Monday, December 17, 2012

Reservation and Merit: Some Myths

           I am against the caste system.  I have always felt outraged about such discrimination among human beings, and felt ashamed that it is prevalent in the country of my birth. I will be really happy to see a day when there is no discrimination at all on the basis of caste, religion or any such factors that arise from the accident of birth.
          Thankfully, my parents did not add the caste as a tail to my name. I have always felt proud that my name does not convey allegiance to any caste. I also felt proud when as a young student I succeeded in convincing my grandmother, for the first time, to let women of some other castes to draw water from the well, at our home.

          In spite of all such feelings against the concept of caste, I do understand the realities of my country, and how deeply entrenched the caste system is.  Therefore, I do believe the affirmative support granted by our Constitution, to the people of less privileged castes is the only pragmatic strategy to bring some parity among our people. The economic reservation cannot replace the caste based reservation so easily because in India caste is not merely an economic factor. It has much more implication- social, political and economic, in India. Therefore, economic reservation will not allow people from the castes that were oppressed for centuries, to come up to the level of members of more fortunate castes.

          Now, about the policy of caste based reservation for promotion. I am not as convinced about the need for it as I am convinced about the need for reservation in employment and education. Once a person is appointed to a post, irrespective of the source of such appointment, his/her growth should solely depend on the performance at the job. Maybe we should ensure that one’s caste or other status does not cause prejudice against him/her, in matters of promotion. In other words, equal opportunity for promotion should be available to all employees.

         However, after considering various aspects of the matter, the Supreme Court of India had validated such a policy with certain conditions that I believe to be fair and reasonable. However, the Parliament in its wisdom is now trying to nullify those conditions stipulated by the Supreme Court.  I am against such a step by Indian Parliament.  

        This post is not about policy of reservations in promotions, and therefore, I am not going into details of the SC verdict or merits of Parliament’s effort towards Constitutional amendment. This one is about some myths beings spread deliberately or otherwise, by those who oppose the caste based reservations.  Apart from the generic arguments like vote bank politics, divisive politics etc. the only argument of substance I heard against the reservation system is about merit.

        In the narrowest sense of merit, it does get affected by any kind of reservation. Therefore, replacing caste based reservation with economic reservation will change nothing. However, this argument of merit being affected by reservation will stand the test of logic only when comparing apples to apples. When things are not equal, one cannot argue for merit based on relative scores alone.

        The apostles of merit do not oppose the differentiation in schools and colleges. There are schools and schools in our country. Not all schools teach same subjects or syllabus, and not all of them have the same or comparable standards.  To a great extent, so called merit is determined by the kind of school one attends than any innate quality. Admission to these different types of schools is also not based on merit or equality, but other factors.

        We often get to hear comments like, “I will not feel safe to be treated by a doctor who is a product of reservation system” or “I don’t want to stay in a building constructed by an Engineer coming out through reservation”.  Ask them if they do check whether the doctor was admitted to MBBS or Engineer to the BE, through a payment seat before availing the services, they look at you with disbelief written all over their face. So, it is not about the merit, but about the deep caste prejudice what is causing such statements!

        Now, let us consider the issue of merit objectively. When an Engineer or Doctor or any other professional earns the concerned degree, they become eligible to practice the profession. They become eligible by virtue of passing the qualifying examination. If the qualifying examination places a cut off mark at 40, 50 or whatever percentage, no one who had scored marks below that cut off gets a license to practice. So, every person who crosses that cut off and gets the license to practice is qualified to practice. The fact that one had a better memory and scored 5 or 10% of marks in the final examination will not make him/her a better practitioner. Consider the ratio of top rank holders in the respective exams, among the most successful practitioners of any profession and this becomes amply clear.

        Same is the case with admission to professional courses. Most of us do not have any issue when rich parents pay hefty amounts to get seats for their children in the top professional institutions.  We will not ask the percentage of marks scored by these children, in their qualifying exams. However, lot of us are again concerned about the quality of the institutions, if a member of a  backward caste gets admission to a premier institute by virtue of reservation.  The reports about problems being faced by Dalit students even in institutions like AIIMS and IITs are indeed shocking.

        But the truth again is lost in the rhetoric. No person can get admission into any professional course without having passed the qualifying examination. That is the simple truth. Another truth is, because a student scored less or more marks in the qualifying examination, his or her performance in the professional course cannot be predicted on that basis alone. Even after getting admission to the course, the student has to study and pass all the examinations to become eligible to practice.

        To conclude, so long as a professional had passed the qualifying examination and holds a genuine degree, I will not seek his/her mark certificate before availing the services. As far as I know no individual has been given any reservation to practice a profession, without duly qualifying for the same. That being the case, using merit as a fig leaf to hide one’s opposition towards caste based reservation is nothing but pathetic.  

Oppose reservation by all means; we all have freedom to hold our own views and to propagate it. I will also wait for the day when we can genuinely say that we have moved beyond concepts like community matrimony dot coms, and are ready to embrace true merit with equal opportunity. Until then, let us not hide behind merit to oppose the affirmative actions to bring oppressed classes of people to some semblance of parity, being undertaken by the state.

Tuesday, November 20, 2012

Section 66A of IT Act– Is it a bad Law ?

          Section 66A of the Information technology Act, 2000 is increasingly being criticized in the social media.  Not all the criticism is misplaced. We have seen arrests being made on frivolous complaints, latest being the arrest of two young girls from Palghar near Mumbai, for posting a message against the total shutdown of the City on the death of a political leader.  Police and Government of Maharashtra seem to have not learned any lessons from the debacle of the arrest of cartoonist Aseem Trivedi.

