ANALYTICAL PIECES

Making mining attractive
With a host of coal auctions out of the way, state governments will soon be allocating non-coal mines in a transparent auction-based method. The mines to be auctioned include iron-ore, bauxite, manganese and limestone. Eight iron-ore mines in Karnataka could be up for bidding; followed by another 107 mines spread across 13 states. While transparent auctions are good for business and will help the stalled iron-ore industry to revive after various courts had cancelled leases for a variety of reasons, both the state and central governments also need to be careful to keep the policy as liberal as possible. India's royalty rates on most minerals are already much higher than those in countries like Australia and Brazil, and the new mining law allows for an equal amount to be paid by way of a district mineral fund (DMF); the DMF levy is a third of the royalty in the case of new mines. Keeping the duty too high will certainly keep out large global commercial miners who have the option of investing elsewhere—since the DMF specified is a ceiling, state governments looking to attract large miners may want to keep the DMF rates low. Indeed, it is to keep imposts low that, recently, the government reduced export duties on low-grade iron ore from 30% to 10%.

Indeed, it is not intuitively obvious why India needs to have export cesses or any other restrictions on exports. While the theoretical rationale is to create greater value addition within the country, it is easy to justify an iron-ore type tax on exports of steel as well—indeed, the government would do well to keep in mind that countries like Australia have built up a thriving mineral business on the basis of exports. In the case of Cairn India, as our lead story today points out, not allowing the company to export its superior quality crude is unduly penalising the company. Indeed, while it is taken for granted that oil/gas produced in the country cannot be exported—this reduces the country's potential as an investment destination for oil/gas developers—it is absurd that developers are not given market prices for their products; indeed, not giving market prices for gas found in the deep seas has ensured exploration activities have slowed dramatically. If the government, due to its Make-in-India policy, for instance, puts high imposts on exports—or states via the DMF—this will prevent the healthy development of the country's mining sector.

Getting a fix on India's real growth rate By: VL Rao " May 25, 2015 11:54 pm
In late January and early February, when the Central Statistical Office (CSO) announced revised figures of India's real GDP growth rate, these were received with scepticism, even derision, since the figures turned out to be far too high compared to the old series. In 2013-14, according to old series the GDP growth rate is 4.7% while according to new series it is 6.9%. Similarly, in 2014-15, according to old series the GDP growth rate is 5.5% while according to new it is 7.4%.

Until that time, observers in India and abroad were feeling gloomy about the poor performance of the Indian economy and suddenly the announcement came that the economy was, in fact, doing very well.

Surprisingly, serious discussion on this is not be found, probably in the wake of the euphoria created by Moody's raising India's credit rating to 'positive' and encouraging reports by some other observers.

This is not an isolated case of swings from collective gloom to complacency and vice-versa in India. In May 2013, when the US Fed announced it may taper the bond-buying programme under QE, there was a quick outflow of investments from the emerging markets to the US. From India, the FII outflow during June-August 2013 was to the tune of $13 billion, the CAD-GDP ratio reached a high of 4.9% (compared to the sustainable level of 2.5%), and the rupee touched its weakest level of R68.85 to a dollar in August 2013. Now that the CAD-GDP ratio is below 2%, the country is in a complacency mode, forgetting that the CAD came down because of lower oil prices and fall in gold imports in the wake of raising the import duty to 10%, while exports are stagnant at about $300 billion a year.

The Economic Survey, released before the presentation of the Union Budget in February 2015, had categorically pointed out that the divergence between the old and new figures is difficult to reconcile since, by many counts, 2013-14 was a crisis year. The survey also pointed out that the difference between the old and new figures is more glaring in the case of growth of the manufacturing sector, viz six basis points. So, the survey suggested that these issues need to be examined in greater detail.

RBI's Monetary Policy Report, released along with the Monetary Policy Statement, on April 7, 2015, pointed out that the robust expansion of manufacturing portrayed in the new series is not validated by subdued corporate sector performance in Q3 and still weak industrial production. The statement pointed out that the magnitude of the gap in real GDP growth rates between the old and the new series for 2013-14 and 2014-15 has complicated the setting of monetary policy.

Recently, the IMF Mission Chief in India pointed out that they were seeing discrepancies or puzzles in the new data and it has become a problem for them too. He said that since the CSO gave the IMF the GDP growth data (on the basis of new methodology) only for the previous four years, it is trying to compare an apple and an orange ("IMF to examine India's 'puzzling' growth data", FE, April 20, 2015, http://goo.gl/Gmb5yF). The IMF is reported to be giving CSO expert advice regarding the new data. The CSO should have sought this advice and discussed with other experts before announcing the new data.

