Doing Business In India

Where others have failed, Mr. Pallonji Mistry has proved to be a visionary. The business world has always hailed the foresight and acumen of business leaders like Late Dhirubhai Ambani, Mr Ram Prasad Goenka (R P Goenka) and other illustrious names who have built empires from humble beginnings. Mr Pallonji Mistry built on the business that his grandfather started in a small way (Ratan Tata’s successor: Spirit of enterprise runs deep in Cyrus Mistry’s family). Today, Shapoorji Pallonji group has over 23,000 employees and a turnover of US $ 2.5 billion, with presence across real estate, construction, infrastructure, agriculture, consumer products, textiles, engineering, shipping and logistics. Beside this it is the largest single investor in the Tata Sons, the holding company of the Tata group.

All these business leaders have created vast amounts of wealth for themselves and their children to inherit. Then what has Mr. Pallonji Mistry done differently that we can actually stand and salute him?

In one master stroke he has done what others could not do. He has crafted a succession plan that effectively takes care of the aspirations of both his sons and has insured that there shall be no warring in future. Most siblings end up squabbling for a larger share in the inheritance not because of the quantum that each begets but for their desire to lead the flagship business. All family succession have met the same fate.

In this case, what has been achieved is not short of a master class in managing relationships and ensuring that the family stays together. The elder son gets to drive the Shapoorji Pallonji business whereas the younger on, Cyrus Mistry shall head the Tata empire. They shall remain as one happy family……

You may have experienced this before….. you get a call on your mobile… it rings once or twice and then clicks off. You look at the missed call number and its from an international destination. Your first reaction…… maybe a relative in distant land or a new foreign customer???? Inquisitiveness makes you to call back. No one really remembers all the ISD codes … is +1 for US or +44 for UK. Do most us really understand and make out. Once you call back… the receiver on the other side takes your call and informs you that you have won a lottery or they would want to carry out a poll on some current issue. You disconnect…..

Seriously, what could this be….. why are so many missed calls happening from ISD destinations… +92, +994, +263, +37. When we checked, +92 is for Pakistan, +994 is Azerbaijan, +263 is Zimbabwe and +373 is Moldova. None of these countries inspire confidence. Moreover they remind you of internal strife and maybe unlawful activities. Then why would calls come from these destinations?????

There is no logic……..

Yes……. there is but one possibility

Calls originating from these destinations are all international numbers and thus attract higher tariffs for call back. All this happens for some benefit. There is no way someone is calling you to let you know that there is lottery you have won in an international draw without participating or that your unknown ancestor has left you obnoxious amount of wealth or more so that some wealthy person has died inestate and there are no claimants, so the attorney on file is willing to partner you to share the spoil.

You know this is all is ‘humbug’, but still, if you have someone calling you and the call gets disconnected…your reaction is to call back…

Who should benefit from this natural reaction of human beings. It could be some tricksters who can pull-off with some gullible souls or may be the telephone companies who benefit from the international calling.

Look at the current scenario for telecom companies, the APRU (Average revenue per User) has been consistently declining, the operating margins are under pressure and the competition is increasing. Why wouldn’t telecom companies find ways to increase billing per subscriber? This is an easy way..call from friendly countries where numbers cannot be traced or routing to other destinations and really, if it gets traced blame it on the terrorist link in those countries. These countries have no databases or efficient legal systems for redressal. What would you say……… Ingenuity or unworthy.

Discussions by eminent credit experts have highlighted the pure dependence of credit risk assessment on financial statements and payment history. Whereas good business research thrives on ‘Alternate data sources’ then why shouldn’t credit risk assessment incorporate alternate data for a robust model? Whether financial statements are more reliable is debatable point especially in the context of MSMEs (they form the bulk of business enterprises all over the globe). Most developed economies do not insist on audited statements from business owners and in developing economies, we are aware of what happens. The business owner decides what is to be presented….. Yes, payment history is credible and can be used as a source of information but can be misleading if relied solely upon. Credit rating does consider ‘alternate data sources’ but as a product is used for a minuscule segment of the universe. When you consider credit scoring or internal risk assessment processes, invariably ‘alternate data sources’ are disregarded. Moreover, majority of the credit officers are unaware of ‘alternate data sources’ and their relative weight in the risk assessment model. It seems that we all want to follow the system that has been established………….. Are we doing it right?

