Friday, July 22, 2011

Is it time to review additional responsibilites given to practising professionals?

In the recent years, the response of every professional institute(ICAI, ICSI, ICWAI) to corporate scams, is to indirectly demand additional work for their members. Whether it be precertifying annual returns, allowing fast track process for optionally precertified forms(like availability of name application approved instantly online in such cases), increasing number/scope of audits(secretarial audit, borrower compliance certificate etc), the desired and conferred work have only increased.

But in their zeal to get assignments and execute them quickly, are professionals blindly signing forms? In a June-11 circular(, the Ministry of Company Affairs pointed the case of 11 companies(including a few listed companies like Raj TV) where a basic data field(number of shareholders) was given absurdly high/low numbers which besides being patently absurd violated even the statutory norms/previously filed returns. This reflects poorly on the preparer(company) but even more on the certifying professional, who receives his fees for verifying the return. There is no excuse for this lapse, because even a cursory sanity check would have revealed the absurdity of this.

With responsibility comes accountability. If professionals do not show themselves to be worthy of this trust, then their license to practise should be suspended. Alternately, we should bar such professionals from practise for say 1 month, to set an example for others. After all, the need of professionals was precisely to prevent such garbage values, but now this is happening.

Wednesday, July 20, 2011

Anti Naxalite militia Salwa Judum-a case of police outsourcing gone too far?

Before reading the entire judgement(, I was taking the ultra right view that the Supreme Court is playing into the arms of Naxals, and endangering national security. But after reading the entire judgement and reasoning, my ideas changed too much.

This month(July 2011), the apex Indian legal court(Supreme Court) declared unconstitutional, the tribal militia armed and financed by the State of Chhatisgarh. For some background, note that the Maoist Naxal violence earlier confined to the mineral rich belts of Orissa, Chhatisgarh, Jharkhand etc is now spreading to all deprived areas including Maharashtra, AP etc. An estimate is that 100+ Indian districts are now under the Naxal sway. Besides issues of internal security, this also holds up 'development' projects-both by Government and private sector. The conventional police means have not worked, so the State Governments are trying all means like amnesty schemes, arrests of supporters and special tribal compsoed state sponsored(Indian government often funded upto 80%) militas like the Swala Judum/Koya Commandoes. It is this last one which was under appeal.

The press and 'Civil Society' activists have largely opposed it on ideological grounds-that the State cannot arm tribals, that they are used as cannon fodder etc. These grounds may be valid, but they are policy choices which even courts cannot question. What was questioned(and grounds for holding the militia unconstitutional) was
  1. State abdicating its responsibility to police:- Salwa Judum was seen as an 'off balance sheet' police force, with arms loaned to them, and money given as 'stipend'. The State did not have to contend with tricky questions on human rights violations etc. The Court objected to the State relinquishing its monopoly on violence
  2. Unfairness to tribals:- While expected to do similar duties, under like disciplinary codes and exposed to greater risks, the SPOs just got a 'stipend' and a 'temporary appointment'. No special counter insurgency training was given to them, thus causing risks to both themselves and society. It is therefore unfair under Article 14. Contrast this to the Greyhound force in Andhra Pradesh of simillar composition/objectives, but with a critical difference, that Greyhound staff was part of the AP police, and given superior training/status. This did not happen in Salwa Judum, reading to much higher death rates of 6%, compared to 1%(average) for Central & State forces.
  3. Questionable motivation:- Both army and police recruitment tests apply psychological screens to weed out vigilantist/paranoid personnel, or those who cannot act coolly and dispassionately.  This may lead to field mistakes/massacres, but also far graver consequences.  Local enmities, normal social conflict, and even assertion of individuality by others against over-bearing attitude of
    such SPOs, could be cause to brand persons unrelated to Maoist activities as Maoists, or Maoist sympathizers.
  4. Post termination consequences:- A SPO could be terminated for far lesser cause and without appeal, than a regular police constable. His erstwhile opponents(Naxals) would target him both for his past actions, and then for his special knowledge on informers, operations etc. In that scenario, the sacked SPO would refuse to surrender arms and may pose a risk to society. And when India does not have a witness protection scheme or a way to protect high risk targets(except jail), his concern would be valid. Given that 1200+(out of 3000-6500 SPOs) were sacked since inception, this problem is not a small one.
The way forward:- The argument of Salwa Judum being a 'force multiplier' has been rejected. So unless the Government inducts these milita members into the police, there seems little scope to comply with the SC ruling, as disarm net is otherwise impossible. And hopefully, police outsourcing next time will be less blatant. India does not have its Blackwaters yet, so till then only the State can do the policing function.  

Saturday, July 2, 2011

RBI mandates banks to ensure 'reasonable property prices'-how to implement?

While reading the RBI master circular on Housing Finance issued in Jul-11(, one condition was that banks could extend term loans to builders only for specific projects(no general loans), and not for land acquisition(even as part of project). The subsequent text made my jaw drop.

Care should also be taken to see that prices charged from the ultimate beneficiaries do not include any speculative element, that is, prices should be based only on the documented price of land, the actual cost of construction and a reasonable profit...
 Has anyone even thought about how will the banks enforce this? For a sector without a price regulator, with no accepted costing standards and with so much opaqueness, who will make this work. Let us see each of these 'price elements' which the RBI desires.
  1. Documented price of land:- Land transactions involve substantial amount of black money. But accepting the principle that Govt should punish black market deals, this is fine-punishing the builder for undervaluing the land procurement cost.
  2. Actual Cost of Construction:- What about overheads, interests, construction delays(avoidable costs) etc? We do have accounting standards for all of them, but they need to be audited, on a project basis,  to be of any use
  3. Reasonable profit:- Who determines this? Market(via P/E/ROE/markup) or Govt(price cap etc). This determination is an open invitation to rent seeking.   
Good intentions are fine, but why play to the gallery to mandate something which you know cannot be enforced? This will only give RBI the excuse to point fingers at lending banks, when blamed for rising prices. And at worst, banks may curb term lending and structure it differently. However one slices it, this is just not done.