Yes Bank Has No Money

V Pattabhi Ram

Everyone and their Uncle knew that Yes Bank was perched atop a cliff, ready to fall.  When you are growing 6x the industry average, it’s a red flag if a Rana Kapoor is at the helm. The irony is that on the board was an RBI representative and a former president of the ICAI.

Did the regulator sleep? In fact, investigations into the bank should have started when the RBI did not renew Rana Kapoor’s tenure as CEO. Some say the RBI should have acted much earlier when the bank was growing its loan book at over 30-40 percent. Well, we can always be wiser after the event.

Rana Kapoor was to the industry, what the RBI is to the banking sector, the lender of last resort.  Yes Bank never said ‘No’ to any suitor, even if other banking brides had rejected the groom. Kapoor would lend big, charge a hefty upfront fee of 2%-3%, and credit it to the P&L account. It immediately fattened the bottom line. And the rate of interest was about 16 percent compared to the 13 percent others charged.

In the early 2000s, the news was Yes Bank would operate on cyberspace. It did not pan out that way. Rana Kapoor, the former ANZ banker had founded Yes Bank along with Ashok Kapur, known in the banking circle, for his conservatism. Kapur was killed in the 26/11 attack, and after that, Rana was an unbridled horse. Reportedly,  Rana personally oversaw every lending, surely not a good sign for a large bank.

The trouble started when the RBI used technology to play Peeping Tom on the non-performing assets (NPA). Earlier, banks used to sell and buy back an account to avoid it becoming an NPA. Yes Bank said it had less than 1% of bad loans when its corporate exposure was a high 65%. That itself should have been a red rag.  With new regulations kicking in banks had to submit quarterly reports on all borrowers with an exposure of Rs 50 million.  The chicken came home to roost.

The scrutiny led to loan divergences. Meaning, the RBI and the Bank disagreed on the quantum of a bad loan. In FY17, this number was Rs 63.55 billion. A report by Jefferies showed that the Bank’s exposure to stressed accounts was Rs 102 billion, second only to SBI’s Rs 150 billion. And the total exposure to ADAG was a massive Rs 130 billion.  A cavalcade of corporate India’s fallen heroes: Anil Ambani (ADAG), Naresh Goyal (Jet), Subhash Chandra (Essel), Peter Kerkar (Cox and Kings), Wadhawan (DHFL) and Sameer Gehlot (Indiabulls) are likely to be called for questioning in connection with the Yes Bank probe.

My concern is in the State Bank stepping in to bail out Yes Bank. I have no problem with a Satyam style bailout. But a government mandating a nationalized bank to bail out a private sector bank in this fashion is not on. I didn’t place my money with SBI for it to play Knight in shining armor for a greedy and corrupt banker. I do agree that public deposits are at stake, but you cannot ask others to step in, without their making a judgment call.

We seem to be making a rash of such bailouts. The government recapitalized PNB, LIC infused fresh money into IDBI Bank, and now a slew of banks are pumping into Yes Bank. And they are acting under the instruction of the government. SBI is pumping in money at  Rs 10 per share. The market price has already gone up to 60 in a matter of days, but that’s not the point.

For now, the news is that the bank will be managed and run as an independent private sector bank.

But I would any day prefer a Satyam type sell-out.

Likes and dislikes

by: V PATTABHI RAM

Many years ago, at an inter-collegiate contest, I wrote an essay on If I were the Finance Minister of India.

DOWN THE THAMES

I wrote that the Income Tax Act must be dumped into the Thames; lock, stock, and barrel (those days, nobody called you anti-national if you didn’t quote the Ganges).  You see, I wouldn’t say I liked taxation as a subject in college. My essay reflected it. I suggested that India should tax “spending,” and I called it “Spending tax.” You see, I did not have an item called indirect taxation, so maybe I hadn’t begun hating it yet.

I wrote, “businesspeople create jobs, and it is good enough for the country. Employees slog for companies, and it is bad enough for them.” I wrote about the canons of taxation. You see, I loved economics, and fancied that one day I would be the finance minister. Nobody, myself included, understood my essay! A jury member liked my piece, fought for it, and thanks to her, I won the first prize.

Years later, the sitting finance minister has surprised. At the risk of being dubbed anti-Modi, let me point out a few things.

