Explained: How to be in the 'top league' of business education in India

This article was first published in Business Standard on December 12, 2019; https://www.business-standard.com/article/education/explained-how-to-be-in-the-top-league-of-business-education-in-india-119120301339_1.html

Rigour versus relevance is a debate that the B-schools need to engage in

Industrial revolution and rise of large corporations necessitated shareholders to employ agents who worked towards maximization of shareholders’ wealth. Business Schools globally played an important role in imparting education to students that would make them ready to manage and eventually lead these corporations. Technical knowledge was much valued and management education naturally was skewed towards imparting them.

The advancements in technology has made it easy for people to obtain hard skills as and when required. Similarly, many of the jobs now performed by MBA graduates will get performed by machines in the future. Some of the top global leaders have openly expressed that management education needs to undergo changes to bridge the gap between what is required in the real life versus what is taught in B-schools.

Speaking on education, at the World Economic Forum (2018), Jack Ma, the founder of Alibaba, emphasised on the need to move away from knowledge-based teaching to teaching the softer skills like “values, believing, independent thinking, teamwork, care for others...”. Similarly, Nitin Nohria, the dean of the Harvard Business School, admitted, “anyone can teach you how to read a P&L or value a derivative; those kinds of things have become commoditized. The bigger challenge is to teach America’s future business leaders how to be curious, humane, and moral; how to think outside the box about problems like funding the research for a new blockbuster drug. And how to be strong enough to stand up to Wall Street when it demands the opposite”.

In India too, the India skills report 2019 stated that only 36% of the MBA students in the country were employable. Further, hundreds of B-Schools across India are shutting down every year due to lack of offers from recruiters. While a few top schools like the ISB and IIMs are continuously re-evaluating the curriculum, marking themselves with the market demands and innovating teaching pedagogy, the trends are clearly shifting globally, and all B-Schools need to recalibrate their efforts to remain relevant.

Nassim Nicholas Taleb famously said, “In academia, there is no difference between academia & the real world. In the real world, there is”. How does a B-school bridge this difference? For one, Engage with stakeholders to add real time value to the community. Curriculum and faculty should be geared towards integrating theoretical knowledge to practice. Maximizing shareholders’ perspective is now passé with companies aspiring to move towards a more wholistic measure of performance like the Triple Bottom Line approach that looks at people and community (social responsibility), planet (environmental sustainability) and profit (the bottom line). B-Schools need to accordingly reset curriculum, faculty and mindset.

Research is an important component of all business schools. And rightly so. However, rigor versus relevance is a debate that the B-Schools need to engage in. Warren Bennis, a professor of management at the University of Southern California says that “Business schools have forgotten that they are a professional school.” Not all good researchers are good teachers and not all good teachers are good researchers. Add to this a component of practical experience and industry engagement. A healthy balance is required in a fast-changing world.

Letter versus Spirit- Ethics class doesn’t make one ethical. Knowing risk management tools didn’t prevent a Lehman brothers from collapsing. But knowing the consequences of not acting ethically or knowing what is at stake if a wholistic assessment of risk is not done, will act as a deterrent for people to take shortcuts. The school must understand, communicate and practice the basic values that it stands for and inculcate it in its students too. Strong personal and organizational values aid people to keep pace with changing times with integrity and in an ethical manner.

In order to be globally relevant, B-Schools in India must truly globalize. Efforts to attract sizeable proportion of international students, impart international experience, design globally relevant curriculum, promote cultural diversity and bring global faculty need to be made. Companies and marketplaces are global in nature after all.

Hard versus Soft Skills- Traditionally, management education has paid emphasis on hard skills and quite neglected soft skills. With technology getting more and more adept at providing on-the-go technical knowledge and soft skills proving to be vital to succeed, increased focus on enhancing skills like negotiation, human behaviour, leadership and structured thinking are needed. It is also important to allow students time to think and reflect so that it becomes a habit and incidences of breakdown and mental health issues can be avoided in the future.

Entrepreneurial- The schools themselves need to have entrepreneurial traits of curiosity and innovation. Executive education, new courses, flexible programs, online programs and specialized programs need to be launched to keep pace with market requirements.

