IT’S TIME FOR THE ROC TO RISE AS A VIGILANT REGULATOR

Under the prevailing cloud of allegations about corporate frauds, I vividly recall a cover story that we did in this publication almost 18 months back (Statutory Compliance – A big joke, BFM May, 2011). Therein we analysed how the Registrar of Companies needed to act like a vigilant watchdog rather than being a toothless facilitator helping companies to get away with all sorts of corporate governance lapses. We further argued that such a passive approach on part of the RoC was allowing creation of dubious corporate structures providing a perfect recipe for the generation of black money.

There is no doubt that with 721,719 companies already registered (as on March 31, 2011) with the RoC and the number increasing by close to a lakh per year (in FY 2011), the task is daunting. But all it needs is a strong bureaucratic will to manage this menace. RoC is the first touch point for all companies when it comes to due diligence in cross checking the details submitted by the promoters. All it really takes is an initial physical verification of the addresses provided. It could be as simple as the physical address verification exercise undertaken by mobile service providers when we buy a sim card. This basic procedure has the potential of saving the nation from spectacular shocks in later days.

Moreover, RoC needs to be more efficient and techno-savvy to make the huge task a bit relaxing. For example, keeping a track of who is a director in how many companies is not an easy task. But technology can come in great use here. RoC can put up a system through which an individual’s details as a director are automatically fed into the records of RoC. This can be done by allotting an id unique to that director, linking back all his details to this single reference point. Every time an application is submitted for a director’s enrollment in a different company, the software would be able to pull up all archived data linked to this id. This will help the RoC keep track of companies and people, which under the current setup is a great challenge.

Moreover, the RoC also has to use a strong hand in ensuring the fact that companies do follow the rules strictly when it comes to filing their annual submissions with the regulator. Because late or irregular filing allow the companies who intend to indulge in frauds the much desired time frame to cover up their crimes and then get away with the regulatory requirements by paying a miniscule late fee and filing their documents. For a country that ranks 20 in terms of Corporate Governance (in a list of 38 countries, survey conducted by GMI ratings), and 75% of it’s top corporate executives agree in a survey that corporate fraud is on a rise (KPMG India Fraud Survey, 2010), these lapses are some serious trouble and must be taken care of on a serious note.

It’s time when the RoC rises from being a mere book keeper to an aggressive regulator in terms of attitude. Looking at the burgeoning size of India Inc. the sooner RoC understands this, the better it is for India.

FINALLY SOMEONE IS HERE TO GET PSBS OUT OF THEIR LAZY HABITS

What caught my attention recently was a statement highlighted by a business daily. It was a statement made by Financial Services Secretary D. K. Mittal, where he urged public sector banks to get out of their lazy habits.

That reminded me of another piece I had come across just a few days before. While comparing Mittal with the erstwhile chief election commissioner T. N. Seshan, the article mentioned how Mittal is trying to stir up the system like Sheshan did, in the limited world of public sector banks (PSBs).

The thought of Mittal wanting to put in order the house of PSU banks, reminded me of a certain talk that did the rounds last year. It was about the forced mergers of unviable PSBs with their healthier cousins. Now, on one hand, Mittal wants the banks to be more efficient and on the other hand, the government is mulling to dump inefficiency on the heads of a handful of PSBs who are ‘somewhat’ efficient. And that means, Mittal’s job is not going to an easy one.

To achieve a state of total financial inclusion, a task which has been on the government’s top agenda for quite sometime now, in a country where 50% of the population still lives without a bank account, the banking sector needs to be super-proactive and efficient. But a look at the PSBs (except for a few rare exceptions) – including those which have been in operation for over 50 years now – reveals how slow they have been. For example, Bank of India was founded way back in 1906 and even after 106 years it only has 3,752 branches; Central Bank of India was started in 1911 and currently it only has 3,967 branches, while an ICICI Bank that came into existence just a couple of decades ago now has 2,760 branches across the country. For that matter, IDBI Bank, which was given a license only during the last decade, showcases a network with 973 branches. So the question remains, how did the private and semi-private banks manage to expand their network at a pace at which the PSBs could not in a century?

Well, the answer lies in the spirit of competition, a desire to grow and constant pressure from shareholders to earn profits. As long as the PSBs do not grow fast enough and manage efficiency to take up the challenge to prove a point, there is no way their government-sponsored mines can dig out diamonds, at least not close to what Mittal imagines. But for this, even Mittal has a role-play at hand. The government being the largest shareholder, he has to make these banks accountable for their performance. But at the same time, he also has to give them the desired freedom of operation and strategy making. Forcing a bank to merge with some inefficient and loss-making entities can never help the PSB-system become more active and efficient in terms of operations. Merger here is the wrong strategic decision. It cannot be used as an excuse to disguise some entity’s poor performance.

What Mittal wants to do is noble. It sounds incredible. But as of today, only on paper and in the mind. No doubt, if he succeeds, he’ll single-handedly add great value for the country. It would be a deed well done. But for that he has to think like a strategist and focus on removing the structural bottlenecks first. Asking the PSB bloc to start delivering the goods as a whole isn’t a phenomenon we are familiar to. He isn’t too. Perhaps an assignment or two to copy from the book of the private banks could be a good start. Question is - will the PSBs - the lazy ones I mean - be willing to lift the pen?