It is said that public memory is short. It is getting shorter. As time passes, these issues may fade out from collective memory and we may use the new figures without careful examination. Or we may be in the Orwellian doublethink mode. An inkling of this can be seen from the observation of the IMF Mission Chief—it is as if we have an old India running on old numbers and a new India running on new numbers. We need to guard against both loss of memory and doublethink. In the Orwellian world, doublethink is because of Big Brother. We seem to be doublethinking without him, as is shown in our habit of moving from collective gloom to collective complacency and vice-versa quite fast.

Government must give up majority ownership in loss making PSU banks
After four years of braving economic slowdown and provisioning for rising non performing assets (NPAs), public sector banks are in urgent of capital. Which is why the government's decision to allow 23 public sector banks to raise funds from the market to meet their capital requirement is a welcome move. Yet, along with the permission come relevant questions that have been ignored by our policymakers because of their inability to execute long-term structural reforms. Hence, it is time for the pundits to figure out a lasting solution to the problems afflicting state-owned banks. The first thing that the mandarins in Delhi must ask is if the country needs so many public sector banks. This is an important question because barring some seven to eight, a majority of PSU banks have small-to-medium-sized balancesheets. These banks have largely survived because of continuous capital infusion from the government and not because they were good at core banking operations. Worse, most of these banks have similar lending profiles, and adopt a consortium lending approach, which means that their risk profile is pretty much similar. What's more, all these banks have failed in retail sector lending. This is clearly evident from the identical trends both in their sectoral NPAs and recovery cycles over a long period. This newspaper believes there is express need for mergers and acquisition of these banks into financially viable entitles. Such mergers would reduce overheads and other operational expenses of standalone banks, while helping them expand across geographies without affecting overall profitability. As is the case right now, most small and medium banks adopt a herd mentality, encroaching upon each other's geographical jurisdiction without generating profit. There are pockets in various parts of India where the number of branches of various state-owned banks far exceed the area's banking requirement. Secondly, a large banking entity would be able to raise both debt and equity at much better valuation and competitive rates. This newspaper has pointed out that certain banks are in talks with state-owned insurance companies to raise the required funds. This is unwarranted. Moving cash from one state-owned entity to another translates into a fake fund-raising exercise. Banks seeking the right valuation must approach genuine investors to evaluate their performance on objective parameters. The right of both majority and minority shareholders are protected only when capital is raised at right valuation. Like their private sector counterparts, state-owned banks must also seek long-term valuation by tapping the market in the right manner. For this to happen, the government must first be willing to let go its obsession to retain a majority 51 per cent stake in these entities. As a business, banking requires constant infusion of capital. By insisting on majority ownership, the government ends up sinking good money after bad at regular intervals. This also leads to a situation where one set of investors invest their cash at market determined valuations, while another set, led by the government and other state-owned entities, erode the value. This, in turn, destroys the credibility of the entire system by which banks raise capital. To suggest that the government must control the ownership of banks to advance financial inclusion is fallacious. Till the time RBI mandates that a certain portion of bank lending is directed at the priority sector, the objective of financial inclusion would be achieved irrespective of whether the government owns 51 per cent or less.



Insider trading: All you wanted to know about MEERA SIVA
Looking for a tip-off on a listed company before it buys a firm? Or a preview on its awesome results? Well, hold your temptations, that's a ticket to prison. Insider trading has landed many — from former celebrity Martha Stewart to Rajat Gupta — in serious trouble. Just last week, market regulator SEBI alleged insider trading by promoters of the Murugappa Group.

What is it?
Insider trading happens when those who have information that can move a company's share price trade in the market. All listed companies have an obligation to share every piece of material information relating to their operations, immediately with shareholders. When an insider trades on information that is not available to the public, it becomes insider trading. Insiders can be employees, relatives and all those who have business relations with the company. But what if your brother-in-law tips you off on a development he heard about from the promoter's gardener? In India, SEBI treats all such instances as insider trading. The rule on who is an insider is broad and covers even those not directly associated with a company but who may have had access to information nevertheless. This includes relatives of employees, brokers and analysts.

The information considered price-sensitive includes financial results, dividend declaration, mergers, expansion plans and management changes. SEBI can levy a penalty of three times the amount of profits made and can initiate criminal proceedings on those found guilty of insider trades.

As to company staff who may always have access to sensitive information and yet own company stock, the regulations allow them to create 'trading plans' that give details of when and how they will trade on the shares. This must be approved by a compliance officer, disclosed to the public six months prior to trading and cannot be deviated from.