In recent times, failure of many global giants due to flawed risk assessment, governance lapses, and judgement errors have raised questions about the effectiveness of the management education as the leaders of many of these corporations were educated at the top B-Schools in the world. Elite institutions in the US like Harvard, Stanford and MIT have reported a drop in the number of applications in the recent years. The Indian B-Schools can learn from these experiences and take proactive measures to be top of the league. Yet, let’s not ape the West. The West is looking to Us. Let’s tell them what we stand for. The East is the biggest market for global companies. Let’s make leaders in India, for the world. The leaders who understand these markets better than those educated in the US or Europe.

Views expressed are personal.

Passing the baton... smoothly

This article was first published by Business Standard on November 07, 2019. Co-author: S.Subramanian; https://www.business-standard.com/article/opinion/passing-the-baton-smoothly-119110700037_1.html

In an ideal world, a poorly performing business leader (Chairman, CEO) will be replaced by the board. In reality, this seldom happens. It could be due to interpersonal skills, family ties, difficulty in finding a replacement or the board is a “nodder’s club”. Hence, in many companies, performance or governance may not dictate the leader’s tenure and many of the leaders tend to stay at the helm of affairs for too long. As Marshall Goldsmith, renowned leadership coach, puts it, “If you are not forced to hand off the baton before you want to, you may be tempted to hold it and keep running.”

Even if the incumbent leader’s track record is stellar, too long a tenure as the leader may make it difficult for the successor to find her feet. Ratan Tata had to face board-level storms in Tata group companies after he took over the mantle from JRD Tata, who led the Tata group for half a century.

Anu Aga faced serious problems in Thermax when she became the Chairperson of the company after the untimely death of her husband Rohinton Aga. Krish Gopalakrishnan and Sibulal and later Vishal Sikka also faced issues in leading Infosys after N. R. Narayana Murthy stepped down as the Chairman in 2011, after having led it for three decades.

These three examples are unrelated in industry, location (head-office) and size. The long tenure of their leaders and the turbulent ride for the successor is a common thread though. While there are multiple reasons for the troubles faced by these companies after the new leadership took over, one of the main reasons seems to be the long and successful tenure of the predecessors.

Leadership style and culture: Edgar Schein in his celebrated work on leadership and culture observes that organizational culture and leadership are intertwined. When a leader occupies the top position for a long time, she shapes the culture of the organization to suit her style. The influence of leadership style is very strong with family-owned firms when the leader is also the controlling owner and the distinction between the leader and the company is fuzzy. Over a period of time, the organization culture becomes too dependent on the leader’s style to the extent that it loses its flexibility to adapt to a different style.

If the leader quits when the organization is in trouble, then the new leader gets an opportunity to shake up the organizational culture. However, when the long-serving leader quits when the organization is doing well, the new leader would find it difficult to make the organization adapt to her style. The persisting culture in the organization resists the change in leadership style, thereby creating a problem for the new leader. In the case of Tata group, JRD Tata had laissez-faire style of leadership that allowed the CEOs of the group companies to run the respective firms as their personal fiefdom. When Ratan Tata took over, he tried to adopt a different style and that did not go well with incumbent CEOs and resulted in legendary board room battles.

Similarly, at Thermax, Rohinton Aga had a style of leadership which resulted in an informal culture in the organization. However, that proved to be a hurdle for Anu Aga in reviving the fortunes of Thermax. She wrote in the in-house quarterly magazine Fireside (April-June 2000), "Our culture - once our strength - has in many ways contributed to our woes. We have also misinterpreted the culture to suit our convenience. In the name of 'Thermax' culture, we have chosen to opt out of unpleasant and unpopular decisions relating to business activities and people. We have justified this paralysis by arguing that Thermax is a people-oriented company”. She took drastic steps to change the culture and revived the fortunes of the company. 

We all know the turmoil that Infosys went through after the retirement of Mr Narayana Murthy. The bridge between values of “compassionate capitalism” practised by Murthy and “entrenched in capitalism” Vishal Sikka was too long and not easy to traverse.

Smooth and timely passage of the Baton: In today's highly competitive environment, firms cannot afford such painful transitions. Research has shown that leaders with long tenures are inclined to maintain status quo while the newly appointed leaders would like to make more strategic changes to either make an impact or to accelerate growth. Now, an organization cannot always be in a “stable” mode. They will miss out on opportunities. At the same time, an organization cannot perpetually be in “change” mode. It will tire the people and the organization.

A healthy balance, as in everything else, is needed even for leadership tenure. In the Dabur group, the tenure of the Chairman is around 10-12 years, long enough for the individual to make his mark, short enough to ensure that the firm/group does not depend too much on the individual and entrenchment is avoided. Similar is the case with Murugappa Group.