BIZARRE DECISIONS

The decision to do away with the dividend distribution tax is bizarre. It was perhaps one of the most elegant pieces of legislation since the arrival of the IT Act in 1961. I will tell you why. It met one of Adam Smith’s four canons of taxation, namely convenience, and was also in line with ideas in behavioral finance.

The famous economist had argued that taxes must be convenient to collect and easy to pay. Now imagine a company has 100,000 shareholders. Pray, tell me which is more straightforward: To raise the dividend tax from 100,000 shareholders; or to collect it from one entity, namely the company. Anybody will tell you that it is the latter. Enter dividend distribution tax (DDT). DDT goes to reduce the reserves. The reserves belong to the shareholders. So indirectly, they pay out without feeling the pinch.  In short, it was easy to pay and was so in line with the ideas of behavioral tax. Now when you push the tax on to the shareholders, they will feel the pinch of charge. To collect it from them even if it is through a TDS hardly makes sense. It means more paperwork. If you say that in today’s world of technology, it’s easy to do so, I would still ask why to do it, if there is no apparent benefit.

Let’s take up another of Nirmala’s ideas:  the creation of two parallel rates of tax and, therefore, two sets of taxpayers. If you wanted to eliminate all allowances, by all means, do that. After all, the days of targetted savings and consumptions are over. But to remove the saving element, namely the 80C and 80D parts is clearly sad. As it is, India is shifting out from being a saving to a spending economy. To accelerate that process does not make sense.  Like someone pointed, you may be willing to forego Rs 50,000 of tax to get the extra cash flow, which comes in because you are not making those investments. Personally, I would have liked to see tax investments stay on the radar. Also, at a time when the government is screaming hoarse about one nation, one tax, one law, why have two classes of taxpayers. Perhaps only Sitharaman can answer that.

WELCOME DISINVESTMENT

I like this idea of disinvestment, although it might be hard to imagine India minus LIC. I believe that governments must be in the business of governance, and not in the management of the business.  They must restrict themselves to law and order, primary education, foreign affairs, and defense, and throw the rest to private players. I also like the idea of Sitharaman that, over the long term, she would do away with all allowances and concessions. I would like that in the medium-term, she does away with all the grants and rebates to parliamentarians, both MLAs and MPs. Let them begin by paying a toll on roads, paying full fare on trains and flights, and paying tax on their income, including perquisites.

Getting back to my essay at college, I had also suggested that every Indian citizen, namely passport holder, should pay tax at 5 percent of his earning beyond a threshold limit. I initially celebrated the finance minister’s announcement, but the clarification that came in later stopped me.

 

 

 

FIFTY SHADES OF BLACK AND WHITE

V Pattabhi Ram and Anju Mary Peter

When we were young, we clearly knew the difference between right and wrong; between black and white.  Either this was taught to us in our schools, or we picked it from what we saw people practice around us.  Like Ernest Hemingway wrote, “I know that what is ‘moral’ is what you feel good after, and what is ‘immoral’ is what you feel bad after.” It was that simple, and there were no shades of gray.

But as we grew older, as we did our CA, and as we began working in firms or in corporate India something happened; the voice of our hearts became feebler, and the vision about right and wrong blurred. We started to bend the law without breaking it. Somewhere along the line, we began to say, “but, hey, forget the moral position; we are legally right.”  Let us be honest. The audit and accounting profession too has contributed to the mess.

In this article, we look at ethical dilemmas faced by professionals: doctors, lawyers, accountants, and auditors. These men hold positions of trust and have encountered ‘conflict of interest’ issues.   Today, the CEO and the CFO are often chummy; while in the natural scheme of things, they should act as each other’s check and balance.  We now know Enron was the rule, not the exception. WorldCom, Xerox, Satyam, DHFL, IL&FS, etc., have slowly begun to shatter the trust people had in the CA profession.

WHEN TRUST BREAKS

Things are good until trust is broken for the first time. After that, it’s like a cracked glass; nothing can reset it. Remember how a kid laughs when dad throws it into the sky. It’s because the child believes dad will let it fall. The day he drops, the kid will stop laughing.  Today, the public has stopped laughing. We have many fallen heroes, leaving us gasping for role models.

