Doing Business In India

The Satyam episode has become a joke on Corporate Governance, Questionable Polity and Degenerating Ethical Standards. I had mentioned my views in this blog, Satyam Saga…..Is Corporate Intelligence Adequate In India?, a couple of weeks earlier.

In all this mess, there are some blokes who have the sense of humour to make a joke of this ugly episode.

Chief Minister of Andhra Pradesh (the State in which Satyam ex-boss, Mr. Ramalinga Raju had political patronage), Mr Y S R Reddy went to a school. After have a brief talk with the children he asked them if they had any questions to ask him.

One boy raised his hand and stood up.

YSR: Whats your name?
Prakash: Prakash

YSR: Whats your question?
Prakash: Sir I have three questions.
1) Why did the Andhra Pradesh government provide so many land deals to Raju?
2) Where is the Rs.7000 crores?
3) For all the controversial situations, why does the ruling party alway blame the rival political party?

YSR: You are an intelligent student Prakash..(just then the bell rang for recess).

Oh dear students we will continue after the recess is over.

After the recess

YSR: Ok children where were we? Yes, so anybody wants to ask any question?
Suresh raises his hand

YSR:Whats your name?
Suresh: Suresh

Suresh: Sir I have 5 questions.

1) Why did Andhra Pradesh government provide so many land deals to Raju?
2) Where is the Rs.7000 crores?
3) For all the controversial situations, why does the ruling party blame the rival political party?
4) Why did recess bell ring 20 mins before the scheduled time, and
5) Where is Prakash?

In times of uncertainty and regression, the one thing that is dear to all businesses is the credit that they extend to their customers. The function becomes critical to SMEs who have limited resources.

The one question that needs to be answered is: While assessing a BUSINESS PARTNER for its Credit & Operational Risk, what elements would you consider in the following business functions?

Financials
Distribution
Goodwill
Clients
Vendors
Human Resources
Sales & Marketing
Goodwill

I asked this question to various industry professionals and academicians, the responses were:

Demissew Ejara, Associate Professor of Finance at University of New Haven “I think the list contains appropriate variables to spot operational risk. For credit risk, you should look at financial conditions and character or more specifically the five C’s of credit.”

Brian McGuinness,Vice President at Business Lenders, LLC “I always start with the 5 C’s. After that look at industry risk & concentration of sales.”

The five C’s of credit are Character (Integrity), Capacity (Sufficient cash flow to service the obligation), Capital, Collateral (Assets) and Conditions (partner’s condition and the condition of the economy).

William Martin, Sales/Relationship Manager: NBFIs at JP Morgan PLC “You are looking at 2 different elements: credit and operational risk. Each has different constituent elements but as we are seeing in current markets, operational risk can impact on credit risk and force companies out of business. When looking at credit risk, I used to consider:
History: how long has the company been in existence? How has it grown? What changes have there been?
Management: Who? Experience? Length of time in position?
Product: What is it? What is the competition, demand?
Buyers: Who? How many? Bargaining power?
Suppliers: Who? How many? Bargaining power?
Terms of Trade: What are they? Have they changed?
Turnover/Revenues: How has this changed?
Margins: Rising/falling?
Debt/Ability to obtain credit: Can they do this? Who are their bankers? How much debt have they got out?
I would count goodwill as “reputation” – an intangible asset, but one that can mean almost more than the company put together (think of Coca Cola, for example – what value does its brand have?). Media contact – tricky. This is about managing perceptions and those who are good at it can reap great rewards. Operational Risk is the risk of loss arising through fraud, unauthorised activities, error, omission, inefficiency, systems failure or from external events. It is inherent to every business organisation and covers a wide spectrum of issues. Operational risk can arise from a number of causes, including but not limited to:
Fraudulent and other external criminal activities.
Breakdowns in processes and procedures due to human error, misjudgement or malice.
Terrorist attacks.
System failure or non-availability.
In certain parts of the world, vulnerability to natural disasters.
Failure of buyers/suppliers.
Regulatory events.
Political events.
In short, operational risk arises from people, processes, systems and external events. The trick is assessing the impact of an event happening and then its likelihood. this is more of an art than a science!! Different businesses will be subject to different risks in different countries (and even different parts of the same country if, for example, one part of the country is prone to flooding).

There were some who saw the funny side of the serious question, Mohit Mehta, Director at Investment Bank “If you are CEO of a leading business risk assessment company. Please tell us how you would do this?”

In my view, it is important to follow the 5 C’s but more important would be to implement a system of Corporate Intelligence in your work flow. A robust internal credit system coupled with an efficient Corporate Intelligence system would provide the desired response to a deteriorating credit position of the businesses.

