The Power of Democratized Data

This article was first published by Global Association of Risk Professionals, Risk Intelligence, on September 21, 2018. Coauthor: Sanjay Fuloria

https://www.garp.org/#!/risk-intelligence/technology/data/a1Z1W000004B9QmUAK

How readily available data sets and crowdsourcing can promote problem-solving and policy solutions

While reading a post on the Reddit social news aggregation site, we were amazed by a link to download government data. The data pertained to parking tickets issued by the Chicago Police Department over a decade. The data was anonymized but had all the details regarding the reasons for the tickets and demographic details of the violators.

The local government put this data up in a comma separated value (csv) format to invite inputs from researchers and intellectuals for help in policy formulation. This would improve the performance of the police department. They could answer questions, for example, about gender or racial bias in issuing parking tickets.

This approach should be used by the Indian government at the Center, and by state governments and local civic bodies. Anonymity is important to maintain, but other than that, there is no reason why this data should not be made available to the public at large for analysis. While the government has started data.gov.in, the amount of data available there is pretty limited.

Apart from that there is this need for accuracy. We compared the actual seasonal rainfall data for the state of Telangana on two government websites, www.imd.gov.in and http://www.tsdps.telangana.gov.in/. 

They were not the same. As per IMD, the actual rainfall to date was 665.8 millimeters as of September 5, 2018, which is 6% in excess of the 50-year Long Period Average (LPA). The other website showed rainfall of 584.8 millimeters as of September 7, 2018, which is a 7% deficit. 

IMD publishes data weekly, whereas the Telangana data is daily. Which to believe? It looks like the two agencies don’t talk to each other. No wonder the forecasting models used by these government agencies are far from accurate.

The data availability would enhance the scope for better inputs to shape public policy. The areas could be as diverse as traffic management, crime control, queuing in hospitals, school admissions, etc. The government could in fact have contests, with prizes given for best policy recommendation or for the best machine learning algorithm to solve a particular problem.

Downloadability

The government could take a cue from the likes of Kaggle, where such contests are the norm. On Kaggle, a lot of companies provide their data free of charge to solve their problems. The only requirement is the availability of data in an easy to download format.

The census data available through www.censusindia.gov.in is very difficult to download. The navigation of the website is itself a bit challenging. The data sets are distributed into different files. The best alternative would be to make it available in one file and at the village level. Such granularity is needed for analysis and to make sense of data.

Census data, if easily downloadable, could lead to a lot of analysis. Much of it would be superficial, but some would definitely be meaningful and could be used by the government to inform its policy choices. 

As James Surowiecki says in The Wisdom of Crowds, “A diverse collection of independently deciding individuals make better predictions than individuals or even experts.” The wisdom of crowds can be leveraged.

While financial data is made available by the government, data on other socially relevant fields can be hard to come by. With so many open source tools available for handling the data, it has become relatively easier to make sense of data. Moreover, there are many MOOCs (Massive Open Online Courses) available to whoever is interested in learning data handling.

With the democratization of education, it is high time the government thinks of democratizing data. We are not saying data privacy is not important, but as long as the details don’t identify an individual, it should not be an issue. Let a hundred flowers blossom.

Family firms up stake over last decade in India: Research

Promoters of family firms have increased their stake in their NSE and BSE listed companies over the last decade, findings of a research study released here today revealed. 

Indian School of Business (ISB)'s Thomas Schmidheiny Centre for Family Enterprise conducted the research study "Family Businesses: Promoters' Skin in the Game 2001-2017," which reveals the pattern of increasing stake of promoters in NSE and BSE listed family firms. 

The study, conducted by Dr Nupur Pavan Bang, Professors Kavil Ramachandran and Anierudh Vishwanathan of the Centre and Professor Sougata Ray of IIM Calcutta, provides insights into the ownership pattern of family firms in comparison to the non-family firms and also explores the heterogeneity within family firms. 

It is a first-of-its kind research study that presents and analyses the trends in equity ownership by various classes of shareholders for 4,615 firms listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) of India, across different ownership categories, for the period 2001- 2017, according to ISB. 

