The Satyam of the CS profession-Company Secretaries-heal WIRC before preaching governance

The Institute of Company Secretaries of India(ICSI) is organized into 5 regional councils. Of these, the WIRC(Western India Regional Council) got a stinker in terms of adverse audit report due to financial iregularities pointed out by the statutory financial auditor-incidently a chartered accountant
https://www.icsi.edu/Portals/72/WIRC%20Annual%20Report%202015-16.pdf

The report goes into deep detail but to quote a few examples, the adverse observations include procurements at high prices without comparative quotations, organizing events in 5 star hotels without HQ approval, incurring hotel tariffs over authorized limit, purchasing luxury pens worth Rs 4 lakh and keeping with self, giving staff overtime via inflated conveyance vouchers, purchases via non substantiated invoices, giving sponsorship without written agreement resulting in potential NPAs. These observations led to AGM being adjourned, speculation in CS community and finally the supercission of the regional council, with the ICSI Central Council finally making its actions public below
https://www.icsi.edu/WebModules/Advisory.pdf

While a single instance does not tarnish a full community, the institute employees are akin to public servants, and the office bearers being elected representatives of professionals, have a duty not to bring the profession into disrepute. What happened at the WIRC ICSI appears a failure of internal control, collusion/overlooking of employee fraud by elected council members who themselves were not setting a good example. And despite the audit taking 6mths to close, the council members did not comment on the audit report and just blamed the earlier President. This is not good governance.

While this is bad for any profession, it is especially ironic that ICSI which brands itself as a governance expert, did not nip the WIRC issues in the bud. One only hopes that the WIRC issues are investigated, corrective action is taken including reprimand/dismissals so that further episodes don't repeat. And here may I point out that it took a chartered accountant to detect the fraud, and not a CS/CWA. This only reiterates that financial audit is a job best left to CAs, and that having an auditor independent/not regulated by the institute(A CA is not regulated by ICSI) does help to detect fraud.

How finance professional regulators like ICAI ICSI ICWAI are failing the public interest test

In a recent article, Prof Ajay Shah of NIFP advocated the separation of powers of professional regulators to ensure that 'poachers cannot be gamekeepers'. He cites the example of stock brokers regulation as a success model here.
http://www.nipfp.org.in/media/medialibrary/2016/07/25072016.pdf

Ever since the Medical Council of India(MCI) which was plagued by corruption was dissolved and a new body asked to be created with 4 verticals of UG education, PG education, Licensing and New College creation/Infra, there has been interest in figuring out models for others.

As regulators like CVC and CAG have put it below, professional regulation is not working enough:
http://indianexpress.com/article/business/business-others/one-in-five-cas-breach-tax-audit-norms-says-cag-report-regulator-steps-in-to-form-panel/
http://cvc.nic.in/codeethics.pdf 

My view is that unless the disciplinary arm and academic arm is divorced from the membership body, we will have issues like lax disciplinary measures, pass rate depending on economic conditions(or so it appears to the outside world) and people joining the councils for reputation/business enhancement(eg coaching class owners who are clearly conflicted) rather than public service motto

TCI sues Coal India-morally and legally flawed

For the past few months, one of the UK activist hedge funds TCI(The children's investment fund) and Coal India have been locked in a tussle, with TCI objecting to the Central Government directives to Coal India on pricing, fuel supply agreements and the like. Following standard corporate governance principles, TCI feels that a third party(the government) should not interfere in the commercial matters that are in the domain of the board. However, as my IIM Ahmedabad Professor Dr TT Rammohan commented while lambasting TCI on his blog http://ttrammohan.blogspot.in/2012/04/tci-takes-on-coal-india.html investors cannot expect a PSU to follow a private business model. Investors were well aware of this while investing in Coal India, and indeed the issue was considered underpriced by global benchmarks for many reasons including this one. Legally, the government plays the triple role of the sector regulator, majority owner of Coal India and the sovereign. These roles are often contradictory and lead to conflict of interest when 'populist' decisions/'national interest decisions' taken as a soverign/regulator conflict with the interest as a shareholder. In the prospectus risk factors(who really reads that but still its here http://www.sebi.gov.in/dp/coaldrhp.pdf), there were multiple warning points including on the very topic(public interest versus company interest) as below