 In the recent past, there was another incident in which a person from Pondicherry was arrested for his tweets on Mr Kartik Chidambaram, son of the current Finance Minister of India.  A Professor was arrested in West Bengal, for forwarding cartons that depicted Chief Minister Ms Mamata Banerjee. In all these cases, Section 66A was a common factor, though various sections of Indian Penal Code also were used. No wonder Section 66A became the villain for social media enthusiasts!

It is time for us to be objective in our criticism about this section that was inserted into the IT Act, by an amendment 2008. Let us see what the section reads like:

66A. Punishment for sending offensive messages through communication service, etc.  Any person who sends, by means of a computer resource or a communication device,

(a)    information that is grossly offensive or has menacing character; or

(b)    information which he knows to be false, but for the purpose of causing annoyance, inconvenience, danger, obstruction, insult, injury, criminal intimidation, enmity, hatred, or ill will, persistently makes by making use of such computer resource or a communication device,

(c)           any electronic mail or electronic mail message for the purpose of causing annoyance or inconvenience or to deceive or to mislead the addressee or recipient about the origin of such messages

shall be punishable with imprisonment for a term which may extend to three years and with fine.

Explanation: For the purposes of this section, terms "Electronic mail" and "Electronic Mail Message" means a message or information created or transmitted or received on a computer, computer system, computer resource or communication device including attachments in text, image, audio, video and any other electronic record, which may be transmitted with the message. (Emphasises supplied)

Now consider the section objectively. Don’t we need such a provision? With the increasing penetration of internet connectivity, most of our interactions are shifting from real world to the virtual world. Can any Government ignore this completely? We all know potential of the internet and social media to create law and order issues, and even revolutions! 

Consider those highlighted portions of the Section. The acts mentioned therein are strictly defined. If a stalker or fraudster uses the internet or other communication media to do an unlawful act should the government be a mere spectator because it is done in the virtual world? To my mind there is no doubt that no country can allow the internet to be left totally at the mercy of its users alone.

         If we look at the FB post or the Tweet or the cartoons, it was very clear that they did not warrant use of Section 66A or any other criminal proceedings. Any sensible police officer or a judge will see there is no substance in the offence alleged.  Yet, the section was misused to terrorize the unsuspecting persons who chose to express an opinion that is not acceptable to another person.

         What is the solution? In my opinion, we need such a provision to deal with the criminals on the net. Same time, I agree we need to ensure that the section is not misused to settle scores or to intimidate. The IT Act itself recognized this and includes Section 78 so that adequate consideration, at an appropriate level, is given before charging someone under Section 66A. Section 78 reads as follows:

78. Power to Investigate Offence: Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), a police officer not below the rank of Deputy Superintendent of Police shall investigate any offence under this Act.

Now look at another aspect of the issue. Will removing Section 66A save our Right freedom of expression? Apparently, in all these cases Section 66 was used to make the IT Act applicable since the medium used for alleged crimes were Internet and computers.  All the persons were also charged under various sections of Indian Penal Code, in each case. So, merely removing Section 66A would not have saved the so called offenders from prosecution. We have cases were cartoonists were charged with sedition and put in jail for drawing a cartoon of Mr Narendra Modi, without using Section 66A, since the cartoon appeared in print media and not electronic media. I am sure it is no one’s case, that print media has lesser right to freedom of expression than electronic media?

          Any society which has Right to Freedom of expression must also have Right to be offended. No Right is of any use unless one can enforce it and that is even true for the right to be offended.  If a person is offended by words or deeds of another, what is his remedy? He can either collect a mob of 1000 or 2000 and go and attack the person or his premises.  Or, the offended person can seek legal remedies to punish the offender. Needless to say, for us Indians the first option seems to more acceptable than the second option. We are less outraged when mob violence takes place against free speech and expression and more outraged when someone decide to prosecute the offender!

         Let there be a legal remedy available for those who can’t, or do not prefer to exercise the mob violence option. Let them use their other Fundamental right of Right to Legal remedy (equally or more important than Freedom of Speech).

         Individuals’ right to legal remedy is also subject to reasonable restrictions as much right to freedom of speech is also subject to such restrictions.  Merely because a person has exercised his right to file a complaint against what he thinks is offensive, a person need not be arrested and put in jail. As Section 78 itself demands, the fairness and reasonableness of action must be considered at a level of not less than a Deputy Superintendent of Police.

        What we urgently need is accountability for any potential misuse of law.   Even if Police thinks the alleged act meets the conditions of Section 66A, the Court must look at it. Primary duty of any court must be to ensure that individual’s right to freedom is protected. Court must see the seriousness or otherwise of the alleged offence and the character of involved person and then decide on granting bail at the easiest terms. Our courts must always keep in mind that bail and not Jail must be the rule while dealing with accused persons. The offenders can be convicted if they are found guilty. But to jail accused persons as under trials, must be avoided to the best possibility. If a Police officer has exceeded his powers in arresting a person, he must also be acted against by the Court itself.

       Please remember, no Government can force a court to jail an accused person for expressing his or her view on any media. Courts must rise to their constitutional roles to protect the freedom even if there are police or administrative excesses at times. Courts as well as legislatures must come up with more stringent rules about the arrest and jailing of persons. These issues are not limited to the presence of Section 66A alone.

Section 66A is not a bad law. We need such a law to deal with the activities on Internet, though I agree there is scope for more amendment to bring more clarity in the clause (c). We in the social media cannot demand better rights than other citizens. If we engage in any activities that concern the public, including expressing our views on matters involving others, we are exposing ourselves to the risk of being prosecuted. That is a part of the rule of law. Misuse does not make an otherwise valid law, bad.  