Why is it important?
Trading on inside information creates information asymmetry. Regulators crack down on such acts. The SEC in the US prosecuted 250 people for insider trading during 2009-14. The most high profile of these cases was the one relating to Rajat Gupta, former McKinsey boss, and Raj Rajaratnam of Galleon Funds. In 2014 alone, the SEC filed 25 insider trading cases. In India, however, SEBI's track record has been unimpressive. Its cases against Wockhardt's CFO and Ranbaxy's independent director were successful, but many high profile cases such as the one against Hindustan Unilever and Tata Finance's managing director were overturned. One possible reason for this could be that SEBI has not traditionally enjoyed access to phone calls or phone records of market players to pin them down as the SEC does. But it has been granted access to call records in the new regulations.

Why should I care?
Unfair profits for insiders could mean losses for common investors. You should be aware of the illegality of insider trading while acting on tips too. If you are given a 'tip' on a company's impending profits by your golfing buddy who claims to have got the information directly or from a 'trusted source', beware!
By the same token, if you have access to sensitive information that can affect stock prices, remember that you automatically become an insider.

The bottomline
Trading on insider information is illegal. 

What about growth recovery?
With more data released in the past few days, are things any clearer about an economic recovery? Things, as is by now well known, have got clouded by the arrival of a new national accounts series that doesn't quite correspond to common economic indicators. Hence the greater concern given mixed signals so far.

Consider the most recent indications: Exports continued to contract in April — a 14% fall after -0.21% growth in March — explained by a mix of price and volume effects (especially petroleum and agriculture) and low global demand. Both influences are likely to persist for some time. Next, industrial production was weak at 2.1% in March; growth for the full financial year 2014-15 is 2.8% — compared to a 0.1% contraction in 2013-14, this represents a very small uplift. Gross direct tax collections are certainly far lower this year — just 9% growth against a far more robust 14.3% in the previous year. On the other hand, gross indirect taxes grew 9.5%, nearly double last year's growth. Likewise, April car sales grew smartly at 18% year-on-year, although helped by low base effects.

Corporate earnings growth in the last quarter, and the full year, are marked by their poor show so far. Sales and profits of 480 firms analysed by Business Standard in a 13 May report are at two-year lows. There is little indication of any investment demand but there are some signs of consumption demand. On the latter, recall this was expected to benefit from falling prices, especially of fuel. While the latter have started to firm up globally, inflation data in this context shows slow pass-through effects at retail level. The questions are whether this window is closing, and over the extent of purchasing power boost to consumers.

What lies ahead? It is instructive that public policy discourse has veered away from yesterday's 'policy paralysis' to 'debt overhang' today as underlying the growth slowdown. If that indeed is so — certainly, even faster clearances of stalled investment projects have failed to move them to the next stage, whereas all indications from bankers show no fresh project plans — then solutions lie elsewhere, i.e. how to resolve the bad debt problem.

Increasingly, it seems there are structural problems that impede domestic demand, while global demand isn't of any help. A recovery in the offing, from the mix of cyclical and fundamental indications available so far, then may not be very strong in such circumstances.

Why don't strategies stick?
About 120 of your top managers have gathered in the ballroom of a hotel at an exotic location. It's your annual conference and you have a strategic roadmap to share. Your organization's head of strategy has worked long hours with you to ensure the messaging is just right. Finally, your chief marketing officer and your advertising agency have put together a presentation that is visually rich. Now it's your turn, as chief executive, to deliver the speech and get 120 people aligned behind your strategy and inspired to make it work.

You practised your speech and, along with the powerful presentation, it was a big hit. Many in the audience said so after the speech and during the evening celebrations. This was perhaps the most acknowledgements you had received for any of the annual strategy roadmap presentations you had made over the years.

Two weeks later, the euphoria of a fabulous conference is over, you're at a regional meeting where 15 of the managers who attended the conference are present. You do a random check to see how many of them have remembered the strategic roadmap and understood how it applies to them. What percentage got it right? Well, if two or more got it, you have beaten the odds. The average percentage of people across companies and across geographies who get the question "what is your company strategy?" right is about 5%. In the book The Strategy-Focused Organization, Robert Kaplan and David Norton note that, according to an abundance of research data, on an average only 5% of the workforce understand their company's strategy.