Optimal tenure of a leader may be different in different industries, different organization structures and ownerships, leaders’ own attitude towards change, firm’s financial position and economic environment and easy availability of potential successors. Beyond her “peak”, a leader may be able to maintain “status quo”, but may not be able to remain “relevant” with changes in technology, emerging markets, changing regulations, environment and mindsets. Therefore, it is imperative for the long-term success of the firm that the leadership succession happens in a planned manner, as far as possible, and at the right time.

Blockchain applications: Bringing in the next wave of new technology jobs

This article was first published in Business Today on November 6, 2019. Co-Author: Sanjay Fuloria; https://www.businesstoday.in/opinion/columns/blockchain-applications-next-wave-of-new-technology-jobs-forget-analytics/story/388743.html

Blockchain applications are suitable across industries due to their security, immutability and decentralised properties. This means the next wave of new technology jobs would come from blockchain.

Blockchain is hot news these days. There was a time, in the not so distant past, when working-age people were going after analytics courses. People's inboxes were flooded by emails from sundry institutes and organisations offering analytics courses, degrees and diplomas.

Everybody wanted to get into analytics. While the availability of data is huge and the requirement to analyse and make sense of it is still there, analytics doesn't seem to be so popular now. Blockchain seems to be the next analytics.

As per Yli-Huumo etal, the idea of Blockchain started in 2008 (Yli-Huumo, Ko, Choi etal, 2016). Blockchain is defined, as the name suggests, as a chain of blocks of information. This is stored in a database. Merriam Webster defines blockchain as "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way."

Blockchain is also defined as "a digital ledger of economic transactions that is fully public, continually updated by countless users, and considered by many impossible to corrupt." (Carlozo, 2017). The use of cryptography makes the blockchain transactions trustworthy and secure (Holbl, Kompara etal). All cryptocurrencies including bitcoin have the blockchain technology at its base.

The above properties of blockchain make it applicable across industries. As usual, banking was the first industry to make use of blockchain technology. The banking industry has always been the first mover when it comes to the latest technology. Barclays and UBS are trying the blockchain technology to speed up settlement and their other back-office functions.

This could lead to an annual saving of $ 20 billion in costs. Middlemen could be eliminated just like that. Payment collection and automation of digital invoices are other applications in the banking industry. Crowdz is a B2B startup that is blockchain-based.

Barclays bank has invested in Crowdz in May 2019. JPM Coin is being launched by JP Morgan to enable transactions between one institute and the other. JPM Coin is based on blockchain technology.

Blockchain technology is slated to revolutionise messaging. It is going to be used to build an improved and secure communication infrastructure. The security expectations would be uniform across platforms. Currently, different platforms have different protocols which might compromise security.

SuchApp is working at creating a "5G ecosphere" using blockchain. Commercial transactions would also be possible on SuchApp. Then there is BlockMesh. This will work outside the range of cellular towers. It will work on the concept of peer to peer networking.

Telegram Open Network (TON) is being developed by the popular social networking app Telegram. They are planning to get into censor less browsing, payments and file storage. Other chat platforms like Kik are also raising money via Initial Coin Offering (ICO).

Kik is into in-app currency. There are other nuances which some companies utilise to make themselves unique. There's an app called Echo that uses a different protocol named Interplanetary File System (IPFS) which leads to quicker messaging. Echo is unique because other apps require the interacting parties to access the blockchain directly whereas Echo bypasses this by using the IPFS client.

Ride-sharing services have started using blockchain technology in a big way. Although we hear a lot about ride-sharing, according to a U.S. report, only 1% of the Vehicle Miles Travelled (VMT) (standard terminology in the ride-sharing industry) are accounted for by the ridesharing services.

There is a huge opportunity in rural markets. Blockchain technology can help by removing intermediaries between the driver and the rider. Driver vetting is another advantage of blockchain technology. Smart contracts make the rules and regulations transparent. These can be viewed by any stakeholder of the platform.

Any variations would be accomplished by enforcing smart contracts. The drivers' traffic record could be added to the blockchain to be used later for feedback and corrective measures. An Israeli company is working on a community-owned transportation platform that utilises any unused capacity for the benefit of the rider.

They are using the blockchain technology to device a ''fair share" reward system for all the stakeholders. There's another example of Arcade City that uses blockchain technology for all transactions. They permit drivers to set their own rates, build their own clientele of riders, and provide other services like delivery.