Real remedy lies elsewhere- reforms in police and criminal justice system. But that subject is beyond the scope of this post.

Saturday, October 27, 2012

Some Apolitical Questions on Fight against Corruption, Arising from Gadkari’s Purti Group Saga

I do not think there is any need here to repeat the allegations being raised against Purti Group of companies, allegedly controlled by BJP’s National President, Mr Nitin Gadkari.  A high decibel investigation and trial by the Media is on, from which there is no easy way to keep aloof.  Since the facts that are being disclosed by the Media are already part of public domain, through records of Ministry of Corporate Affairs (MCA) and Mr Gadkari has chosen not to contest these facts (unlike the previous allegations by Indian Against Corruption (IAC) on certain land deals), no one is left with any choice but to believe these allegations, prima facie.

However, here I am not rushing to pass any judgement on Gadkari’s culpability or otherwise. I continue to maintain my stand that criminal liability of any person is to be decided by courts alone, after hearing both sides of the story.  However, without any prejudice towards Gadkari or his companies, for the purpose of this post I would consider these allegations are true, because I am aware that such alleged activities are not completely alien to the Indian corporate world.  May be not to the scale of being alleged against Gadkari and Purti Group, but many of those alleged actions are only too common to corporate bodies in India.

Having said that, let us come to the subject of this post.  I happened to read a tweet from an IAC activist (who, incidentally, is supposed to be facing an internal Lokpal on certain allegations of wrongdoings against himself) claiming credit for the head of Gadkari, as a victory for their ‘fight against corruption’. What is this victory; Gadkari losing his second term as President of BJP? Or even being forced to resign before his first term ends?  Will that resolve all the alleged crimes of forgery, benami transactions, misrepresentations etc? Or is the ‘fight against corruption’ limited to getting established leaders resigned from their respective posts and scoring political victory?

I have been maintaining that corruption is not a political, but a social and systemic issue.  If at all, Gadkari incident only proves that corruption is not something that one gets afflicted with, while acquiring a membership to Congress Party as some people would like us to believe! Corruption is spread across the political spectrum, often people from different parties forming a nexus to pursue their activities, irrespective of political changes!  So, the real fight against corruption has to address, not just the individual leaders (that only makes political class to go on the defensive and weaken our democracy) but also the systemic reforms and propagation of positive social values!

Now look at the expose itself. How is it that a bunch of journalists are able to unearth so easily, such details that were supposedly created by the so called financial and legal brains so as to never come out in the open? Well, answer is simple.  It is made possible by a technological reform that MCA undertook some years back, when they established their e-portal for all the regulatory filings and information sharing.  Today, any concerned citizen can log in into the MCA website ( and down load enough information about any company. 

Same was the case with e-filing of Income Tax returns.  It has reduced a huge amount of corruption in the IT department, at least for the ordinary tax payers.  While corruption continues unabated to a large extent where individual cases are taken up for assessment, some hope has certainly been generated from the changes that occurred since the introduction of benefits of IT (Information technology) to the IT (Income Tax) department.  

Role of Right to Information Act (RTI) is another case in point. We all know what role RTI is playing in exposing the alleged corruptions and how bureaucrats and politicians are becoming more careful about their acts and deeds.  Right to Service Act and Citizens’ Charter etc being introduced in various states now are also expected to take these reforms further and enable empowering of citizens against corruption.

After observing these developments, I can only say that corruption can be eliminated by such systemic reforms that bring in transparency and accountability.  

No Lokpal or Police can prevent corruption that takes place between two willing parties.  At best, they can act when extortion happens.  But if the person is willingly giving a bribe for an undue benefit (true in most cases) Lokpal or Police will never get to play a role.  If third parties are allowed to complain, then we run the risk of every unsuccessful person alleging corruption and challenging each and every decision.

That brings us back to the Purti Group issue.  How so many companies could be incorporated at fraudulent or fictitious addresses and how so much funds could flow between these companies with no apparent economic activities?  Therein lies the real problem that needs to be tackled to prevent corruption, black money and Benami transactions.

More often than not, novo rich entrepreneurs would not even know the basics of corporate strategy.  It is the hired professionals like Advocates, Chartered Accountants, and Company Secretaries who advise them with such exotic structures for money laundering and tax evasion.  So long as our focus remains on political leaders alone, these professionals will continue to flourish unnoticed.

So many companies have been incorporated, apparently with wrong facts.  How could this be possible? What does the law says?  Section 32 (2) of the Companies Act, 1956 provides the law as follows:

A declaration by an advocate of the Supreme Court or of a High Court, an attorney or a pleader entitled to appear before a High Court, or a Secretary or a chartered accountant in whole-time practice in India who is engaged in the formation of a company, or by a person named in the articles as a director, manager or secretary of the company, that all the requirements of this Act and the rules thereunder have been complied with in respect of registration and matters precedent and incidental thereto, shall be filed with the Registrar; and the Registrar may accept such a declaration as sufficient evidence of such compliance.

Why is that the Media and investigations not focusing on the person who has certified (in prescribed Form 1) that all the requirements of the Act have been complied with? RoC will merely wash his hands by pointing out that the Act permits him to accept such declaration as sufficient evidence of compliance!

            Now how can we improve the situation better? Just amend the Section by deleting the words “or by a person named in the articles as a director, manager or secretary of the company” and make it compulsory for an independent professional to certify the compliance of all laws. We know in Gadkari like cases, an illiterate driver or a cook can be forced to become a director and sign such declaration which serves no purpose at all in ensuring compliance.  But for an Advocate or a CA or CS, certain due diligence will be necessary before signing and therefore, they can be made accountable for the veracity of facts therein.   