• Risk factor 14- Our business, operations and prospects may therefore be affected by various policies and statutory and regulatory requirements and developments that affect the thermalpower industry in India in general or public sector power utilities in particular, including those introduced oradministered by the Ministry of Power, GoI and the Central Electricity Authority ("CEA"). 
• Risk factor 17- The price of raw coal sold under our FSAs does not fully reflect market prices for coal in India or in international coal markets. Inaddition, in the event that our production costs or other costs associated with the purchase of our coal that arepayable by our customers, such as transportation cost and statutory levies, were to increase, there can be noassurances that we would be able to increase the price of coal to offset any such increases. For policy or other reasons, we may not price our coal at levels that would adversely impact the power sector or the Indianeconomy. 
• Risk factor 55- The interests of the GoI may be different from our interests or the interests of our other shareholders. As a result, the GoI may take actions with respect to our business and the businesses of our peers and competitors that may not be in our or our other shareholders' bestinterests. The GoI could, by exercising its powers of control, delay or defer or initiate a change of control of ourCompany or a change in our capital structure, delay or defer a merger, consolidation, or discourage a mergerwith another public sector undertaking.In particular, given the importance of the coal industry to the economy, the GoI has historically played a keyrole, and is expected to continue to play a key role, in regulating, reforming and restructuring the Indian coalmining industry. The GoI also exercises substantial control over the growth of the power industry in India which is dependent on the coal we produce and could require us to take actions designed to serve the public interestand not necessarily to maximize our profits.
  

 The above risk factors made it explicit(especially risk factor 55) that the Government of India could, had and intended to act like a robber baron(as perceived by private investors). If TCI had any concerns, it should have raised it before purchasing the shares. I'm sure the Goverrnment would have been much more receptive to concerns raised during the road shows. But instead, like the anecdotal eternally optimistic wife who marries a man hoping to change him, TCI purchased Coal India shares, took the high risk approach of moral suasion/persuading the Government to change its policy, and when it failed hired its top legal gun Luthra & Luthra to try recouping its losses! One who plays with fire should not complain of getting burnt. And that is the moral side of the issue-of all people, an activist hedge fund cannot take the plea of ignorance of law/not having read the prospectus! And as Prof Rammohan points out, Coal India's high ROE shows that perhaps the customers are getting gouged not the shareholders!!!

As an aside, as pointed out in the economic survey Chapter II, In a market where all dominant players are public-sector companies, ‘market price’ is not a very meaningful concept. It is easy for government to control state-owned companies through nods and winks. Hence, even if TCI wins an injunction for stopping such actions(very unlikely), the Government can still get its way. Hence, Luthra & Luthra will laugh its way to the bank, but TCI is not likely to see a single rupee of compensation.

US type IPR framework for India-absurd and utopian

If I'd a rupee for everytime I saw an IPR reform proposal referencing USA, I'd be a rich man! Besides those who see USA as a panacea for every Indian ailment(despite its creaking education/healthcare/fiscal issues), even absolutely rational people point to USA, correlate its global power status to its innovative nature(so far logically plausible) and then make the logical leap of faith to connect it to its IPR. Now,trying to match the same format is absurd in India because of the factors outlined below. For the record, by US type IPR framework, I refer to a system friendly to the inventor rather than public interest; where fast track courts settle disputes; where IPR violations are stringently punished even at consumer level by fines/barring ISP connections and where an entire ecosystem(patent trolls, lawyers etc) extract rent from the system.

1. IPR protection not embedded in Constitution:-Patent Protection is a constitutional right in USA, while the Indian Constitution does not even guarantee right to property!
2. Traditional Knowledge and Different culture:The traditional Western model of IP does not sufficiently protect traditional knowledge, and presumes that people need only a monetary incentive to invent. Prof Anil Gupta's work at the National Innovation Foundation, proves that that is not the case.  
3. We are still net importers.:-India does import IP whether it be directly(royalty payments by Maruti to Suzuki for example) or indirectly(mobile manufacturers paying Qualcomm etc ). And of software, I'm hardpressed to name a single Indian produced software 
4. And countries grew rich by not paying for IP:-Be it USA(for books), UK(for machinery), South Korea/China(for technologies), even countries topping the innovation charts have stolen their share of IPR. Is India in a position to pay for IP? In a land where good foreign published books can cost a week's average income, is it fair to penalize students for piracy? 
5. Our legal system would crack:-Intellectual property being a legal right, its ownership.validity can ultimately be decided only in court. And IPR being subject to fast erosion of value if subjudice, not having fast track courts/speedy justice does defeat the purpose. And it is a matter of public policy to decide whether IPR law should get priority over a host of other laws when it comes to justice enforcement. When not even TRIPS requires this, I doubt this will happen anytime soon in India. After all, setting up new fast track tribunals for law/tax cases has been hanging fire. 