The research study attempted to give a bird's eye view of the shareholding pattern of listed Indian firms. 

Dr Nupur Bang said, "We found that promoters of family firms have increased their stake in their companies over the last decade, while State owned Enterprises (SOEs), Other Business Group Firms (OBGFs) and Standalone Non-family Firms (NFs) have witnessed a decline in promoter shareholding." 

This, she said, reinforces the preeminent role of family-controlled businesses in India. 

It seems to imply that the engine of growth of Indian businesses would not be dependent on overseas or other promoter categories. 

Instead, promoters of family firms would continue to play a major role. 

Executive Director of the Centre, Professor Kavil Ramachandran said the ownership pattern of listed businesses in India is fairly concentrated, especially in the case of family firms, SOEs and MNCs. 

While this has significant positive effects, there is also a need to keep close vigil on their governance practices, he added. 

The research study found that while the concentration of promoters' shareholding is decreasing in non-family firms, it is increasing in the family firms. 

By steadily increasing their shareholding in the firm, the promoters of family firms, both family business group firms (FBGFs) and standalone family firms (SFFs), were signaling their growing confidence in the potential of their company, thereby instilling confidence among the investors. 

Promoters of MNCs have also increased their stake in their Indian subsidiary, probably indicating their belief in the 'India story.' 

The promoter stake in SOEs has been steadily falling over the past decade. 

This is in line with the policies of the successive governments in India to divest their holding in the SOEs. 

OBGFs and standalone non-family firms (NFs) have also witnessed a decrease in promoter shareholding. 

Non-promoter institutional shareholding is lower in family firms when compared with non-family firms and it has decreased further between 2007 and 2017, the study noted. 

The press release was covered in several newspapers, magazines and websites, including: Business Standard, The Hindu Businessline, BL on Campus, Times of India, Business Standard, The Economic Times, ETCFO, Financial Chronicle, Financial Express, Asian Age, Deccan Chronicle, India Today, Business Today, The Week, Telangana Today, Eenadu, Sakshi, Andhra Jyothi, Hans India, PTI, Millenium Post, IndiaFinancenews, Newsfeed.co.in, Devdiscourse, Dailyhunt, Bullfax.com, Hunterinfo.in, Technologyforyou,com

Entire study can be accessed and read at: https://www.isb.edu/sites/default/files/Family_Business_Promoters_skin_in_the_game_1.pdf

India’s Big Bank Heist

A record fraud prompts more insistent calls for improvements in an industry grappling with ongoing loan problems.

This article was first published by Global Association of Risk Professionals, Risk Intelligence, on August 03, 2018. Co-author: Anisha Sircar; https://www.garp.org/#!/risk-intelligence/culture-governance/conduct-ethics/a1Z1W000004AsL3UAK

In an article last year, India Confronts Its Non-Performing-Asset Crisis, we wrote about the rise of NPAs in India and how banks and the government had been managing the concomitant stress on its crisis-ridden banking sector. 

Failure to take decisive action regarding mounting NPAs was seen as perilous for the overall economy. Stronger auditing systems and punitive measures have been proving increasingly necessary to curb the festering of bad loans and wilful defaults across the country's public and private banks.

Since 2017, a lot has happened. Nirav Modi and Mehul Choksi have emerged as poster boys for credit-related fraud involving Punjab National Bank, Axis Bank, and Allahabad Bank, with implications for the general stability of the banking system.

Here, we deconstruct the mechanisms that enabled these crimes to occur and look at lessons that can be gleaned from what has been billed as the biggest fraud in the history of India’s banking sector.

The Fraud Is Revealed

In March 2018, Finance Minister Arun Jaitley told Parliament that 1,213 fraudulent letters of undertakings (LoUs, which are letters from one bank to another assuring that a loan will come through by a specified date) had been issued on behalf of companies belonging to Nirav Modi and Mehul Choksi over the previous seven years. 

As it turned out, Modi had acquired these LoUs with the involvement of two employees from Punjab National Bank (PNB) and conducted fraudulent transactions worth Rs. 114 billion, according to initial reports.