Education Industry has a lot of potential for the use of blockchain technology. Academic credentials could be added to the blockchain. This would make the verification process easy. Any fraudulent claims could be nipped in the bud.

There is a U.S. based startup, Learning Machine, that has created a toolset called Blockcerts that can be used to prepare, provide, view, and verify blockchain-based certificates. Student records can be shared and secured using blockchain. There are a lot of education apps and services available nowadays. Identity management for these services is a major problem. There are blockchain-based platforms available that help users carry their identity around the internet.

Internet of Things (IoT) could use blockchain technology for its advantage. A new concept christened as Autonomous Decentralised Peer-to-Peer Telemetry (ADEPT) uses a technology similar to blockchain to let devices (things) to communicate with each other directly without the presence of any mediator.

Data security is a major challenge with IoT as multiple devices get connected in real-time. If the data gets leaked or it is in some way not secure, it could be detrimental for all the concerned parties. The security aspect of blockchain could be utilised to its full potential when dealing with IoT.

Real Estate industry is another where blockchain technology could play a pivotal role. There are software as a service (SaaS) platforms where property information could be put in and documents could be recorded.

Blockchain applications are suitable across industries due to their security, immutability and decentralised properties. This means the next wave of new technology jobs would come from blockchain. Get ready to be swarmed by promotions from organisations/institutions offering blockchain courses. Working knowledge of blockchain could be the next great differentiator.

Social Media Analytics and Its Place in Management Education

This article was first published in GARP, Risk Intelligence on August 30, 2019. Co-author: Sanjay Fuloria; https://www.garp.org/#!/risk-intelligence/technology/data/a1Z1W000003mAbvUAE

Business schools can teach the power of the technology and stress its ethical application

There is a surfeit of social media data available for anyone who cares to generate insights and use it for legitimate (or illegitimate) purposes. However, to capture the data in the best possible manner and to get the desired outcome, one must know what to look for and where.

Space, time, content and network are the four key dimensions of data collected or information disseminated through social media. But how does one capture and analyze these? Are the management graduates and post-graduates of today equipped to make the most of this data? The point we will try to make is that social media analytics can be used for making positive impact on business outcomes and hence must be introduced in B-schools as an elective.

Calculating the impact of company marketing campaigns is one such use. In order to do this, questions about the brand could be asked on any of the social media platforms such as Twitter. These questions could generate a lot of discussion about the brand. Then, the company that has launched the product can measure sentiments through the discussions. Twitter metrics like engagement rate, potential impressions, geographical locations, tweet frequency, hashtag usage, top tweets, and followers' activities can be measured. All this would give a fair idea about the success or failure of the marketing campaign.

Social media analytics can help organizations learn from their competitors. By analyzing the social media activity of competitors, organizations can understand what new product launches are happening, how the customers are reacting, what are the good/bad product features, the kinds of complaints customers have, etc. This analysis could lead to prevention of similar mistakes by the company that is analyzing the data.

The use of social media in trading and investing is well documented. In financial markets, information and the speed of information is the key. Short-run movements in the Dow Jones average can be quite accurately predicted through the sentiments expressed in tweets, thereby giving an edge to traders able to make such predictions.

Soft and Hard Skills

On the jobs front, analysis of social media sites like LinkedIn could help users comprehend the types of jobs that are aplenty. They could also help indicate supply and demand for various skills in the jobs market. This kind of social media analytics could be most useful to MBA students who are about to get into a full-time career.

A quick search on the internet for most sought-after soft skills that companies are looking for in 2019 are creativity, persuasion, collaboration, adaptability, and time management. The most in-demand hard skills are cloud computing, artificial intelligence, analytical reasoning, and user interface design.

Another important aspect of business that could be strengthened by the right use of social media analytics is problem resolution. If a customer complains about a product or service on social media, the company should try to resolve the issue in a timely manner, in real time if practically possible. If the social media analytics reveals a sizeable number of complaints about the same service or the same feature, then the company can take stronger action to rectify the problem: changing/correcting the feature, replacing the person handling the issue, or maybe even re-launching the product/service with improved performance.

Management Initiative

In all this, the management professionals in any organization would play a key role, as they are the decision-makers. If they understand how to use social media analytics, then the job for any organization would become easier.