I know the above arguments have some logical fallacies(like #4 has the fallacy that two wrongs make a right), but I feel it is not in India's interest to accord that same level of IP protection. If I was a content creator, I would use cloud computing etc to protect my rights via technology, instead of lobbying for changes that overall affect the country. So which kind of a system would I prefer? Something on the lines of utility patents(cheap, simply, for proven useful IPR). I'll do a follow up on this after more research on the subject

Why financial innovation IS necessary and useful

Judging by the number of books/articles/blog posts and Steve Job memorial mentions, one would think that innovators are the most valued ones in this economy, and that innovation is good. But recently, two facets of this debate struck me.

• Students's dream jobs are now in tech companies like Apple, Google and Facebook-which are all glorified despite significant concerns about privacy, impact by creatively destroying other industries..
• Occupy Wall Street(OWS) students ambushed recruiting sessions at Yale of Goldman Sachs/Bank of America and harangued them about how their rocket science had resulted in evil.

 It is fashionable to trash the financial sector for creating instruments and structures which induced helpless real world borrowers to spend more, buy homes beyond their reach, and deceived governments to maintain unbalanced budgets. But even leaving aside this simplistic explanation for a moment,  one cannot deny that many financial structures are products of extreme creativity and innovation, and were originally crafted to address real world issues. So why are they now villifed as rocket science/web of illiquid complex assets etc?

Recently, Mr Masaaki Shirakawa, Governor of the Bank of Japan gave a keynote address, at the
Netherlands Bank conference in honour of Mr Nout Wellink on “Welfare effects of financial
innovation” . He focused on the special aspects of financial innovation, and the speech can be read here(http://www.bis.org/review/r111115h.pdf). The main points he made were

1. Innovation means changing the way business is conducted in order to better serve the clients
   of the business.changes, which provide the same or better service to clients at lower cost, are certainly innovations in the usual sense of the word.
2. Innovation can be technology driven or modality driven. Technology-driven innovation
   crystallizes when the application of technology results in a better way of doing business(like ATMs). On the other hand, modalitydriven innovation aims at rearranging business processes for the better(like derivatives risk transfer)
3. Technology-driven innovations are more likely to be beneficial, because, when the innovator is deliberating on the application of technology, the client cannot usually be ignored. On the other hand, in the case of modality-driven innovations, one can easily lose sight of the client when cutting and dicing existing businesses(emphasis added). Very often, modality-driven innovations are the result of efforts to circumvent regulations, taxes, and accounting rules imposed on the financial industry
4. Problems seem to have arisen when a product or service is insufficiently anchored in inter-mediation or facilitation of payments(the core function of banks)

 The above chain of arguments would lead one to the premise that unless the financial innovation is anchored in 'basics of banking' like cheaper intermediation/payments system, then its utility is doubtful, or at the very least, subject to more layers of scrutiny.

However, the financial inclusion agenda of regulators, would require banks to adopt technology driven innovations, while the infrastructure financing needs would probably need modality driven innovations to come up with innovative financial structures, eschrow mechanisms and build in adequate safeguards(like MIGA guarantee etc) so that the players would have rational incentives to keep up to their word. And more modality driven innovations would be needed for risk transfer. One can certainly argue that the basic bank and investment bank should be split, but that may make both individually riskier(no diversification) and increase capital costs.Hence, before trashing the rocket science/quants/legal eagles of banks, one should also think of their positive uses.

Deregulation cannot be done till market failure is removed.

No regulation is welcomed by industry. And for good reason. Academic theory holds that regulation exists to correct market failure(or the chance of that happening). Regulation does impose costs on everyone involved, and the expense is borne ultimately by end users. But instead of terming it a deadweight cost and calling for 'light weight regulation','self regulation' etc, one should first introspect whether the market imperfections have been corrected or whether the policy framework is self reinforcing. If not, regulation should stay. Few people can openly advocate this position though.

Below are a few areas where 'reform' is often sought, but I propose to show that relaxing regulation would be a disaster, as the market is not mature enough to ensure good behaviour.

1. Labour laws
2. Corporate disclosures
3. Corporate governance
4. Environmental assessment
5. Corporate pay-especially to promoters/their relatives

Ironically, people love regulation when it suits them. For instance,

1. Exercise of eminent domain for private land acquisition 
2. Coercive savings direction into infrastructure/favoured sector
3. FDI caps/restriction on foreign competition
4. Export bans/tax on raw materials(rice/wheat/onion/iron ore)
5. Subsidized fuel/minerals/freight

So before signing up on that petition opposing 'Big Brother' government, think hard on what you are signing up for. The results may surprise you.