IT IS TIME FOR ARCs TO TAKE CONTROL OF NPAs

Post 2009, when the world had started believing that global meltdown was over and the time of recovery was nigh, Europe landed its right foot on the bear trap. Today, it seems the EU bloc will never find living easy; at least not in near future.

But I do not want to discuss the global economic scenario. You, and everyone else who reads a magazine or two every month or a newspaper or two every week knows it all. Instead, I am more interested in discussing another matter that deserves a quick thought – the rising non-performing assets (NPAs) in the Indian banking industry.

Wait! Do not brand me a pessimist. I am talking about an industry that is set to gain momentum from NPAs that are piling up in the books of banks – the asset reconstruction companies (ARCs). Yes, I want to talk about the boom that is set to bring in some resilience for the Indian ARCs, at least for those who missed the bus during the first phase of this four year-long slowdown.

For those who know little about ARCs, they are companies which thrive on bad loans of banks and other financial institutions. Their modus operandi is to buy these bad or distressed loans from the banks’ books and turn them around to make a fortune when good times come knocking. Going by that logic, the Indian banking industry is set to provide them ample opportunities now. As they say, bad loans are made during good days, it’s just that you realise the pile of (worthless?) waste when days go bad. The situation with Indian banking industry is more or less the same. While there has been much talk about how well the Indian banking industry has managed to stay insulated from ills of the global crisis, rise in their gross NPAs to advances ratio, especially in the first quarter of the current calendar year (gross NPAs of public sector banks other than SBI rose 10.5%), got every one thinking.

Gross NPAs of a few public sector banks including Indian Bank, Central Bank and Punjab National bank shot up by as much as 35% of their value a year ago. As a result, it’s time for the ARCs to arrive at the scene to infuse make banks’ books appear pretty. And all this at a time when the ARCs are being ridiculed by almost everyone around, especially since the past 12 months or so, when everyone started dreaming of a quick recovery.

It is high time the ARCs prove why they are such an essential part of the financial industry. It is also time that the Indian banking industry admits to the benefits of the ARCs, which are all set to make their living appear worthier on paper, especially in the light of the current market condition. In short, ARCs will play the doctor and keep the banks’ NPAs under check. Period.

CASH IS KING, HOLD ON TO IT

Honestly, I can’t take personal credit for the pathbreaking guru-speak that you must have witnessed in this editorial’s heading – “Cash is king, hold on to it.” From management writers like Ramcharan to top of the lot financial practitioners like V. Balakrishnan of Infosys, maintaining of what I term ‘superhealthy’ cash reserves has been encouraged to no ends, especially in times of economic slowdown. Of course, there’s a double whammy hidden within this that even the likes of Dinesh Trivedi can easily forecast – and that is that when savings, especially cash holdings, go up, investments and consumption automatically reduce. And this leads to a further spiral down for economic growth, with a lovely backhanded slap of an El Dorado waiting at the end of the rainbow – an economic deflation cycle. And unfortunately, the way events are unfolding in the global financial system, this fear is not without sound logic. With the eurozone crisis worsening by the day with no respite whatsoever in sight, corporate India – like me – could well have started believing that the ongoing meltdown will snowball into a full fledged crisis and will continue till the end of 2012, if not any further.

But honestly again, the current scenario is quite paradoxical. By no means are Indian companies cash strapped to such an extent that they need to hoard up superhealthy cash reserves, more so when we are talking about the top 500 (BSE 500 constituents). But that’s exactly what they have been doing and were doing even during the last financial year. As their balance sheets suggested, by March 2011, the BSE 500 constituent companies had piled up a mammoth cash and bank balance of $96 billion (Rs.4.88 trillion at current conversion rate). This figure has only grown till date. At the same time, India Inc is apparently facing a liquidity crunch, which is severer than the situation in 2008; at least 45% of corporate India believes that way as per a recent FICCI report. Raison d’être: In the wake of the global crisis, trade credits have been curtailed, external commercial borrowings are hard to avail, not much money is present in the primary market, PE investors are either weary to invest under the present economic scenario or are waiting like vultures for the right time, and the last but not the least, the domestic banking sector has become very selective in lending, to safeguard their own asset quality.

If that was not enough, input costs have skyrocketed over the past year and companies have not succeeded in passing on the full burden to consumers at all stages resulting in squeezed margins (negative growth of 14% year-on-year in BSE 500 PAT for the 9-months ended December 2011). As a result, no one wants to part away with their cash balance at present. So much so that 50% of the respondents (82% of which were large corporate entities) interviewed in the FICCI survey said they were planning to hold on to their cash balances at least for another six months.

Without doubt, our economic growth is slowing down due to this double trouble of banks reducing lending to protect themselves, and large corporations postponing investments and consumption to a later date. So should the companies change track? The answer is no, not at all. Why should a profit motive driven company suddenly feel the need to be patriotic and free up its cash reserves? This might sound weirdly un-nationalistic, but a company’s primary responsibility lies towards its shareholders, not towards the nation. It’s the government’s job, and not that of privately run companies, to ensure more liquidity in the market. If the banks have become subdued (lending to industries by scheduled commercial banks have fallen from 25.9% in March 2011 to 22.1% in November 2011), then alternative fronts like NBFCs must open up to ensure that lending to industries is not hampered. And that is the crux of this issue’s cover story, which presents a hypothesis that there is no time better than now to promote NBFCs. So here goes my guruspeak again: “Cash is King, hold on to it... and pray the government gets it right this time.”