Businesses are under constant threat of loosing what they own or have created diligently over the years. In this age of technology advancement there is a huge possibility of “Information Leakage” thus resulting in loss of valuable assets such as proprietary processes, product patents or inappropriate disclosures of operational performances. Therefore there is a need for Forensic Accounting and Audit of Information systems that prevent such occurrences.

In a recent case, one of the leading players in the Pharmaceutical industry desired “To review existing Policies and Practices on preventing Information Leakage in the factory area covering the Production, Plant Gate, IT Infrastructure, R&D and Quality Control section and to suggest remedial measures”. What prompted this business to secure Information systems was a review by the US FDA (US Food and Drug Administration) for granting license to their facilities. The US administrator considers Information system as a critical part of the manufacturing process.

The business had adopted several standard operating procedures to avoid leakage of information. They had blocked all electronic mails ‘to’ popular public mailing systems such as Google, Yahoo and Rediff mail. Most of the communication devices such as scanners, photocopying machines and mobile phones were disabled for copying and transmitting. Closed circuit cameras were installed to capture the overall activities of the employees. The IT department has hastily put together some randomly created Standard Operating Policies (SOPs) that would manage the email system, the IT infrastructure and the server room.

On the face of it, the measures adopted by the business would have, to a greater extent, prevented the flow of unwarranted information from within the facility to the outside world. But this was not the case!

As a first step towards checking the robustness of the system that had been implemented a couple of tests were instituted. The business managers were of the opinion that information on the computer systems could not be transferred to a remote location without the active connivance of the device owner. Inspite of these measures the investigators, with the help of Bluetooth technology and when the device owner was not at his work station were able to transfer documents from a computing device to a mobile device. In another case an email was delivered to an unknown address from a desk top system without the knowledge of the work station owner. Both the cases indicated a lack of operational understanding on the part of the employees to treat information in a sacrosanct way and some of the possible shortcomings of the planned system.

Considering the initial results that exposed the vulnerability of the system that was in place, an elaborate audit procedure was adopted. Various operational aspects of the facility were checked that mapped extensively over most of the departments.
1. The inventory of communication devices was verified for ownership and location.
2. The server room was assessed for:
i) Accessibility violations.
ii) Security arrangements.
iii) Disaster management.
3. Email management system was thoroughly checked against active and inactive accounts, access levels and other improper behavior.
4. Scrap management policies were advised.
5. The Gate and Key management were not as per the standard operating procedures.

The audit process established that the facility was under threat from “Information Leakage”. Based on the findings the following recommendations were made to the facility management in order to avoid the criticalities of the system. They are:

1. Standard Operating Procedure Manual should be developed keeping in mind the different information needs and security levels requirements of different department.
2. Emails can be managed through advanced screening software.
3. Implementation of security measures like body searches, metal and other advanced detection facility.
4. Stress testing the system at regular intervals.
5. Finally as a first line of defense it important to continually educate the employee about the SOPs.

There are lessons to be learnt by other organizations. Leakage of confidential information can result into crucial damage to a business in its reputation, employee work culture and profitability. Before such an eventuality arises, it is necessary for businesses to adopt a multidimensional approach to Information System management.

Vivek Parti, CEO, India Business Database.com, Risk Management and Forensic Company

Dun & Bradstreet (D&B), a leading Business Information company, is continuing a program in India to collect trade payment information from industry participants. What is the rationale of such a program? There are several key issues that figure especially in an operating environment where Credit Bureau referral systems are not fully developed. Moreover this has global implications especially in light of the failure of large corporations all over the world.

Let us first take a look at how does the D&B program work? The program operates as a ’shared information network’ that gives that gives 24 hours online access to payment information on businesses. The trade participants have to provide their receivable information on a monthly basis. In return the trade partner receives free of charge data to reduce risk. Additionally D&B would provide Business reports, for a charge, that would incorporate trade payment data alongwith financial and operational information on the subject business.