            Even in the present case, I wish the Media don’t give up with Gadkari’s head alone but go further in unearthing the role of any professionals in these activities, whether in making the declaration or in filing of the documents. They must also be held responsible for taking part in fraudulent activities.  Individuals do not have any higher duty to be accountable to society; but Professionals do have such a duty! Their respective regulatory bodies must ensure that the professionals comply with such duties towards the public and State.

Now look at the role of statutory auditors.  I am surprised that The Institute of Chartered Accountants have not responded to these allegations! I wish they have taken suo moto notice of the allegations and called for an inquiry into the role of their own brethren in the whole matter. After all, the Institute in mandated to ‘regulate’ the profession of Chartered Accountants.

As per the Second Schedule to the Chartered Accountants Act, 1949, inter alia the following acts and omissions amount to a professional misconduct:

(4)       Expresses his opinion on financial statements of any business or enterprise in which he, his firm, or a partner in his firm has a substantial interest;

(5)       Fails to disclose a material fact known to him which is not disclosed in a financial  statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity;

(6)       Fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity;

(7)       Does not exercise due diligence, or is grossly negligent in the conduct of his professional duties;

(8)      Fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion;

There is no doubt, if we go by the alleged facts about these companies their auditors are likely to be guilty of one or more of the above misconducts. 

           Further, the Standard on Auditing (SA) 700 (AAS 28) issued by the Institute itself demands from the statutory auditors while issued audit certificate that, the “report should include a statement that the audit was planned and performed to obtain reasonable assurance whether the financial statements are free of material misstatement” and that the “report should describe the audit as including “examining, on a test basis, evidence to support the amounts and disclosures in financial statements”.  Therefore, it is the duty of the Institute to ensure that its Members are adhering to the basic needs of the profession while issuing audit reports to shell companies with no apparent business other than routing of money, to and fro!

            It is pertinent to note what the Report of the Expert Committee on Company Law has to say about the Duties and Liabilities of the statutory auditors of a company:

29. Auditors have the general duty of discharging their statutory functions with care and diligence. Many stakeholders would rely on the auditor’s reports for accessing the financial picture of the company. However, there cannot be any specific prescription of negligence keeping in view the expectations of all the stakeholders. However, auditors are required to carry out their work within the discipline of the legal provisions and the standards of accounting/Accounting Standards (where notified). There is a necessity that the work of the auditors should uphold the highest standards of excellence and independence. Non-compliance with such standards should invite stringent penalties. The Committee was of the view that the basic duties of the Auditors and their liability need to be laid down in the law itself instead of in the Rules. Quantification of penalty for Auditors may be prescribed in the Rules (

Same is the case for all Income Tax Officers who have subjected any of these companies to assessment.  They must be made accountable for incompetency, if not collusion for failing to identify the nature of fund flows in these companies.

            If we have to prevent corruption (please note, I am talking of preventing corruption and not about punishing corrupt) we have to ensure that there is accountability and transparency across the regulatory environment.  Our policy of externalising entire responsibility for corruption on to political leadership alone is surely back firing and proving ineffective.  Let us also demand higher standards (or at least reasonable standards) from those professionals who enjoy statutorily protected monopoly in their respective practices!

Tuesday, October 16, 2012

Is Corruption an Issue in Indian Politics?

Are you surprised at the timing of this question?  Are you wondering how any sensible person can even ask such a question while the entire media is discussing nothing but corruptions and scams?

Well, I have my reasons for asking such a question, which I hope you will appreciate, if you continue reading this post.

I, for one, strongly believe that corruption is not an issue in Indian politics!

Well, we make lot of noise around corruption. There are allegations and counter allegations being hurled in all directions, with total impunity.  Even media is willing to air stories about individuals without even proper verification of the alleged facts, with scant regard for the person’s reputation or propriety. 

Look at the number of agitations and fast unto deaths etc that was conducted purportedly against corruption in the past 15 months or so. It is very easy for us to get convinced that corruption is the single most important issue in today’s politics.  Now, we even have a new political outfit (yet to be named), under the aegis of India Against Corruption (IAC) or whatever is left of it, with fight against corruption as the only known ideology and agenda that binds them together ( though some would say, it is not corruption but the love of anarchy that is the binding force).

We have allegations not only against reigning central ministers and chief ministers but even against President of the principal opposition party and son in law of president of the ruling Party. There are insinuations as to who the Team A is and who else is their Team B etc in fight against corruption.  There are also claims and counter claims as to who is behind the activities against corruption- RSS, Congress dynasty and Ford Foundation getting the maximum credit or discredit.

The most bizarre theory about scams I heard recently was that the new scams are brought out into public domain only to remove the previous ones from the public memory.  I even heard that allegations involving Law Minister Mr Salman Khurshid was brought with his own connivance to deflect the heat away from Mr Robert Vadra, the son in law of Mrs Sonia Gandhi, against whom allegations of arranging undue favours from a state government to a corporate group as quid pro quo for benefits given to him was alleged.

On the other hand it is business as usual as far as Indian elections are concerned.  In various bye-elections and local elections, the current ruling party at Centre is facing mixed results, with some wins and some loses.  Same is the case with many regional leaders who are facing corruption allegations.  None of them seem to have lost any supporters on account of the allegations.  Even on social media, the arguments for and against the leaders facing allegations are mostly on predictable lines- depending more on the affiliations of the person commenting than on the nature or extent of the allegation itself.