Among corporates, Tata and Infosys, still considered doyens of governance, have mud slung at them, and some of it has stuck. Air Asia and Infosys’ Panaya deal come to the mind. Cognizant and Larsen & Toubro didn’t cover themselves with glory in the bribery scandal that rocked them in the US.  Generally, what we know is what is made out for us to know. We get shattered once the truth is broken, leaving us skeptical about trusting again.

A chief contributor to this is ‘ethical dilemmas.’ You face such a dilemma when you have to choose between two situations that are equally dicey. The process becomes complicated as it differs from person to person either due to culture or because of individual perceptions of right and wrong.

THE SHADES OF GRAY

To understand the ethical-legal conundrum, let’s raise a few questions.

Do I as the CEO recruit a close relative in a position of influence? You may say “Yes. Why deny him the opportunity if he is, otherwise, eligible.” I disagree because promotions and payments, of which I am in charge, will see a conflict of interest.  Remember, Infosys’ founders decided that none of their children will work in the company.

Is it unethical to sell tickets in the gray market? You may say “Yes,” while I might say “No” because I have spent time and resources in procuring a ticket and wish to charge a premium for my effort.  If products can be sold above cost, why not tickets? Remember a banana being sold at a 5-star hotel at Rs 375 plus tax? Who is right, and who is wrong? Aren’t there shades of gray?

Next, is the question of legality. What is legal in one country is illegal in another. Both betting and abortion are wrong in India, but perfectly okay in some other countries. How do we then sit on judgment over these? Also, when laws change to allow for what was once illegal, is it right to say the code was wrong earlier.  One day when professional bodies allow advertising, would it mean the decision not to allow advertising all these years was morally wrong?

We must understand the relationship between law and ethics to further understand the shades of gray, aka ethical dilemma.

Law is a set of rules created by the government to govern society; and is made after considering moral values. We must obey the law; otherwise, anarchy will prevail. A breach of law invites penalty. In contrast, ethics or morality guides us about what is good or bad; it’s an unwritten code of conduct adopted by people. Allowing an ambulance to jump the traffic signal is a case in point.

The situation becomes dicey since we cannot define a moral law for all cases because code is principle-based, and not rule-based. Do I give a seating space to a pregnant lady on a bus while I am feeling sick? Do I wink at a possible qualification in an accounting statement because I am promised a more remunerative audit the following year? Do I, as a journalist, accept a gift from a company about whom I am writing? Do I as a doctor refuse a Diwali present from a medical laboratory? Remember Economics 101, where every theory assumed that ‘Human behavior is rational’ and every argument would have a limitation that it assumes rational behavior by human beings? Thus, we cannot define a law for all situations and must rely on good faith.

MORE SHADES OF GRAY

A person can face an ethical dilemma in any aspect of life, including personal, social, and professional.

Take the case of a highly decorated police officer who, because of being an awardee, was entitled to travel business class at a concessional rate. She travels at the reduced fare but charges the client the full fare. Was she morally wrong? After all, the discount was for her past work. Is there a need to pass on that benefit to the client? But then reimbursement is getting back of actual money spent.  Ha, there is a dilemma there!

Staying with travel, if I am eligible for air travel, do I travel by train and pocket the difference saying that any the which way the company was willing to spend the higher amount? To whom does the frequent flyer points accumulated on usage for company travel belong? You or to the company? Take another example. Suppose an airline allowed you a free trip for every nine trips you made. If you traveled nine times on company’s expense, to whom does the 10th travel, which is free, belong: to you who traveled, or the company which had paid nine airfares? Meaning, can you use the free ticket for personal travel, or must you use it for business travel?

Take the engine driver who faced a moral problem. There were two rail tracks, one used and the other, though good, unused for the last many years. Seven kids were playing on the used track while a child was playing on the other. The train was hurtling at 150 miles per hour,  when the driver noticed the children. There was no time to apply the emergency brake.  He had a split-second to decide. Should he travel on the regular route and kill seven? Or use the other route, which was still good, and kill the lone child. He did not change track and ran over the seven children. At the court, he said, “the lone child was playing, knowing it was safe. My killing it would have been immoral.”  The court acquitted him.