Basically, a number of partnerships owned by Modi and Choksi – Diamonds R Us, Solar Exports, and Stellar Diamonds – approached PNB with requests for buyer's credit, to make payments to overseas suppliers.

PNB's letter to the National Stock Exchange and Bombay Stock Exchange, informing them about the fraud a day after it came to light, stated, "Based on these [fraudulent] transactions, other banks appear to have advanced money to . . . customers abroad.”
In other words, based on fraudulent guarantees, banks in India were requested to advance funds to international clients and suppliers through unapproved sanctions issued by certain employees at PNB.

While shares of other banks such as Union Bank of India and Allahabad Bank fell immediately after the fraud was revealed, PNB suffered the most, having lost at least 10% of its market capitalization immediately following the news. Most public-sector bank stocks have been in free fall since February, but PNB has witnessed the largest decline.

(Prices in Rupees)

Source: Bombay Stock Exchange

As shown in the graph, PNB’s shares fell by about 55%, from a closing price of Rs. 171.25 in January when the fraud was revealed, to Rs. 78.7 in July. The scam, a reported swindle of Rs. 143 billion at a time when public-sector banks were already ailing, began highlighted an immediate need to implement more effective practices in the Indian banking system.

How Did They Get Away with It?

Firstly, staff at PNB were hand-in-glove with Nirav Modi. PNB employees.

Gokulnath Shetty and Manoj Kharat approved loans for Modi’s companies to buy and import diamonds for little or no collateral over a reported seven-year period. The fraud came to light when representatives from diamond-importing companies owned by Modi came to PNB’s Brady House branch in Mumbai to ask for LoUs and insisted that they had secured LoUs previously without providing collateral.

Ordinarily, when one of Modi’s companies was borrowing U.S. dollars to fund American diamond purchases, PNB would send a letter in the name of one of Modi’s import companies to the New York branch of another Indian bank, from which Modi was borrowing the dollars. The second bank would then deposit the money into PNB’s nostro account in a U.S. institution, and PNB would release the money to Modi’s company. PNB would repay the lending bank with interest in dollars, while Modi’s company would repay the amount to PNB in India.

But, on the day in mid-January when Modi’s companies applied for new LoUs, the official in charge asked for collateral, and Modi’s executives demurred, stating that they had acquired many letters in the past without being asked to provide collateral. 

When bank officials proceeded to check their database and SWIFT (Society for Worldwide Interbank Financial Telecommunication) records, they found that unapproved LoUs for little or no collateral had indeed been issued to Modi’s and Choksi’s companies since 2011. As the probe deepened, it found that newer LoUs had been requested to pay debts incurred by earlier ones.

Because the bank’s database hadn’t been updated, and SWIFT messages weren’t integrated with customer records, the transfers hadn’t triggered any warnings, and the two diamantaires were able to get away with it for so long. This was the primary vulnerability that invited the attack. The slope might have continued if Gokulnath Shetty hadn’t retired in 2017.

Secondly, lapses in communication facilitated the fraud.

Concurrent auditors that validate transactions on a daily basis neglected to reveal the fraud, and the funds moving in and out of PNB’s nostro account should have raised a red flag when they didn’t square with the actual amount approved by the bank. Further, PNB stated that it did not receive a crucial directive sent out by the Reserve Bank of India (RBI) in November 2016 asking all commercial banks to strengthen their risk mechanism to avert frauds such as these.

After the scam broke out, the RBI sought a compliance report from all banks, including PNB, which could have prevented the fraud. But PNB denied ever having received it. With stronger control mechanisms monitored by the RBI to ensure security, more effective communication at every level, integration of the SWIFT and CBS (Core Banking Solution), and stronger auditing measures, the fraud could well have been prevented in any bank.

The Continuing NPA Crisis

Non-performing asset and loan frauds, which are cases where borrowers intentionally deceive lending banks by deferring the repayment of loans, continue to be a massive problem. World Bank data reveals that India is among the top 30 countries in the world in terms of non-performing loans to total gross loans. The RBI's statistical tables show that NPAs have been on an upward trend since 2012.