Any analytics starts with defining objectives clearly, asking the right questions, collecting the right data, analyzing the data and, finally, gathering insights from the analysis. The two most important links in the analytics value chain are clear objectives and asking the right questions. If these two aspects can be somehow hard-wired into the brains of management professionals, right from their MBA days, the outcomes would be better.

MBA curriculums have many analytical subjects these days. Introducing social media analytics into the curriculum would be an added advantage. The topics to be covered should include open-source programming languages like R or Python.

However, it needs to be realized that there are two sides to every coin. Social media analytics can also be used to influence outcomes illegitimately. Cambridge Analytica, a London-based election consulting firm, was in the news for analyzing data from an estimated 50 million Facebook profiles for insights that were used to influence election results in the U.S. and other countries. Online materials favoring candidates were delivered to individuals based on their psychographic profiles. This was a wrong and sinister use of social media analytics that compromised personal information and wrongly influenced election outcomes. Hence, the study of social media analytics must have an ethics component as well.

Who Will Act on Income Inequality?

Because of its far-reaching consequences, governments must be involved

This article was first published in GARP, Risk Intelligence on June 28, 2019. Co-author: Sai Nitya Bodavala; https://www.garp.org/#!/risk-intelligence/all/all/a1Z1W00000551qTUAQ

In his victory speech on May 23, 2019, India's newly re-elected prime minister, Narendra Modi, said that “from now on, India will only have two castes: the poor and those that want to remove poverty.”

Historically, the Indian government focused policymaking on alleviating the social inequality cemented by caste differences. The primary focus was bridging the gap between the upper and lower castes through financial and educational parity, like reservations in educational institutions and government jobs. Of late, however, there has been a shift to targeting policies to inequalities presented by income.

India began to face issues of heightened inequality post-1991, when economic reforms and liberalization were initiated, ending the license-quota regime, following a balance of payments crisis. Pre-reform, the public sector ensured that resources were diverted to those geographic areas that required them, and thereby leveled the playing field. After the private sector entered the playing field, however, things changed. The private sector focused on cutting costs and profit-making. Businesses moved to more developed areas where access to resources was easier and cheaper. This led to regional income inequality.

During its last tenure, the National Democratic Alliance (NDA) government, led by Modi, targeted income inequality with a bill that aims to introduce a 10% reservation in jobs and educational institutions for those belonging to the “economically backward” sections of the general category. Economically backward is defined as families receiving less than Rs. 800,000 of income per annum and possessing fewer than five acres of land, in addition to other measures based on residence.

In the recently held elections, the Congress party's manifesto also incorporated an element that aimed to do the same. It proposed the Nyuntam Aay Yojana (NYAY) scheme, according to which 50 million of the poorest families in India would receive Rs. 72,000 a year. It was assumed that each family has at least five members, meaning that 250 million people would benefit – if the Congress party had come to power and implemented scheme.

UBI and Wealth Taxes

India is not alone in moving toward policies that aim to reduce income inequality. Andrew Yang, a candidate for the Democratic presidential nomination in the United States, has based his campaign on the idea of Universal Basic Income, which guarantees to each adult a certain amount of money per month. Yang proposes to pay for UBI through a value added tax (VAT) and the revenue from the envisaged increase in productivity from receiving an unconditional cash transfer.

Billionaire philanthropist Eli Broad, writing in the New York Times, said, “Our country must do something bigger and more radical [than steps such as raising the minimum wage and building affordable housing], starting with the most unfair area of federal policy: our tax code. It's time to start talking seriously about a wealth tax . . .

“Don't get me wrong: I am not advocating an end to the capitalist system that's yielded some of the greatest gains in prosperity and innovation in human history. I simply believe it's time for those of us with great wealth to commit to reducing income inequality, starting with the demand to be taxed at a higher rate than everyone else.”

If governments are attempting to curb income inequality, it is only right to explore why.

The Bigger Picture

The Gini coefficient is used to measure income inequality. On the scale of 0 to 100, 0 is perfect income equality, with everyone receiving an equal amount. At 100, there is perfect inequality, with one person receiveng all income.

Studies have found that low levels of income inequality may actually be beneficial for the economy.

Income inequality denies educational and culturally stimulating opportunities for children from low-income households. This deprivation keeps them from obtaining relevant skills that the job market requires, making them less employable. They end up being paid low wages.