This ‘shared information network’ is a private company initiative that does not have explicit regulatory approval in the form of licensing. Licensing is an important criterion in developing markets where any form of monopoly is shunned. But then…….how does it affect the trade participants? Well there could be positive and negative implications……there could be legal liabilities for masked sharing of ‘mutual’ information between trading parties but on the other hand a wider information base will support better credit decisions.

The Credit Information business environment in India can be a perfect example of a developing market that is maturing. In the current scenario, only regulated and licensed credit information entities, those that have been licensed by Reserve Bank of India (RBI) under the Credit Information Companies (Regulation) Act, 2005 are allowed to operate. Presently CIBIL is the only licensed and operating Credit Bureau in India. Last year RBI had called for applications for fresh licenses. Large Global players like Equifax Inc and Experian Ltd had applied in partnership with local financial institutions. Thus the credit information space will see lot of action in the coming months. The Credit Bureaus will collect and share information with specified members that are participants from the financial markets.

Under the licensing arrangements, Credit Bureaus are expected to carry out the following business:
(a) providing credit information to individual and corporate borrowers his/her/its own credit report;
(b) providing data management services to the Credit Institutions who are its members;
(c) collecting, processing, collating and disseminating data/information related to property mortgaged to credit institutions;
(d) collecting, processing, collating and disseminating data/information related to investments made in Securities other than those issued by Central Government; and
(e) any other function as notified by the Reserve Bank from time to time.

What do the Credit Bureaus do? Credit Bureaus collect information on borrowers from the member institutions, process the data on proprietary and advance risk management process and collectively store it for usage by member on demand. Typically the data collected would be on the account performance of the borrower. Account performance will include indicators like number of credit lines the borrower enjoys, current outstanding status of those credit lines, number of credit applications among other information. CIBIL is faced with several disputes on account of deviation and differences in the data on the credit reports. This is the case even when the underlying data comes from established data sources like the banking system.

Currently there are no established data privacy laws prevalent in India. Another tricky issue is that of data ownership. In the financial markets, financial institutions and other licensed entities that are governed by their respective regulatory authorities are prohibited from sharing personal data on customers with some exceptions (e.g. sharing with Credit Bureaus). But for other industries there is no clear law that allows sharing of trade information. In such a scenario, sharing of information without explicit approval from counter party will attract legal cases with civil liability even though proving the guilt will be an onerous task. But the possibility of legal cases will become a deterrent for the trade participants to share information with private networks.

How does the industry gather credit information? The trade finds its novel yet practical ways to address this function. Informal process of reference gathering from local trade players is the most prevalent option. Another way of getting information is through insiders like employees and other vendors. Competitors also form a good option to gather information. These methods are mostly disorganized, are loaded with an element of bias and are conducted in with least technical knowledge.

D&B’s Trade Exchange Program prima facie is an important move in the right direction. With trade payment information details the quality of Business Credit information will improve considerably. The quality of risk scores will improve. But there are some serious challenges that it will face.
1. The basic hesitation of private businesses to share information.
2. The credibility of the information that is being provided. It is common knowledge that Account Receivables seldom reconcile between trading partners.
3. Retribution by warring parties. The result would be that the credit report of one partner would deteriorate and that could harm its business prospects.
4. Payment delays could be on account of other differences such quality issues
5. There are legal issues in sharing mutual information. Account Receivable information is not proprietary to one party. Unless there are definite agreements in between trade partners that clearly spell the ownership of the data.
6. Additional cost in using business information reports.

“Building Databases @ ur cost“. Effectively D&B attempts to build databases at the cost of the Trade partners. The implied usage of data is in the Business Information reports that it primarily produces. On the other hand we have Credit Bureaus that are spending crores of rupees to gather data and on substantial license fees.

What is the alternative? Credible information from Credit Bureaus would be a good answer. But currently they have a limited scope of operation and are primarily focused in the financial markets.

The other option can be a central repository that stores all trade payment information. This would ensure the credibility and correctness of information that is stored. The information can be accessed by all licensed users for a minimal charge.

The third option will be of professional firms that provide specialised services in the Account Receivable management vertical. For example IBD’s AR management solutions. IBD is a professional services firm involved in risk management.