Everyone speaks a lot on corruption.  But invariably, it is against the leaders of the opposing parties. Even those people who are not supporters of any conventional political parties (like the ‘I Am Also Common Man’ or ‘Mein Bhi Aam Aadmi’ volunteers) are focusing on targeting individuals and seeking their resignations than addressing corruption as an issue!

We don’t get to hear any suggestions from anybody as to what we should do or not to do to end or reduce corruption  in our country.  Look at the issue of Mr Salman Khurshid’s Trust. What is the sole demand of everyone concerned? Let the Minister resign!

“How about an investigation?” ....“ Well, no one has any faith left in the investigating agencies. “

“But the investigation is being conducted by the State Government ruled by another party!”... “So what?!  Centre will use CBI against State leadership who are themselves facing corruption charges, so that State Government will not let the truth come out against Central Minister”

“How about fighting it out in the court?”... “Are you crazy? Don’t you know in India, courts take so much of time and nothing comes out of it?”

“Ok, what if the Minister resigns but his colleagues continue to influence the probe?”... “Yes, very much possible. That is why this tainted government must go”

“What if the same government comes back to power?”... “No way, don’t you know 120 crore Indians are against corruption?”

“But then you saw the Nanded Municipal elections where Congress party was led to major victory by none other than Mr Ashok Chavan, who had to resign as Chief Minister, due to the infamous corruption case relating to Adarsh?”... “ Well, those are municipal elections and fought on  local issues” 

“But then how can we say corruption is an issue for 120 Crore Indians if they are not even willing to punish someone like Ashok Chavan, who has lost the perception war very badly?!”

This goes on...  Some would like to see the entire government out and replaced by their own party, like any genuine opposition would wish.  Some others are not happy with any party coming into power.  They, like true anarchists, want the government out but don’t want any other government to come back in its place! Some of them even say what India needs is a revolution.  Ok, fine. Revolution, and then what? No answer!

Why are we not asking ourselves as to how can we stop the corruption?  Why no one questions distribution of public money through private trusts?  Salman Khurshid and his Trust may or may not have misappropriated the grant, let courts/investigations decide that.   But can’t we ensure that the money is reaching the needy, directly? Even if the process of identification is conducted through NGOs, why should money be distributed through them?   How about the proposed direct cash transfer scheme, expected to remove all the middle men in distributing subsidies and state aids to poor?

No one seems to be interested in these questions? Why?

Answer is simple. We are not interested in corruption or its eradication as an issue.  No political party in India will dare to raise the issue of corruption as they very well know almost everyone in India is corrupt.  Neither will they take measures to eradicate corruption as the very electoral system in India survives and thrives on black money and corruption.  No one is under any illusion that the 1000s of crores spent on elections after elections are raised through bucket collections but corrupt deals!

With all the movements and agitations against corruption, have you seen a single person who has stopped going to the TTE in train, to get that berth allotted by paying bribes? Anyone who refused to avail admission of his/ her kid because s/he was asked to pay black money as unaccounted capitation fee? Anyone who refused a property transaction since the other party insisted on payments in black? Any corporate that refused to accept a license or contract because it was asked to pay bribes?

That being the case, all parties avoid fighting corruption.  But yes, they do use the concept as a tool in an insidious manner; for gaining publicity and media coverage on the one hand and for character assassination of opponents on the other hand. 

That is what corruption is for Indian politics... Only an easy tool to attack opponents!

I can foresee some readers reminding me about the struggle for Lokpal /Janlokpal as a remedy against corruption!  But again, I believe Lokpal /Jan Lokpal is no remedy for corruption. It is, at best, another tool that can be used against one’s opponents.  If threat of prosecution and punishment can stop deviant behaviours we wouldn’t be having murders and rapes so often.  

The whole focus of the movements against corruption and even the proposed Lokpal is how to punish those who have indulged in corruption.  The concept of retribution!  I am not convinced about the efficacy of retribution measures in preventing corruption.  If we have to prevent corruption we need to necessarily remove the avenues for corruption.  We need to reduce discretion of individuals and increase transparency in administration.  We need to make processes more and more automatic and reduce the interface between service provider and beneficiaries.

In fact this focus on the retribution and targeting of persons are being counterproductive to the cause.  No doubt, the guilty have to be punished. But that has to be done within the existing systems and institutions. We cannot afford to have revolutions and change of government on each allegation of corruption.  Instead, these allegations are only making the governments and leaders to go of the defensive thereby reducing any chance for systemic reforms!  Like lawyers fighting in the adversarial system of trial, people become compelled to take sides irrespective of the merits of the case!

In my opinion, the Right to Information Act alone has done more  in preventing corruption than all other measures combined (please note that more disclosures through RTI does not mean more corruption).  We need to follow it up with Right to time bound Services to citizens.  We also need to make more and more information regarding decision making processes compulsorily available in the public domain through publication on websites of concerned department etc.

These (and many other such) measures require a strong will to implement as any effort would surely face lot of resistance from vested interests.   Such measures lack glamour and will not get more time of news channels.  Instead we will continue to adopt the short cuts like targeting and seeking heads of our respective opponents.

I strongly believe, when our politicians realise that corruption is indeed an issue for our people, they will change and they will start reforming the systems.  Politicians only understand the language of votes... they don’t care a bit for reputation!

If people stop voting for corrupt leaders, leaders will stop being corrupt.  If people are more concerned about caste, religion, mosque, temple, cow, pig and various other such narrow issues, then corruption will continue to thrive in our country- merely replacing the old leaders with new ones, to continue in the same path and to provide new fodder for more retribution!

 May be this is the right time to make corruption a true political issue?