(Amount in Billion)

Source: Reserve Bank of India

Source: Reserve Bank of India

According to a Reuters report, bad loans surged to a record $149 billion last year. An RBI response to a right-to-information request showed that 8,670 loan fraud cases totaling Rs 612.6 billion occurred over the last five financial years, up to March 31, 2017.

Also, in February this year, the Rs. 36.95 billion Rotomac case involving wilful loan defaulting came to light, as did the mounting loans of Videocon, driving home the urgent need to plug every loophole that has been deepening the dilemma of loan defaulting. These cases expose the magnitude of the problem in a banking sector that is increasingly under the hammer for poor lending practices.

Stronger Regulation

As such, regulators have sought to strengthen measures to have banks fully disclose bad loans, speed up their recovery through recapitalization, and start actively highlighting cases of fraud, without concealing them as cases of NPAs.

Last year, the government said it would inject $32 billion this financial year and the next. In the wake of PNB and Rotomac, the RBI sent out a circular revising its Insolvency and Bankruptcy Code (IBC) and redefining some its “defaulting” taxonomy, stating that a company must be termed a defaulter if it fails to repay a loan within 91 days. 

Despite bankers and companies being unnerved by the new clauses, and lobbying with the center to reconsider, the RBI expressed strong objections to relaxing the new norms.

Regulatory steps such as these seem well-intended and capable of making an impact in the long run. But for real change to occur, the fundamentals need to be addressed. People need to start acting in a more moral manner, for which one might need to face a much stronger penalty. Financial crimes such as these could perhaps be avoided by borrowing from the conceptual predicament of ensuring everybody's skin is in the game.

While the extent of the fraud is unmatched, the case of Nirav Modi is not isolated in India and has been allowed to continue with frequency due to systemic issues such as corruption, poor lending practices, failing monitoring mechanisms, communication lapses, and technological issues.

Apart from regulatory reforms, ultimately, perhaps the only way to ensure that people don't take undue risks is by making sure they have to share in the risk-taking.

With one's personal liability at stake, it would be considerably more difficult to make less responsible choices and challenge the larger interests of society, and thereby arrive at a state of exponentially growing Naturally Performing Assets restoring India's banking sector.

Of challenges and choices facing working women

This article was first published in Fortune India on August 3, 2018. Co-author: Sai Nitya Bodavala;
https://www.fortuneindia.com/opinion/of-challenges-and-choices-facing-working-women/102241

Women are climbing up the ranks to reach the highest echelons of an organisation, but much more needs to be done if the workplace is to become truly inclusive.

Last year, Nisaba Adi Godrej, daughter of industrialist Adi Godrej, was appointed as executive chairperson of Godrej Consumer Products Ltd; she was 39. The Harvard-educated scion of the Godrej group has played a major role in the meteoric growth in market capitalisation of the company ever since she was inducted into the company in 2000. 

Dhivya Suryadevara, also Harvard-educated, chief financial officer designate of General Motors (GM), is 39 years, too. Her growth at GM has been stupendous.

These women being educated at Harvard and given key roles at their organisations at the age of 39 are just coincidences. Nisa is from a business family, while Dhivya joined GM as a professional.

Both have carved a niche for themselves in the corporate world. On the one hand, we have such role models and on the other, participation of women in the workforce in India is on the decline.

 According to data from the World Bank, the female workforce participation (as a percentage of total workforce in the country) was approximately 28% for India in the nineties. It declined to 24.5% in 2017, while the global average has been around 39% throughout.

Various studies have pointed out that increased participation of women in the workforce will have a significant positive impact on the GDP of nations. Yet the decline, in India, is not really puzzling. At the heart of the matter is the deep-rooted patriarchal society that has defined the central role of women as homemaker.

What is keeping women away?

Literacy rate: Women accounted for a large part of the workforce in agriculture. Over the last few decades, owing to uncertainties associated with agriculture and better opportunities in manufacturing and services sectors, many families have moved away from farming.