How can you make strategies stick? For sure, visually rich PowerPoint presentations with bullet points and charts are not the answer. To explore what the answer may be, we first need to try and understand why current methods of presentations, roadshows and cascades don't seem to work. The answer lies in a phenomenon called the curse of knowledge, as illustrated brilliantly in an experiment by a Stanford University graduate student named Elizabeth Newton in 1990. Elizabeth took 240 students and divided them into two groups. One group played the role of tappers and the other group listeners. Each tapper was given a well-known English song such as Jingle Bells, and their job was to tap out the rhythm on a table. The listener's job was to guess the song. They were set into pairs and the experiment began.

At the end of the experiment, the tappers were asked to predict the probability that their listening partner guessed correctly. The average prediction was 50%. The reality was that the listeners guessed correctly only 2.5% of the time. Why did this happen? The curse of knowledge. When the tune is playing in the tapper's head, the tapping seems to be a perfect match, but for the listener who does not have the tune in her head, it sounds like noise. But the tappers are usually shocked about how difficult it was for the listeners to get it right.

The challenge is that once we know something—like the tune of a song—we find it hard to imagine not knowing it. Our knowledge has cursed us.

Just like tappers and listeners, in the business world, the provider of the strategy message (you) and the receivers (your employees) are perhaps in a situation of information asymmetry. The tune (understanding of the strategy) in your head is difficult to understand through the tapping (bullet points) on a PowerPoint slide.

This is where narratives can come to the rescue. In our practice, we call it clarity stories. In our Making Strategy Stick programme, we work with chief executives such as yourself, and those who report to you and take key messages like strategy, vision, mission and change management through a journey which results in a strategy story or a vision or mission or change-management narrative, as the case may be.

The narrative usually begins with stating the purpose for which the company was formed. It then talks about what the company did because of this purpose and the results it got. But then something changed, there were some turning points that necessitated our doing something different now (our strategy). Finally, the narrative ends by painting a picture of the future, of what success will look like to people within the company and without. We then train the team to be able to tell this story orally—after all, that is how stories are best told.

There are several advantages to this process. Everyone uses the same narrative structure or skeleton when talking about the strategy. Sharing strategy is no longer subjected to the interpretation of various senior members of the team. Whether you, the chief executive, is addressing the annual conference today or your chief financial officer is having a regional finance heads meet or your chief marketing officer is addressing all marketing and agency personnel, they are using the same narrative structure and, hence, there is consistency.

Consistency, a critical element in getting messages to stick, is the first advantage. Though everyone is using the same narrative structure, we teach them to find personal experiences and anecdotes to illustrate parts of the narrative. This brings richness to the tapestry of the story.

The second advantage is what we have been after—the ability of listeners to relate to a story. Because stories allow us to visualize, imagine and relate, because stories make the abstract concrete, stories connect and stories stick.

The third advantage for me is the most powerful—stories can be retold. No matter how clear your message is, and how simple it is to understand, there are only a limited number of occasions, be it one-to-one or one-to-many, for you (or your team) to personally narrate the strategic story to your employees. However, a story well told is easy to retell and this strategic story can be retold by people who you tell the story to. In turn, they can tell it to others. Finally, we have a cascade that works. And your strategy sticks.

The difference between taking a risk and risky behaviour
As an entrepreneur, should I be confident or cautious, should I take risks or avoid them?

Entrepreneurs are path makers. They create a path where none existed before. That implies there may be uncertainties at multiple levels. As the entrepreneur begins creating a new path, assumptions can prove wrong, unscripted events may present themselves and having dealt with all that, at the end, success is not guaranteed.

On the other hand, there may be unusual gain in terms of personal satisfaction and wealth that may more than compensate the amount of risk taken. That is why entrepreneurship calls for comfort with uncertainty and the ability to take risks. That ability, termed as risk appetite, is part genetic, part acquired, and an entrepreneur must see it as a gift. However, risk appetite is one thing and risky behaviour is quite something else.

A path maker cannot have risky behaviour because a lot of things depend on that individual. That is why the late C.K. Prahalad, a management guru, always chided his cohort of business leaders that their job was not to take risks, their job was to de-risk the future. He would always draw the picture of a moat filled with crocodiles and a fortress beyond. As a leader, as one contemplates the future, in this case the fort and whatever lies inside to be conquered, my job is to use strategy to cross the moat. To do that, Prahalad would ask that the leader define bite-size steps. To Prahalad, risk was an over-glorified thing. Even as an entrepreneur builds things from scratch, at the end of the day, an enterprise has customers, employees and investors—should the entrepreneur glorify risk or focus on creating strategy to de-risk the risk?