The wealthy, meanwhile, produce with the intention of earning profits. If the masses cannot afford to buy what is produced, the wealthy suffer losses, leading to their inability to reinvest, and making the economy worse off. Income inequality at a level below 27 on the scale allows for entrepreneurs to invest more into their businesses, thereby allowing for greater economic growth. On the other hand, a high level of inequality has a snowball effect, with negative repercussions for all.

A 2015 study by the Organisation for Economic and Cooperation and Development (OECD) found that between 1990 and 2010, the rising income and wealth inequality in the U.S. “knocked about five percentage points off cumulative GDP per capita over that period.” It is thereby a misconception that income inequality is an issue only of those in the low-income bracket. It affects the economy as a whole.

Crime

A paper by Nobel Prize-winning economist Gary Becker, “Crime and Punishment: An Economic Approach,” posited that wherever there exists a large gap between the poor and the rich, there is bound to be higher crime. OECD's 2013 How's Life report also noted that “socio-economic inequality seems to play a central role in the occurrence of criminal victimization as disadvantaged people are more likely to perpetrate and to be victims of crimes.”

Those in the lower-income bracket become vulnerable in that they are unable to access the resources that are abundantly available to those with money. This vulnerability manifests in two ways: they may either take to crime in order to meet their needs, or become victims of criminal activity because they do not have the means to protect themselves.

According to Martin Daly, professor emeritus of psychology and neuroscience at McMaster University, inequality predicts homicide rates “better than any other variable.”

Health

In countries where the burden of paying for health care rests with individuals, an unforeseen expense can spell disaster for a low-income household. This could lead to compromises being made on the safety assured by an established medical practice that is expensive, in favor of one that is cheaper.

Aside from the issue of affordability, a 2017 World Health Organization and OECD report shows that in countries where the income gap between the 10th and the 90th percentile of the populace is very wide have higher rates of infant mortality.

Mental health also suffers as a consequence of inequality. It was found that with an increase of 0.2 of a country's Gini coefficient, there were eight more incidences of schizophrenia per 100,000 people.

Caste

According to the 2018 World Inequality Report by the World Inequality Lab at the Paris School of Economics, the top 10% in India control 55% of India's total wealth. In light of this undeniable problem, we may not, however, conclude that caste can no longer be a basis for identifying inequality. Caste has been and continues to be a basis for discrimination and ill-treatment in India. The ill-effects of negative discrimination based on caste and those of income inequality are similar. The effects include being denied social mobility, occupational mobility and access to basic resources.

The intrinsic link between income inequality and the caste hierarchy can be seen in the table.

	Scheduled Caste	Scheduled Tribe	Other Backward Castes	Forward Caste (Brahmin)	Forward Caste (Non-Brahmin)	Muslim	Average
Annual Consumption of households in Rupees	89,356	75,216	104,099	167,013	164,633	105,538	113,222

Source: The Economic Times

It is evident that those who belong to the backward classes spend (consumption as a proxy for income here) far less than those belonging to the forward caste categories, as well as the average. It is also interesting to note that religious minorities such as Muslims also earn less than the average.

There exists a simplistic notion that taxing the rich and handing money to the poor is an effective solution for income inequality. It is erroneous. Income inequality is a result of problems and prejudices that are far more deeply rooted, such as the torment inflicted by the caste system. Both must be tackled simultaneously, since continued discrimination based on caste will only impede progress made on the income equality front. 

Lack of Reliable Data

Most studies in India, such as those of the National Sample Survey Office (NSSO), focus on consumption or wealth rather than on income. Official estimates of inequality present a picture that doesn't seem alarming, while other surveys, like those of the India Human Development Survey (IHDS), present a high number.

To add to the confusion, People's Research on India's Economy (PRICE) found that the number may be lower than what the IHDS suggested. The different methods by which studies gather data on income are bound to suggest varying figures for inequality. Some studies rely on tax filings, some on survey data and others on national statistics. The paucity of accurate data implies that the policies implemented may not yield optimal results.

Conclusion

Income inequality is today's reality. Considering how important parity is for the development of the country, the issue must be continuously addressed in order to be mitigated.

In the past, the Indian government has dealt with income inequality by providing employment opportunities and direct benefits, while private players have managed to contribute to the shrinking of this chasm through corporate social responsibility (CSR) activities. The evidence suggests however, that the government schemes could be better implemented and thought out.

