useless". Can you explain this oxymoron?
That may sound oxymoronic, but it is not. Gold is highly malleable (it can be beaten into sheets), ductile (can be easily drawn into wires), and the best conductor of electricity. Despite these qualities, gold does not have many industrial uses like other metals have. This is primarily because there is very little of it around. Also, pure gold is as soft as putty, making it practically useless for all purposes that need metal.

Now, why am I making this point? It is important to understand that when commodities are used as money, they are taken away from their primary use. If rice or wheat is used as money for daily transactions and to preserve wealth, then there are lesser amounts of rice and wheat in the market for people to buy and eat. This, in turn, would mean higher prices of grains, which are staple food in large portions of the world. If a metal like iron is used as money, it is not available for its primary use.

Why is gold different?
Given the fact that it is extremely expensive, and that it does not have many industrial uses, the mere act of hoarding gold does not hurt anyone or infringe their rights. That “uselessness” also helps it to retain value.

Silver has lots of industrial uses. If one owns silver during a recession, chances are that the price of silver, and thus its purchasing power, would fall, because there would be less demand for silver for its industrial uses. The same would be true for metals like platinum and palladium which are also used for industrial purposes. Gold would not be impacted. As analyst Dylan Grice wrote in “A Minskian Roadmap to the Next Gold Mania“ (2009), “The price of gold will be unaffected by any decline in industrial de­mand because there is no industrial demand!” Hence, gold is useful because it is useless. This is paradoxical, but true.

What determines currency values now, and what causes them to crash, as was the case in the South East Asian crisis of 1997?
Paper currencies inherently do not have any value. What makes them money is the backing by the government that has issued them. Hence their designation as fiat currencies. One paper currency’s value vis-à-vis another to a very large extent depends on the economic strength of the issuing country. Before the South East Asian crisis, the Thai baht was pegged against the U.S. dollar: one dollar was worth 25 baht. Thailand’s central bank ensured that this rate did not vary. Hence, it sold dollars and bought baht when there was a surfeit of baht in the market and vice versa.

Once economic trouble broke out in Thailand’s and other regional currencies, investors exited them en masse. They exchanged baht for dollars to repatriate their money. In the normal scheme of things, with a surfeit of baht in the market, the value of the baht would have fallen. But the baht was pegged to the dollar. The Thai central bank kept intervening by selling dollars and buying baht. But it could not create dollars out of thin air. It ran out of dollars, and the peg snapped.

The baht was a piece of paper before the crisis. And it continued to be a piece of paper after the crisis. What changed was the economic perception people had of Thailand. As a result, the baht rapidly depreciated in value against the dollar.

What is the relevance today?
Central banks around the world have been on a money-printing spree since the late 2008. Between then and early February 2013, the U.S. Federal Reserve System expanded its balance sheet by 220%. The Bank of England did even better, at 350%. The European Central Bank came to the money-printing party a little late and expanded its balance sheet by around 98%. The Bank of Japan has been relatively subdued, increasing its balance sheet by 30% over the four-year period. But it is now printing a lot of money, planning to inject nearly $1.5 trillion into the Japanese money market by April 2015. This is huge, given that the size of the Japanese economy is $5 trillion.

One of the lessons from history is that money printing has never really ended well. It has inevitably led to disaster. But we don't seem to have learned that lesson at all.

In a past interview, Dr. Ishrat Husain, former governor of the Central Bank of Pakistan, pointed out that if shareholders' equity in a bank amounts to 8% of deposits, then 92% belongs to depositors, ang although excessive risks are taken with the depositors' money, the upside gains are captured by the shareholders and managers. But, if they lose money, taxpayers have to bail them out. This “asymmetric relationship in incurring risk and appropriation of reward makes the financial sector more vulnerable to exogenous shocks.”
I totally agree with Dr Husain. I talk about this in some detail in “Easy Money.” Walter Bagehot, the great editor of The Economist, wrote in Lombard Street, “The main source of profitableness of established banking is the smallness of requisite capital.” This book was published in 1873. So things haven't changed for more than a century. The low shareholders' equity of banks makes the entire financial system very risky.