Auditors, because of their proximity to the board and because of sheer competition, take decisions that are legally right but morally wrong.  Like, how much fraud should the company’s shareholders know when you realize that the company is turning around. Can I push an April sale to March knowing the product was produced in March, moved out in March, delivered in April, money collected in May, and financials are to be signed in June? Is a doctor morally bound to tell the patient that he is sinking, while not doing so, would help the patient live the final parts of his life in relative ease? Is euthanasia morally wrong? What about a lawyer who takes up the cause of an assassin? Does the legal nonsense that every man is entitled to defense not run counter to morality?

ETHICAL DILEMMAS IN BUSINESS

Here are some easily relatable examples: taking credit for others’ work, like when the team leader hogs the limelight; offering an inferior product which may not hurt a client, but would profit you; changing jobs to a relentless competitor as in a Coke employee moving to Pepsi. Anything in a business is a potential ground for ethical dilemmas. This is why organizations frame their codes of conduct, violation of which may lead to sanctions.

Acting ethically means determining what is “right” and which is “wrong.” While some unethical business practices are evident; in other instances, they are not.

For example: should the purchase officer visiting the vendor company be put up by the supplier in a 5-star hotel and all his needs met? Remember, the officer will be negotiating prices on behalf of the buyer, and normally hospitality can make a difference. Ditto, when doctors are sponsored for international conferences by pharmaceutical companies. Maybe the doctor is not influenced in his decisions, but Caesar’s wife should be above suspicion.  Should auditors accept the hospitality of their clients or should their fee be all-inclusive?  Can the chief of selectors of the Board of Control for Cricket in India also be the brand ambassador of a franchisee in IPL?

In technical terms, these practices are legal, but it is a gray matter. The purchasing officer is likely to favor the vendor with a price discount. The doctor may prescribe the sponsoring company’s expensive medicine. The auditor may want to look the other way when there is an accounting transgression. The selector may be influenced by the fact that he receives top dollars for his work as an ambassador.

There is unethical behavior among individuals, businesses, and professionals. Being inaccurate on the resume is an example that comes to the mind in the case of individuals. Dumping pollutants into the water supply, and wrongly classifying employees as contractors to avoid ESI are examples of businesses resorting to unethical practice.  Doctors continuing to treat a patient without knowing the exact diagnosis is professional unethical behavior.

Some companies stay away from doing business with the government because of possible bribery. But is it fair to just stay away and let others continue with the practice, or should one fight the system? At the other end, to what extent can one ignore business losses for the sake of ethics? When Nandan Nilekani became the head of Aadhaar, he suggested that no contracts will be given out to Infosys. How can an organization balance corporate responsibility with more pressing matters, such as cost reduction in the face of a global slowdown? These are questions that are not easily answered and become tougher in the context of globalization where cultural issues collide!

ETHICAL LEADERSHIP

Managers face day-to-day ethical dilemmas as conflicts of interest, unauthorized payments, cherry-picking between suppliers, unfair pricing, and discrimination in hiring throng.  But one thing is clear. Without ethical leadership, we cannot see long-term growth. A Deloitte survey identifies five key factors in promoting an ethical workplace: behavior of management (42%), practice of the direct supervisor (35%), positive reinforcement for ethical conduct (30%), compensation including salary and bonus (29%), and the act of peers (23%). As the old English adage goes, “actions speak louder than words.”

Management must create an environment that is conducive to ethical behavior by acting as role models. A code cannot anticipate every possible ethical dilemma. You can have unanticipated situations with no guidance available about how to behave in that circumstance. In these situations, it is best to ‘disclose and discuss,’ say, by either talking to the boss or a colleague.

When faced with an ethical dilemma we must act on it; otherwise, it may result in severe consequences for organizations. To solve moral problems, companies and organizations work on developing strict ethical standards for their employees.

RESOLVING THE CONFLICT

Good ethics is equal to good business. According to greatplacetowork.com, companies that travel from good to great are those who had their moorings soundly based on values and ethics. There are two tests or guidelines.

1. Potter Box provides a guideline for ethical decision making by focusing on facts, values, principles, and loyalties.

STEP ONE: FACE FACTS: 

List the facts without making judgments. Example: Do I as a video journalist shoot a riot even as it is happening?