Vivek Parti, CEO, India Business Database.com, Business Credit Information Company

Obviously corporate intelligence is not adequate and investors are not safe. They all seem to be talking about a Rs. 7000 cr fraud, but what about the billions lost in capitalisation of the Satyam stock and consequenlty the market slide. This is the worst kind of fraud that have been perpetrated with a cold mind.

There are two questions that need to be answered:
1. After the corporate governance issues with the Maytas deal, why was Raju allowed so much time? Obviously there more top management people involved than just the Chairman (as he confesses)

2. What were the Auditors doing? Need to closely look at the various relationships that audit firms maintain with clients. That could result in compromising their position. Audit firms should only have one relationship…that is conducting audit. After Enron, Aurther Andersen was disbanded and sold off and the consulting arm became Accenture. All firms should delineate audit and consulting function in seperate entities.

All this proves that we need better corporate intelligence.

Vivek Parti, CEO, India Business Database.com, Business Credit Information Company

Indian Government has taken a number of steps to minimize the impact of the global financial crisis on the Indian economy. But, is Credit Crunch the only reason why the economy falters? Introducing credit into the system maybe short term measures that would provide immediate impetus, good for stock markets, but for sustained growth we need structural and systematic changes and corrections.

The Government of India and Reserve Bank of India are trying to introduce changes that would address these maladies. These include:

1. Additional plan expenditure upto Rs. 200,000 mn. in the current year mainly for critical rural, infrastructure and social security schemes.
2. An across-the-board cut of 4% in ad-valorem Cenvat rate except for petroleum products.
3. Measures to support exports, housing, Micro, Small & Medium Enterprises (MSME) and textile sectors.
4. India Infrastructure Finance Company Ltd to raise Rs. 100,000 mn. to refinance bank lending for infrastructure projects.
5. Monetary, credit and fiscal Policy- External Commercial Borrowing (ECB):
(a) The ‘all-in-cost’ ceilings on such borrowing would be removed, under the approval route of Reserve Bank of India (RBI);
(b) To facilitate access to funds for the housing sector, the ‘development of integrated townships’ would be permitted as an eligible end-use of the ECB, under the approval route of RBI;
(c) NBFCs, dealing exclusively with infrastructure financing, would be permitted to access ECB from multilateral or bilateral financial institutions, under the approval route of RBI.
(d) In order to give a boost to the corporate bond market, FII investment limit in rupee denominated corporate bonds in India would be increased from US $ 6 bn to US $ 15 bn.
6. Credit flow to the economy:
(a) An SPV to provide liquidity support against investment grade paper to Non Banking Finance Companies (NBFCs) upto Rs.250,000 mn.
(b) An arrangement with leading Public Sector Banks to provide a line of credit to NBFCs specifically for purchase of commercial vehicles.
(c) Credit targets of Public Sector Banks are being revised upward.
(d) Guarantee cover under Credit Guarantee Scheme for micro and small enterprises on loans upto 85% for credit facility upto Rs. 0.5 mn. This will benefit about 84 per cent of the total number of accounts accorded guarantee cover.
7. State Governments will be allowed to raise in the current financial year additional market borrowings of 0.5% of their Gross State Domestic Product, amounting to about Rs 300,000 mn, for capital expenditures.
8. Exports:
(a) Taking into account the fact that the rupee has appreciated nearly four per cent against the dollar since November 2008, it has been decided to restore DEPB rates to those prevailing prior to November 2008. In order to provide predictability and stability of regime in the short term for future contracts, the DEPB Scheme would be extended till 31.12.2009.
(b) Duty drawback benefits on certain items.
(c) EXIM Bank has obtained from RBI a line of credit of Rs.50,000 mn and will provide pre-shipment and post-shipment credit, in rupees or dollars, to Indian exporters at competitive rates.
9. To counter recessionary trends:
(a) Exemptions from CVD on TMT bars and structurals, and from CVD and Special CVD on cement, which were given to contain inflation, are being withdrawn. Full exemption from basic customs duty on zinc and ferro alloys, which was also provided to contain inflation, is being similarly withdrawn.
(b) To release land for low income and middle income housing schemes.
(c) States will be provided assistance for the purchase of buses for their urban transport systems.
(d) Accelerated depreciation of 50% will be provided for commercial vehicles to be purchased on or after 1.1.2009 upto 31.03.09.

One area that the Government needs to look at very closely is the quality of credit that is being extended. In its enthusiasm they should not over extend and end up with another round of credit waivers in the near future (or is this the political far sightedness…who knows). This is a distinct possibility. The road to recovery is long since the global economies are still trying to figure out their bearings.

Vivek Parti, CEO, India Business Database.com, Business Credit Information Company