IBD’s AR management solution adopts proactive processes such as “Dynamic Credit Limit Setting” whereby the organization incorporates the system of ‘know your customer (KYC)’ and will set credit limits based on events. The advantage is that you gather current and credible information on your trade partners. More importantly you continue to respectthe trade relationship that your business has built and nurtured over years.

Vivek Parti, CEO, India Business Database.com, Risk Management and Forensic Company

In these uncertain times where there is a complete stagnation of business growth and slowdown of payments, managing credit worthiness by Small Business owners is a difficult ORDEAL. Make sure you aren’t labeled a ‘bad credit’. You can do this by maintaining a good credit score. It’s simple…….. make timely payments of credit accounts that are regularly reported to credit bureaus, settle open derogatory listings and start making payments on other credit lines inorder to reprove credit worthiness.

The good question is “Where is the money?”. Now before you go around looking for the ‘money‘ bear in mind what the credit bureaus are looking for while scoring your credit accounts:

Payment history weighs heavily in your credit score. Consistently paying your installments on time has a positive influence on the score. Collection accounts and bankruptcy filings are also taken into consideration when analyzing your payment history.

Total debt vis-a-vis total available credit. If your credit limits are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred.

Length of positive credit history, where the longer you maintain accounts in good standing, the better your score will be.

Mix of types of credit and its maturity period has an impact on the credit scores.

The number of new credit applications recently completed has a bearing on the credit score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water.

Additionally your neighbourhood friendly banker (who has now turned horrific!!) looks for Corporate Intelligence on your business. He is making sure that your current performance will not affect your future repayment capacity. Businesses with negative credit listings, such as delinquent accounts, must establish new positive credit lines to try to counterbalance the negative impact of their delinquent items.

Now the most important question of all “Where is the money?”. Well there are various sources for revenue generation. If you happen to be in the US and are part of the erstwhile blue chip corporations…having gone bust, then you have the US treasury that will infuse billions of tax payer’s money. If you happen to be in India and are part of the farmer community, then the government would show its largesse and waive your loans or if you happen to be the global flag bearer of any industry (Corporate Fraud or Financial misstatements not withstanding) you will be provided assistance to keep your business afloat.

Any other category, sorry….you need to brave it all by yourself. You chose to be an entrepreneurship over being a worker or a farmer. You are heavily outnumbered in the populist scheme of things.

Vivek Parti, CEO, India Business Database.com, Risk Management and Forensic Company

In any economy small business are the real drivers, they generate employment and distribute wealth widely. All governments recognise this fact and implement policies that encourage entrepreneurship. In the US, by statute, percentage of the government orders are allocated to the SME segment (though findings revealed that orders were being cornered by large Corporations through front businesses). Coming back to the SMEs, the way forward from the Global meltdown could be by providing ‘real’ impetus to the SME workings.

Lets take India as a case point. The Indian business economy is well characterised by Micro, Small and Medium Enterprises (MSME). The sector provides employment to 42 million people and contributes 45% of total manufactured output and 40% of the total exports. The sector has consistently registered higher growth rates. But the policy makers are underestimating the collateral damage of global economic crisis on the MSME sector. To counetr the Global crisis, the government has provided two stimulus packages having thrust in fiscal measures and an additional plan expenditure of Rs. 200 billion. Along side the Central Bank has taken measures to pump liquidity into the system and assist MSME in meeting their immediate need.

On the face of it the stimulus provided has helped the financial sector but the real economy of Infrastructure and MSME are still lagging behind. The reasons are simple, firsty the institutional funds are bypassing majority of the small units and secondly, there is no ‘real’ demand. What is required is to provide greater purchasing power to a larger section of people by stepping up the public expenditure that is targetted specifically at the MSME sector. Similarly in the US, the government is providing bail out packages to the perpetrators of the great economic slide. But that wouldn’t stimulate demand.

As President Obama says “It’s about time…..It’s about change”. Governments needs to change too- their outlook….from Large Corporates to Small Enterprises. Thats the way forward.

We need voices in support of the SME segment that reach out to the policy makers and bring about this change.

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

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