What would it take to mitigate that riskiness?
Anant Admati and Martin Hellwig explain this point beautifully in “The Bankers' New Clothes” (2013). Let us say a bank has shareholders' equity of 2%, as some had between 2007 and 2009. If the value of the assets falls by 1%, half of its equity is wiped out. The bank cannot issue any new equity. So what does the bank need to do, if it wants to move its shareholders' equity back to 2%? If the bank has assets worth $100, its shareholders' equity earlier stood at $2. If the value of these assets fell by 1%, the bank's assets are now worth $99. Its equity is also down to $1. To increase shareholders' equity back to 2%, assets must fall to $50 – meaning $49 worth of assets must be sold.

In times of trouble, a lot of banks need to do this, leading to a rapid fall in the value of their assets. This tells us that if banks have a little more equity, then they will need to sell a smaller amount of assets, which will make for a more stable financial system during times of trouble.

Therefore, shareholders' equity in banks needs to go up. This is a no-brainer, the influence of Wall Street notwithstanding. 

Wednesday, February 5, 2014

The Coal Plight of India

This article was first published in www.garp.org on January 23, 2014; Co-author: Puran Singh


India has the fifth largest coal reserves in the world (293.4 billion tons as of April 2012), is the third largest producer of coal (about 580 million tons in 2012-13), and still ranks third in the list of top coal importing countries, with imports of 192 million tons in 2012-13 (see Figure 1).

Coal as a resource assumes critical proportions in India as 74% of coal produced goes into the power sector and 68% of electricity generated comes from coal. However, the power and steel industries, top users of coal, often complain about short supplies. In many instances, power stations stay idle for want of coal, and annual production fails to meet demand. While part of the shortage is attributed to inefficient allocation of coal blocks and lack of the latest production technology, leakage of coal through illegal mining also contributes.

 Figure 1: Key Coal Statistics for India
Source: Ministry of Coal, Government of India
Illegal mining refers to the mining done in contravention of applicable rules: Groups of people burst explosives and use unscientific methods for extraction. Done in a haphazard manner on small patches of land, it deters subsequent legal mining due to security hazard. Coal mines abandoned by state corporations are also used by illegal miners.

According to a study conducted by Xavier Labor Research Institute (XLRI) of Jamshedpur, India in 2008, 447 illegal mines fall under operational areas of three subsidiaries of Coal India Limited, a public sector undertaking of the Government of India. Central Coalfields Limited and Bharat Coking Coal Limited in the state of Jharkhand accounted for 195 and 49 such mines, while Eastern Coalfields Limited in the state of West Bengal accounted for 203 mines. This amounted to illegal production of 63,600 tons of coal each year. According to the study, at least a billion rupees was lost to the companies in Jharkhand alone due to illegal mining.

According to the report of standing committee on Coal and Steel 2011-12, 616 First Information Reports (FIRs) against illegal mining were lodged until September 2009, and only one officer was noted to be suspended by these companies for inaction to curb illegal mining. The recovery of coal, mined illegally, also remains miniscule (see Figure 2).

Figure 2: Recovery of Illegal Coal Mining in India

For decades, mafia groups have controlled the illegal mining, which has been passed on to subsequent generations. The report notes that gangs form cartels for coal contractors and scare the prospective bidders out of the tender process for mining jobs. They control the labor unions and create nuisances such as unnecessary strikes to disrupt daily activities, assaulting or murdering family members of mine officials, etc. In some cases, these mafia groups may be backed by Naxalite militants.

A former member of Parliament and Secretary of the Center of Indian Trade Union (CITU), Jibon Roy, stated in 2010 that around 10,000 coal cartels in India steal 5 to 6 million tons. Based on this estimate, a loss of around Rs 18 billion annually was estimated at the then-prevailing market prices.

Figure 3: Coal Pilferage Cases Reported in India
Over the years, the number of pilferage cases reported has declined (Figure 3). However, the incidences actually taking place may have an altogether different story to tell.

Government has not been able to check the illegal mining of coal. The presence of Naxalite groups in the coal production areas has made the problem even worse. According to the standing committee on Coal and Steel 2011-12, organized crime forms a nexus with officials at some places. Elsewhere, local authorities are terrorized by mafia and are forced to cooperate.

The committee noted that except for XLRI in 2008, no other study had been conducted by other coal producing states to quantify economic impacts of criminal activities in the coal sector. Similarly, a special report by Thomson Reuters noted that a Coal ministry tender for a study had no bidders for fear of potential mafia reprisals. Therefore, only estimates of losses to coal companies and the state exchequer are available.