STEP TWO: EXAMINE VALUES:

What do you value most? This helps the analyst to identify differences in perspectives. We may judge according to aesthetics (pleasing), professionalism values (prompt), logic (competent), sociocultural (hard work), and moral (honesty). Example:  Will the shock value of the video discourage riots? Or will it stir up disturbing memories?

STEP THREE – EXAMINE PRINCIPLES:

Principles are reasoning applicable to a situation. You must decide which one of these principles you wish to apply.

• Take the middle path. Emphasize moderation.  (Aristotle’s Golden Mean)
• Compromise, as moral values lie between two extremes. (Confucius’ Golden Mean.)
• Do to others what you would want them to do to you. (Kant’s Imperative.)
• Seek the greatest happiness for the highest number of people. (Mill’s Principle of Utility.)

Staying with the riot example, we would perhaps go with either Aristotle’s Golden Mean or Mill’s Principle of Utility.

STEP FOUR – DETERMINE LOYALTIES:

Where does your loyalty lie in the given situation? Answering this will clarify your thinking. Example: In the video shoot of the riot, does your loyalty lie with the media company or with the general public?

The Potter Box is not a magic wand. Two people analyzing the same issue with the Box could arrive at two very different conclusions.

2. Mamma’s Test wonders whether you would be proud to tell your mother about what you did. If you would, and she would be equally proud of you, it has passed the test of an ethical dilemma, and you can go ahead. If it has not, it has failed the test. You might say this is juvenile; trust me it works.

A FINAL NOTE

When addressing an ethical dilemma, make sure you’re aware of all sides of the story, and talk to the right people for advice. “Good people do not need laws to tell them to act responsibly, while bad people will find a way around the rules,” wrote Plato.

Let’s be good, responsible citizens; and good, responsible, businesses.

 

 

Capital Punishment is anathema

V Pattabhi Ram

Who decides who should live and who should not.

Not you, not me. If you believe in God, it’s God. If you don’t believe in God, it’s Nature. So, it’s either God or Nature that takes a call on when a man should stay and when he should go. Not everyone agrees with this argument.

Some believe that the State has a right to kill as a form of tit for tat, as deterrent, and that is why we still have the capital punishment in our statutes.

There are several arguments for doing away with the death penalty from the statute book. Let me place four of them before you:

One, who gives the State the right to play God? How do one, three, or five ‘wise’ men decide whether someone should live or die? Yes, we need a criminal justice system but we need to think multiple times before it invokes the death penalty, aka state-sponsored killing. What happens if the judgment is not unanimous? When three learned judges, looking at the same pieces of evidence and arguments, come out with different decisions, who is right and who is wrong? What happens to the principle of benefit of the doubt? What happens to the dictum that a hundred guilty men may be allowed to go scot-free than one innocent man is wrongfully convicted?”

Two, worse still, what if the decision turned wrong? Can you give back the life wrongfully taken? I am not shooting in the dark. In the case of Thomas Griffin and Meeks Griffin, the two were convicted of murder. The witness was Monk Stevenson, another suspect. He later admitted he blamed them because they were wealthy, and he assumed they had the money to beat the charges. The Griffin brothers were innocent, but they went to the electric chair nevertheless. In India, Dhananjoy Chatterjee, a liftman, was executed after 14 years in prison on charges of raping a schoolgirl. The jail authorities had forgotten that he was in Death Row. Later, the Supreme Court, in Shankar Kisanrao Khade vs. the State of Maharashtra, remarked that the “criminal test” had not been satisfied in the sentencing of Chatterjee. Now, a study by two professors of the Indian Statistical Institute suggests the State might have got the wrong man, and that the murder was a case of honor killing. 

Three, judgment is not math. It becomes judge-centric. The Amnesty International in a 2008 report says as much. “Two men, Dharmendra Singh (2002) and Kheraj Ram (2003), were convicted because they killed their wives, suspecting infidelity. The former was sentenced to life, the latter to death. Two others murdered their wives and children because of ‘nagging.’ The former’s sentence was commuted; the latter was sent to the gallows.”

Four, legal experts also fear there are occasions when the police frame people to because they are under pressure to solve a case. If the death penalty itself is anachronistic, faking an encounter, pretending self defense, is worse. When revenge substitutes justice, we would be walking our way to disaster.