The idea of risk invariably leads us to the idea of taking bets. It is quite logical because every risk opens up multiple choices, each choice implies multiple possible consequences. In dealing with uncertainties, the entrepreneur must make a choice over the many other options. In other words, take a bet. David Yoffie, a professor at Harvard Business School, who was an independent director with Mindtree for many years, chaired our strategic initiatives committee and always asked the management team, "What can you bet on, without betting the company?"

As an entrepreneur goes past the start-up stage on to a time that the enterprise becomes a young adult, there are several other lives that become part of the journey. These are employees who don't just come to seek employment; they want meaningful work in a safe place so that they can marry, have kids, take a home loan and build a life. Just the same way, there are people who build businesses around your business, these are your suppliers, and finally, there are your investors who have trusted you with their money. Even as an entrepreneur seeks to build new value, he cannot be selfish and usurp the enterprise for his own ego. The entrepreneur must not put to risk the employees, suppliers, customers and investors, and sometimes, if it is the only way, he must be able to secure them and not abandon them, before moving on.

The entrepreneurial journey need not be a solitary one, particularly in matters of risk management. Every great entrepreneur has a formal and informal set of sounding boards—the board of directors, a ring of trusted advisors, paid consultants and peer networks that one may confide in. These then serve as a prism through which options and consequences can be weighed. These are people who can ask critical questions and, in the imminent possibility of ego-hijack, bring the entrepreneur to terra firma. But these relationships must be built on trust and respect, on the willingness to sometimes defer to counsel when it may not be convenient or palatable. So, seek the counsel of the wise each time you are required to assume a significant amount of risk that could impact your stakeholders.

The greatest risks are not entrepreneurial; the highest among all risks are those that pertain to a person's own life. Among adventure sports that often pose such risks is mountaineering. In that context, I want to tell you about mountaineers who scale the Everest. When climbers go past all the hurdles and can see the peak, before embarking on the final assault, they must check with base camp for permission. The tricky thing is that the permission is not always granted. While the base camp is not the one that can see the peak, it is often that the mountaineer cannot see the risk—the weather condition at the top changes treacherously, and by the minute. To be in that moment, mountaineers train all their life, give up everything to come up here and have no guarantee that life would give them a second chance. Everything they can see between themselves and the peak looks doable, they feel they are in great shape; yet, base camp says it isn't a good idea, come back for another day. Picture yourself in that position: should you come back or march on? The wise among mountaineers have a saying: when the biggest allure presents itself, ask a simple question—"you can but should you?"

As we build a business, there are things we must take bets on; after all, as the good old saying goes, no risk, no gain. The question is, what is reasonable? Are there things with which you want to take risks, are there things on which you will seek the base camp's counsel and are there things on which you don't ever want to take a risk? In my opinion, you don't want to do something that poses a reputational risk. We must always remember that reputation is the new capital and, once lost, unlike people, material, money and information, this capital does not easily come back. Taking a risk here is a no-no. But stay with me, we need to talk some more on the idea of risk, so see you on this page in a fortnight.

Coal reforms: What government is expected to do to boost efficiency in mining and increase output
The Centre has reportedly begun spadework for commercial mining of coal, in which supply shortages, underinvestment and obsolete practices rule, despite India's large proven in-situ reserves.

It would be path-breaking reform with the potential to boost efficiency in mining and evacuation and also rev up output. The 1973 coal nationalisation law that vested state monopoly in the mineral for the state was a retrograde move that has choked productivity. Last fiscal, the coal shortage was about 200 million tonnes, as much as 40% of the annual output of Coal India (CIL).

And the policy of captive mining, introduced in 1993 to compensate for the inefficiencies of CIL, has been suboptimal as well.

The very process of allocating mines was riddled with opacity, and captive mining, in any case, precludes economies of scale and scope. Last year, the Supreme Court decided to cancel all but four of the 218 captive, mostly non-operational, coal blocks, on grounds of legal infirmities in allocating mines to anyone other than central public sector enterprises and of arbitrariness in the allocation process.

Criminal investigations are underway into charges of corruption in the allocation process.

The Centre needs to do away with captive mining and usher in commercial mining with modern technology and revamped regulation and oversight, so that specialist coal producers can get to work.

In tandem, the present schizophrenic pricing of coal — just the cost of mining and royalty for captive producers, a low, administered price for those with a coal linkage from CIL, higher prices for those who buy from CIL's e-auction platform and, finally, the still higher price of imported coal — must give way to competitive pricing benchmarked against imports, to reap the full benefits of merchant mining.

In parallel, we surely need specialised entities for coal supply and evacuation, complete with washeries and novel dry processes to beneficiate coal and efficiently manage the logistics. We do need to adopt state-of-the art climate-friendly technologies right across the coal value chain.




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