Saturday, September 22, 2012

My Newspaper Vendor and FDI in Retail...

Today I again got to see my Newspaper vendor of over three years, after more than six months gap!

He has got used to being my vendor so much so that he doesn’t even consider it necessary to visit me and collect the payments on a regular basis.  That always created a problem for me since I have to keep the amount in cash with me all the weekends, expecting him to come for collection.  He of course, wouldn’t accept cheque payments.  I was however, willing to bear this inconvenience because I am generally a loyal customer who hardly changes his suppliers or brands unless I have compelling reasons to do so!

Of late, he has been giving me a rather very compelling reason to change him! He used to supply the newspapers at around 8.00 am on all days. I adjust all my morning chores so as to be ready by that time so that I get at least 50 minutes to read my papers.  But for the last one month, he started supplying the papers at around 8.30 and some days it was only supplied after I left home at 9.00.

Two things I hate in my life are getting up in the morning even one minute earlier than what is really necessary and stepping out of home without having read the day’s newspapers!  In this world of instant messages and live news, who wants to sit and read a newspaper in the evening? By then the entire focus of attention would have changed to new breaking news.

Finally, I decided enough is enough and prodded our security staff to find me another supplier.  They found a guy who was willing to supply the papers by 7.00 in the morning.  It was too tempting an offer to which I immediately latched on to. He began supplying from the very next day and I requested the security to inform my existing vendor to discontinue.  I got two sets of papers for a week, before the old guy was finally conveyed with the message to discontinue! 

He met me in the morning today and tried to promise to mend his ways.  I conveyed my helplessness now that the other person is supplying too.  Finally, he grudgingly agreed to discontinue the supply and also promised to give the account and collect his dues in couple of days! Meanwhile, I got to know that the new vendor is now supplying to many more houses in our society, who were equally miffed with the existing vendor!

Have I done a mistake by changing the vendor? Have I taken away the right to livelihood of that vendor when I brought another vendor in his place?  The fact that this new vendor has not only got my order but also orders from many others in my housing society, since his timing of supply is more suitable to them as well, aggravated the loss of the previous vendor. 

My need to get the service on terms suitable to me, or his right to continue getting his business- which one should get preference over the other?  To me the answer was obvious!  And to my simple mind, same logic applies to all other businesses including multi brand retail as well!

All these years, this vendor has enjoyed monopoly in distributing newspapers within our Housing Society and has become complacent in the absence of any competition. When it was not convenient to him to supply the papers by usual time, he just changed the time of his supply, not making any effort to meet the requirements of his customers!  Now that there is a competition, he is willing to make that extra effort to meet his customers, find their needs and adjust to that.

This has been the situation in almost all businesses in India prior to the liberalisation and globalisation measures initiated in 1991.  We needed licenses from Government to commence any business.  Licenses were refused on the ground of increasing competition and capacity! Businesses thrived under the protection of government and politicians without any competition whatsoever.  There was no need to adjust to market conditions or innovate or increase efficiency in operations.  However, with opening up of the economy and the partial removal of the License Raj, competition began affecting the existing businesses.  We heard loud protests from Left and Right wings of political spectrum in the name of ‘Anti- neo colonialism’ and ‘Swadeshi’ respectively.  In short, they all wanted to continue the protection enjoyed by Indian businesses at the cost of economic growth and efficiency.

We all know what followed. At least those who are beyond their teenage must know the revolutionary changes and growth those simple (half-hearted) measures brought to India, that India came to be discussed as the new economic super power.

Even if they don’t agree to the economic growth etc, at least they would know the difference in terms of availability of choices, be it in TV channels, mobile phone services, airlines, shopping malls, eateries or many other such areas that affect their everyday life! 

The competition and infusion of foreign capital has not weakened Indian economy or Industries.  It only weeded out unfits and made rest of the players stronger

In continuation of the liberalisation measures, India had opened up its multi brand wholesale sector for foreign investment.  As a result, multinational companies like Walmart, Carrefour, Metro etc have already registered their presence in many Indian cities by way of wholesale Cash & Carry operations.  However, efforts by successive governments (which included both NDA and UPA) to open up multi brand retail sector was always resisted by the political parties, keeping in mind the protection of nearly 40 million people working in these neighbourhood shops, also known as Kirana shops.

As a result, these the retail trade in India, which account for nearly 15% of GDP, has failed to change according to the time by taking full advantage of the growth of economy.   Except for a minute portion of new generation enterprising traders, most of the shops remained in the age old mould, making it a very inefficient sector.

Have you ever considered, why we have high inflation (significantly contributed by fruits, vegetables and other food items) on the one hand and farmer suicides on the other? It simply means, the high prices that consumers are forced to pay for these products are not reaching the producers, i.e., farmers.  A lot of it is being sucked out by the long chain of middlemen who thrive in the absence of organised markets for agricultural produce.

FDI or Foreign Direct Investment (which is in fact different from the entry of multinational retail chains) in multi brand retail sector or even entry of the Walmarts of the world is not going to make any significant change in the sector, at least for many years in the beginning; much in the same way as the super malls have hardly affected any small shops in the neighbourhood.  

No existing shopkeeper is likely to lose his business for the simple reason that he will be catering to a different set of consumer needs like proximity, small quantities, credit, home delivery etc.  So long as they provide these niche value add, not much diversion of customers will take place from neighbourhood store to large retails shops.   As an aside, if all the supporters of the political parties who are now opposing the FDI policy, remain true to their ideology and keep away from the ‘MNC chains’, the small shop owners have nothing  to fear!