The fact that we could have got the wrong person, the fact that different judges read evidence differently, the thought that the State has no right to play God, the view that cops may turn rogue are enough indications that capital punishment must go. It’s morally reprehensible; staying on the statute makes it legally barbaric. According to Amnesty International, “by 2018, 106 countries had abolished the death penalty in law for all crimes, and 142 countries had abolished the death penalty in law or practice.” That should be good evidence of its incivility.

I rest my case.

FIRST PUBLISHED IN DT NEXT ON 13-12-2019

G NARAYANASWAMY: QUINTESSENTIAL INTELLECTUAL

G Narayanaswamy, GN to his vast army of friends and admirers, was sharp, quick-witted, and intelligent.

Born to a village school headmaster and to a mother who milked cows to make two ends meet, the man who would later become the doyen of the accounting profession, was the atypical rural lad who struck urban riches.  In an extraordinary career, he rubbed shoulders with top businessmen, leading politicians, and urbane CAs. 

He interned under the tutelage of his uncle S Venkatram who let go the princely sum of Rs 2000 that interns had to pay their boss while joining a firm.  GN set up and ran the ‘Madras Office’ of S Venkatram & Co. even while he was a 16-month-old Intern. The moment he qualified, he received a job offer from a high paying MNC. He consciously skipped it because “it would be ungrateful to let down a boss who had invested time and money in him.”

In the early years of practice, when he had zero clients, GN would visit the IT department where his brother in law worked, get introduced to the staff there, discuss matters relating to IT law, application, and administration, making new friends. These pals would come in handy in later years.

GROWING PROFESSIONAL PRACTICE

In a competitive profession, you have to prove your competency.  When he was young and raw, GN was introduced to a tannery merchant. Because the subject was Greek to him, GN had a prior long chat with a friend to become familiar with the processes and terms. Today the ICAI calls it ‘knowledge of business.’ When the client saw him, he if GN he had experience in tannery accounts. The auditor did not bat an eyelid in lying, “Yes!”  When Narayanaswamy completed the case to the satisfaction of the client, the tanner bought him tons of business.

GN used to say, “There are no hard rules on whether you should accept an engagement. Suffice to say, the professional must ensure that he keeps himself away from business dealings of the client and advise him to remain always within the four corners of the law.”

SOCIAL CAUSE

GN counted among others Rajaji, the first Governor-General of independent India, as his client.  His own political thoughts were free market and he was part of the Swatantra Party. He was a member of the regional council (the equivalent of legislative assembly) of the ICAI in the years 58-61 and was Secretary in each of those three years, which is an unbroken record. Then between 1979-88 he got into the central council (the equivalent of parliament) and was a member of the Disciplinary Committee in the profession’s self-regulatory organization.  At the council, he rubbed shoulders with some of the best brains in the country and learned for the first time how it is important to “disagree without being disagreeable.”

His association with the Society of Auditors started strangely. In 1952, a senior member invited him to a meeting of the Society, organized to felicitate the then Chairman of the CBDT. “I was welcomed at the meeting hall by two smiling gentlemen, both of who would later become Presidents of Income Tax Appellate Tribunal. They showed me the memorandum to be submitted to the Chairman regarding the grievances of the citizen. I criticized most of the points contained in the memo, which I later realized, was drafted by these two gentlemen. The duo, Suri and DR, appreciated it, and it resulted in my getting closer to them.” 

GN says an imperfect decision arrived at by consensus is better than a perfect ‘conclusion’ reached at by majority. 

WIT PERSONIFIED

The man was wit personified. Once he was to chair a session on taxation. The previous evening while traveling with the speaker, he told him, “Your paper was excellent.” The happy speaker said, “Thank you very much, Sir.” The following morning at the breakfast table, GN told the speaker, “Your paper was excellent.” The speaker said, “Sir, you told me that last evening while we were traveling.” GN had clearly forgotten. But he was quick on the repartee, “But that was before I read your paper. This is after reading it!”

Another time, I was a speaker at a National Conference that he chaired. I spoke on Initial Public Offerings and had a lot of queries from the audience to be responded. Not allowing me to answer beyond a certain number of questions, he told me, “Your IPO is oversubscribed.”

As a speaker, he was thick on content, wit, and wisdom. At 92, his was a life well lived.