However, the women in these families continued to work on farms, as they were not educated enough to find other work. According to data from the last census, in 2011, the literacy rate for women in rural areas was only 59% as against 79% for men; in urban areas it was 80% when compared with 90% for men.

Socio-cultural causes: Despite a history of women contributing on farms in the agrarian Indian society, as the country gradually started to industrialise and urbanise, societal expectations were that a woman’s primary duty involves caregiving and child-rearing.
It was an unspoken rule that she must obtain the approval of her family if she wished to work. It was thought shameful if one’s wife or daughter goes out to earn money instead of staying at home.

Unpaid work: Hiring processes have not been immune to the patriarchal manner of thinking. It is assumed that women have to keep up their primary duties, and therefore are a bad investment. The first part of this assumption is true in most cases making it very difficult for the women to juggle roles.

McKinsey Global Institute estimated that when compared to men, women perform 9.8 times more unpaid work in India (globally it is three times) and if they were to be compensated, it could add an additional $0.3 trillion to India’s economic output.

Lack of infrastructure and sensitive policies: When a woman secures a job, lack of safe transport facilities, and dearth of crèches at workplaces hinder their progress and mobility. Further, corporate policies are largely designed to rule out ambiguity.

In the process they become inflexible. Yet, to attract more women to the workforce, flexible timings and focus on achieving targets would be needed rather than stipulations such as physical presence from 9 to 5.

Pay gap: Gender pay gap is the difference in the average hourly remuneration earned by men and women. According to the World Economic Forum’s 2017 report on the Global Gender Gap, it will take about 217 years for the disparities in employment opportunities and wages, to disappear.

According to the latest Monster Salary Index, the gender pay gap in India across all sectors averaged at 20%. Manufacturing industry has the highest pay gap at 34.9% closely followed by the IT industry at 34%. Financial services and communications sector has the lowest pay gap at 17.70%. Pay gaps are demotivating and fills one with a feeling of being less worthy.

Let the tail become fatter

Considering the massive opportunities in terms of GDP it only seems right to take steps toward the achievement of equality in the workforce. The banking sector has shown promise in this regard. The sector realised the need for gender neutral policies early on. As a result, we have seen many women who have risen up the ranks to reach the highest echelons of an organisation, such as Arundhati Bhattacharya, former Chairman of the State Bank of India, and Kalpana Morparia, CEO of JP Morgan India.

Similarly, many family businesses have been encouraging women from the next generation to play active roles in the business. The involvement of women in boardrooms and in senior leadership positions has increased the focus on issues faced by women in organisations.

Many of the next generation women leading family businesses are making their firms sensitive to the needs of women employees.

Dhivya and Nisa seem like outliers. It can be argued that they were fortunate. But the tail is becoming fatter. The mean is shifting to the right. According to McKinsey Global Institute, even if India does not achieve its full potential, under best-in-region-scenario, a further $0.7 trillion could be added to the GDP by 2025.

Non-participation versus inequality

Amartya Sen, Nobel prize winner for Economics, in his book Inequality reexamined advocated the capability approach to measure equality. He showed that equality can be measured in much wider terms such as empowerment, quality of life, choice of living the way they want, and so on, not just in terms of monetary or economic output (as the debate on gender parity is being made out to be).

“The pervasive diversity of human beings intensifies the need to address the diversity of focus in the assessment of equality,” Sen writes in his book. For example, Sindhu Mohan, a post-graduate from a premier management institute in India, chose to retire to a life with kids, friends, travel, books, sports and fun after a few years of slogging it out as a banker.

There is no inequality in play in her case. It is a choice. Hence, not all non-participation in the workforce can be termed as inequality.

What is important is that if a woman wishes to work, and is as capable as a male counterpart, she receive equality in all aspects. In conclusion, capability and not gender should be the deciding criterion for a job.

Finally, the mindset of men needs to change if true gender parity, in terms of capabilities, choices and opportunities is to be achieved. The men need to be ready themselves for an equal society as the women march forward despite the challenges.