The new large stores or chains will only partly absorb the growth opportunities provided by an estimated 12 to 15% year on year growth! At least for now, not more than 53 large cities (with more than one million of population) and 5 or 10 other cities that may be notified by states and UTs with no city having more than one million population will be eligible to have these stores!

What these chains will make, in my opinion is a cultural shift.  Trading will shift from a caste and family based activity to more professional activity over the years.  The choice available to the consumers (even if limited), will force the service providers to change, like the Newspaper vendor!  In order to retain the business he will innovate and make it competitive and niche.  They will be forced to find ways to eliminate multi-layer middlemen and reduce the gap between farm/factory prices and retail prices.

As for the loss of job for middlemen and the traders who are not willing to adapt to new changes, well, there will always be some collateral damage to any change.  In every business some failure do occur. No one has a right to remain in a business that he is not capable of running efficiently and competitively.  Adapt or perish is the only survival mantra for any service provider; traders being no exception. 

To conclude, the new retail chains or FDI in retail (much same as my new newspaper vendor) is neither a panacea nor a livelihood shattering evil step.   It is merely a small part of overall reforms of our economy to ensure its growth and efficiency so as to meet the demands of an every growing and demanding population. 

PS: For a more serious and technical discussion on FDI in retail please read my post 'Foreign Direct Investment in Multi Brand Retail Trading- Some Basics'

Sunday, September 16, 2012

Foreign Direct Investment in Multi Brand Retail Trading- Some Basics

When the so called ‘big bang’ reforms were announced by the Government of India the term Foreign Direct Investment (FDI) gained prominence. The fact that these announcements were only minor steps to reverse the perceptions and nothing earth shattering was lost in the propaganda blitzkrieg that followed!

What caught the imagination of politicians as well as common people was the 51% FDI allowed into multi-brand retail trade.  This was projected as something that will eliminate the entire neighbourhood (kirana) shops and also the very livelihood of entire Indians.  Both Left and the Right wings of economic divide are planning to force those very same Kirana shops to remain closed on a Bharat Bandh, to protest the entry of FDI into the sector!

The debate that followed brought out the fact that, like any other major decisions in India, even this was being seen only through politically coloured eyes.  Many of the arguments did not show even a basic understanding of the related concepts.  Let us look at some of the basic of the FDI and its impact in the multi-brand retail trade sector.

Legal framework
The power to regulate FDI is derived from the powers granted to the Government under the Foreign Exchange Management Act, 1999, to regulate in flow and out flow of foreign exchange.  Under these powers GoI can prescribe conditions for entry of foreign capital into any of the sectors.  These conditions or framework comes under the category of subordinate legislation promulgated through Cabinet or Ministerial decisions under the delegated powers, in the main Act.  Therefore, a Government need not seek Parliament’s approval for making any changes in such frameworks.

In order to ensure that the policy framework on FDI is made ‘transparent, predictable and easily comprehensible’ for all the potential foreign investors and the Indian parties who want to receive such investments, the Department of Industry Policy and Promotion, under the Ministry of Commerce and Industry of Govt of India, publishes a consolidated FDI Policy.  This policy document is updated every year, with changes, if any, issued during the preceding year.

Foreign Investment
Inflow of foreign capital happens through many modes of which the following are important:

Foreign Direct Investments
For Persons resident outside India 
Foreign Portfolio Investments
For foreign institutional investors (FIIs), Non Resident Indians (NRIs) and Persons of Indian Origin (PIOs)
Foreign Venture Capital Investments
For Foreign Venture Capital Institutions through Venture Capital Funds or Indian venture capital Undertakings
Other Investments (G0Sec, NCD etc)
For FIIS , NRIs and PIOs
Investments on non-repatriable basis (cannot be taken back from India)
For NRIs and PIOs
Issue of shares by Indian Companies under FCCB/ADR/GDR
For Persons resident outside India 
FDI in Limited Liability Partnerships
For Persons resident outside India , subject to prescribed additional conditions for LLPs
External Commercial Borrowings (ECB)
For International lenders , subject to extant RBI regulations on ECBs

What is FDI and Why FDI?
While we saw that there are many modes for entry of foreign capital, here let us restrict ourselves to the FDI alone.  FDI means direct equity investment into a domestic company with the objective profit earning/sharing, with or without acquiring management control.  FDI is distinct from External Commercial Borrowing (ECB). ECB is debt funding sourced from foreign lenders and is required to be repaid with interest.  However, in FDI there is no obligation to repay.  Only the profit is shared by way of dividends and the exit is only by way of selling the equity shares to any third party or the Indian partners.

After the opening up of Indian economy as part of the Liberalisation and Globalisation, it is now the stated objective of Govt of India to attract and promote FDI in order to ‘supplement domestic capital, technology and skills, for accelerated economic growth’.   It is widely accepted that the capital required for growth of Indian economy to meet the aspirations of its growing population is just not available domestically (even if you point out those presumptive zeros of CAG to counter this, please note that even those zeros will have to come from somewhere!).

FDI is preferred to Portfolio investments for the simple reason that unlike portfolio investments, FDI establishes a lasting interest in the recipient enterprise and therefore greater stability to foreign exchange reserves.  Portfolio investments get invested in listed shares through stock exchanges and are likely to flow out as soon as markets show any downward trends.  But for FDI, to make an exit, it takes much more time and efforts and even the valuation at which domestic investors can buy out the foreign investors is regulated by the Reserve Bank of India.  Hence, FDI investors have much more stake in making the Indian enterprise a success by providing it all the necessary managerial and technical support.