The NDA government showed intent to overcome this issue in their previous tenure, and Modi's speech has inspired confidence that they intend to carry out their promises in the next five years. All that is left now is for them to act decisively and show lasting results, because although the private sector has a role to play, the ultimate responsibility of dealing with income inequality must lie with the government.

Pledging Shares and the Mirage of Prosperity

This article was first published in Business Standard on June 24, 2019. Co-author: Prof. Kavil Ramachandran.
https://www.business-standard.com/article/opinion/pledging-shares-the-mirage-of-prosperity-119062300819_1.html

Pledging shares has become an easy option to raise funds, even for many well-known business families. Unfortunately, they do not seem to visualize scenarios where the optimistic assumptions about future performance may not always materialize. As of May 2019, 62% of all listed companies in India had pledged at least some (in a few cases all) of their promoters holding. As many as 193 companies’ promoters had pledged 75% or more of their shares and 327 companies’ promoters had pledged at least 50% of their stake. The scenario of lenders liquidating the pledged shares of defaulted borrower is very scary.

Background to Pledging of Shares

Pledging of shares where promoters use their shares as collateral to raise money is not a new phenomenon but has become popular amongst promoters in recent years. It was after the scam involving Satyam Computers in 2009 that SEBI made it mandatory for promoters to disclose to the stock exchanges of any pledging of shares.  It is often understood as pawning the “family jewel” as a last resort to tide over difficult times. Stock market sees it as a sign of weak financial position of the promoter. Promoters often pledge shares for personal use like investment in another venture or buying more shares of the company. Pledging shares in a “cash cow” company to fund a risky untested startup or a fledging business may spook the investors.

Similarly, when the promoters pledge their shares to buy more shares of their own company, on the one hand it signifies that the promoters think the share is undervalued and/or have confidence in the prospects of the company. It therefore should send a positive signal to the market. However, promoters are not only putting more of their eggs in the same basket but also taking on leverage to do so. Adding to this, the increase in control in the company is based on information asymmetry that exists between the promoters and the minority shareholders. This gives rise to insider trading and governance concerns. In a recent amendment to insider trading regulations, to promote fair market conduct, SEBI has plugged this gap by closing the trading and pledging of shares window for the promoters starting from the end of a quarter to 48 hours after the declaration of quarterly results by the company.

Dangers of Pledging

Trouble begins when the value of the pledged shares falls below the agreed level with the lenders.   Many promoters get into the trap of pledging more shares to fill the drop in value in the hope that they will soon be able to revoke the shares by repaying the amount to the lenders.

When stock prices fall or go in a downward spiral and the promoters are no longer able to either pay the money or pledge more shares, the lenders invoke the shares, and sell them in the open market. The promoters may even end up losing control, as has happened with a few companies recently.

The implications for business families are grave, particularly with a lot of their family wealth blocked up in the business. Family splits, loss of reputation and bleak career possibilities for the next generation do happen in such cases, resulting in formation of entirely new trajectories of life for everyone.

Way Forward

In a rapidly growing economy, entrepreneurial promoters naturally tend to assume that the rising graph of growth and prosperity will never fall. This is a myth. Pledging beyond small quantities is very dangerous, like over leveraging. Shares are virtual collaterals with very high potential for volatility, due to known as well as many unknowns, including news or events that are totally not related to the company, its performance or management. There is a huge possibility of share prices falling anytime.

Most bankers and lenders fail to learn from history that in a crisis, most assets become illiquid. Most of the risk models do not account for illiquidity. They assume that markets are perfectly liquid. However, that is not the case. Lenders often invoke the pledge and dump shares in the market at very low prices, translating the already downward spiral into a shock. Financial Institutions need to have built-in mechanisms and standards to ensure that investments are made in assets that can be liquidated at the lowest possible cost.

SEBI must also put in place a limitation to the percentage of shares that can be pledged, including the cumulative pledged shares after margin calls. Having pledged most of the shares and yet maintaining the voting rights may seem like a good situation to the promoters when in reality their fate is hanging by a day’s movement on the stock exchange. Or, pledging should also suspend voting rights till the pledge is not revoked. If the promoters need to raise more money, they should take a conscious decision to sell their stake in a phased manner or through a strategic sale.

The board of directors must also assert and prevent promoters from taking this treacherous road to the mirage of prosperity. As the custodian of the wealth of all stake holders, the board has a vantage view of the things to happen. It has to exercise its rights instead of being a rubber stamp.

(Bang is Associate Director and Ramachandran Professor and Executive Director at the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business).