Is India’s QIP Destroying Investor Wealth?

This article was first published in the Global Association of Risk Professionals on June 01, 2018. Co-authors: Nikhil Rastogi, Chakrapani Chaturvedula

https://www.garp.org/#!/risk-intelligence/market/financial-markets/a1Z1W000003ImP8UAK

Analysis indicates that an institutional share-issuance program is associated with lower shareholder returns.

Imagine you are an investor in one of India’s listed companies whose share price is Rs.100. You come across an announcement that the company is offering some shares to institutional investors at a price of Rs.95. You wonder why, but then you just let it go. 

As you track the stock price over the next few months, it falls below Rs.100 and even below Rs.95 – even as the broad market is trading at higher levels than at the time or the institutional offering. Maybe the company’s performance was bad, you wonder. But you also observe many such examples of companies trading below their offering price.

Welcome to the world of Qualified Institutional Placement (QIP).

QIP is one of the methods of raising equity by listed companies, with follow-on offer, rights and preferential allotment being the other methods. Under QIP, started in 2006 by the Securities and Exchange Board of India (SEBI) as a faster and cost-effective way to raise capital, shares are issued to a select group of Qualified Institutional Buyers (QIBs) – usually mutual funds, insurance companies, etc. – at not less than the average of the last two weeks’ high and low price (also known as floor price). A further discount of 5% on the floor price was allowed by SEBI in later years.

We reviewed the return performance of 84 QIPs from 2010 to 2016, in terms of average holding period returns for 3 months, 6 months and 1 year post the issue of QIP. Thus, we broadly analyzed whether on average investors made or lost money on QIP investments.

As depicted in the bar chart, average short-term holding period returns (3 and 6 month) are negative for all years. Excepting 2013, 1-year average returns across all years are negative or very marginally positive.

Index Comparison

 

Since the returns could be impacted by general direction of the market in a specific year, we also computed comparable, average holding period returns of the S&P BSE 500 index. For each year, we use S&P BSE 500 index price at the same time that a QIP was issued, and then use the index level 3 months, 6 months and 1 year hence to compute the returns. These are then averaged to arrive at returns for a particular period (3-month, 6-month and 1-year).

As depicted in the bar plot, 3- and 6-month returns are positive for most of the years. Except for 2015, the 1-year returns are positive for all years between 2010 and 2016.

This in essence means that QIPs have not been such a good investment for QIBs as compared to returns on an unmanaged index such as S&P BSE 500.

Now, here we are not measuring the performance of lay investors. These are expert investors getting paid to make investment decisions, and on an average they are losing money for all holding periods from 3 months to 1 year, both absolutely and relatively (compared to S&P BSE 500).

Double Whammy

Another point to note is that many of these QIPs have been issued at a discount of around 5% to the trading price (average two weekly high and low price before the QIP offer). From the perspective of long-term, non-QIB investors this comes as a double whammy. First of all, non-QIB investors are not offered shares at discounted prices; and to add insult to injury, the stocks trade below this price for the next year.

The analysis until now shows that, prima facie, both QIB and non-QIB investors are losing money for average holding periods of 3 months, 6 months and 1 year. But could it really be true for QIB investors? As per the QIP regulation, the issued shares have no lock-in period; that is, they can be sold by QIBs at any point after the issue is made.

 This is as opposed to the regulation in a preferential offer (another method of raising equity by listed companies), where there is a minimum lock-in period of 1 year – the shares cannot be sold before one year. So technically, making use of this regulation, smarter QIBs might be selling the shares so issued, thus driving down the prices of stocks.

We do not have access to detailed data of holdings of respective QIBs across different dates, and we cannot infer if QIBs are moving out of the stocks after subscribing to them. However, the results are consistent with the view that on an average QIP, shares are witnessing downward pressure on account of selling, which is leading to negative holding period returns.

This selling pressure is more likely to come from experts (QIBs) rather than others. The source of selling may be a mystery, but to retail investors, the broad message is clear: QIP could be synonymous with dip.