Prohibition of FDI in some sectors
Foreign investment in any form is prohibited in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not (such as, Trusts) which is engaged or proposes to engage in the following activities:
  •  Business of chit fund, or
  • Nidhi company, or
  • Agricultural or plantation activities, or
  • Real estate business, or construction of farm houses, or 
  • Trading in Transferable Development Rights (TDRs)

 Apart from the above general prohibitions on Foreign Investment in any form, FDI is also specifically prohibited in certain sectors such as: 
  • Atomic Energy
  • Lottery Business including Government / private lottery, online lotteries, etc. 
  • Gambling and Betting including casinos, etc
  • Business of chit fund
  • Nidhi company    
  • Trading in Transferable Development Rights (TDRs) 
  • Activities / sectors not opened to private sector investment
  • Agriculture (excluding Floriculture, Horticulture, Development of  seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations)
  • Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes              

Till the recent decision announced by the Govt, Multi Brand Retail Trading (except single brand product retailing) was also a part of the above list.  In short it is the removal of MBRT from the above list of prohibited sectors that has caused all the commotion.

Restriction on FDI in some sectors
Further, the Govt has also prescribed conditions on FDI into certain sectors.  They are listed in the table provided in the consolidated FDI Policy (pages from 42 to 78).  The entries in the Table may permit FDI in a specific sector under the automatic route or under the approval route where prior sanction from the Government (FIPB) will have to be obtained.

In sectors/activities not listed in this Table, FDI is permitted up to 100% on the automatic route, subject to applicable laws and regulations, if any, and security and other conditions that may be prescribed from time to time.  The Retail Trading will now become another entry in this Table with FDI Cap/Equity of 51%.

Implications of FDI in Retail Trading                
Many a commentators has opined that the permitted 51% FDI into retail trading will sound the death knell for crores of retail traders or the kirana shops in India. But how far is it true?  One look at the safeguards will clearly tell us that it is a very humble beginning into organised retail trading with hardly any potential to threaten existing retail traders!

The following safe guards are being incorporated in the policy in order to provide a level playing field to existing traders: 
  • FDI capped at 51%
  • Retail sales outlets may be set up only in those States which have agreed or agree in future to allow FDI in Multi Brand Retail Trade.
  • Retail sales locations may be set up only in cities with a population of more than 10 lakh (As per 2011 census, there are only 53 such cities whereas there are 7935 towns and cities in India)
  • In States/ Union Territories not having cities with population of more than 10 lakh as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities.
  • Establishment of the retail sales outlets will be in compliance of applicable State laws/ regulations, such as the Shops and Establishments Act etc
  • Retail locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking.
  • At least 30 per cent of the procurement of manufactured processed products shall be sourced from small industries, in the country, that have total investment in plant and machinery not exceeding $100 million.
  • Minimum size of FDI will be $100Million
  • At least 50 per cent of the total FDI brought in shall be invested in back-end infrastructure, within three years of induction of FDI. Back end infrastructure includes investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture market produce, infrastructure, etc.  Expenditure on land cost and rental, if any, will not be counted for purposes of back-end infrastructure
  • A high-level group under the Minister of Consumer Affairs will be constituted to examine various issues concerning internal trade and make recommendations for internal trade reforms.
  • A strong legal framework in the form of Competition Commission is available to deal with any anti competitive practices including predatory pricing.

From the above restrictions, it is clear that the proposed investments will be made through Indian companies where at least 49% of the holding will remain with Indian equity holders and the retails outlets by these companies will be set up in very large cities where the growing demands can easily absorb the additional supply outlets. If at all, this will only increase the choice for consumers, thereby forcing the existing kirana shops to innovate and value add to their existing services.  These retail traders will also be benefited by sourcing their goods from the larger chains, thereby eliminating the series of middlemen who do not add any value in the supply chain but cause huge price increase through their commissions. In a growing country like India, there is enough scope for additional investment in these sectors.

In the words of the Govt of India, “The decision would benefit stakeholders across the entire span of the supply chain. Farmers stand to benefit from the significant reduction in post-harvest losses, expected to result from the strengthening of the backend infrastructure and enable the farmers to obtain a remunerative price for their produce. Small manufacturers will benefit from the conditionality requiring at least 30% procurement from Indian small industries, as this would enable them to get integrated with global retail chains. This, in turn, will enhance their capacity to export products from India. As far as small retailers are concerned, it is evident that organized retail already co-exists with small traders and the unorganized retail sector. Studies indicate that there has been a strong competitive response from the traditional retailers to these organized retailers, through improved business practices and technological upgradation. Global experience also indicates that organized and unorganized retail co-exist and grow. The young people joining the workforce will benefit from the creation of employment opportunities. Consumers stand to gain the most, firstly, from the lowering of prices that would result from supply chain efficiencies and secondly, through improvement in product quality, which would come about as a combined result of technological upgradation; efficient grading, sorting and packaging; testing and quality control and product standardization.”

“Implementation of the policy will facilitate greater FDI inflows, additional and quality employment, global best practices and benefit consumers and farmers in the long run, in terms of quality, price, greater supply chain efficiencies in the agricultural sector and development of critical backend infrastructure.”

In India, all the changes are opposed as a rule. We have before us the examples of mindless opposition to the opening up of Indian economy in 1991, introduction of computers, and introduction of VAT etc where the decisions turned out to be the game changers in the positive sense.  Each time we are told that the country’s sovereignty is being surrendered, the country only gains further in its stature and economic power!

The government is well placed to assess the needs for making policy changes.  Let us have faith in them. If they don’t live up to that faith, we have the option to replace them in the next elections.  But to prevent Government from making policies is to hold up the Indian economy and the development of its people.