Saturday, August 31, 2002

Omissions & Commissions

The Sebi move to bar agents from using incentives to bait gullible investors is good--but not quite good enough.
Gautam Chikermane
POLICYMAKERS HAVE a problem. They can’t look beyond their noses–or, rather, the spreadsheets in which their noses are buried. Which is why even well-intentioned policy exercises, ostensibly aimed at protecting investors’ interests, do not come close to delivering the intended results. Take, for instance, the recent Sebi (Securities and Exchange Board of India) decision to make rebating illegal. Well-intentioned? Yes. Thought-through, well-executed? Definitely not.
Story in Outlook Money

Should you dump Tata shares?

Accounting irregularities. Performance below par. Are the Tatas worth your money anymore, especially after the Tata Finance episode? The stock market has given its verdict by dumping Tata shares. What do you feel? Write in and share your views on the issue with others.
Gautam Chikermane
Integrity–we must conduct our business fairly, with honesty and transparency.
Everything we do must stand the test of public scrutiny.

--One of the five core values of the Tata Group
IN THIS day and age, trust is a lost cause. From business to accounting to politics, everything is malleable, manipulable. And the
Rs 41,300 crore Tata Group, that stretches across 80 companies in seven sectors, is facing all these problems all at once. The question that today haunts more than 2 million shareholders of the 35 listed Tata Group companies is this: can we trust the Tatas?
Story in Outlook Money

Thursday, August 15, 2002

Unearned income

It all boils down to a four-letter word called risk: find the inclination to court it, and you'll be on your way to riches.
Gautam Chikermane
WHY IS it that the rich keep getting richer and the poor poorer? What is it that prevents wealth from percolating down to the man of merit from the man of money? Why are the Bill Gates or Warren Buffetts, who have created immense wealth for themselves on their own steam, so few? In this age of knowledge, why is it that the knowledgeable person is found working for organisations either run or funded by the rich–why isn’t he wealthy? What is it that keeps money in the hands of the rich?
The answer: unearned income.
I owe this insight to a friend, who claims that the only way people become truly wealthy is when they don’t earn the money. What he is really saying is that people become rich only when they start making their money–rather than themselves–sweat for what they earn. Almost as if they had created an obedient, intelligent robot. When I examined this closely, I found myself nodding in agreement. This is a valuable lesson for us middle-class people, for whom the whole philosophy and process of wealth creation is relatively new, and one which has only recently got moral sanction. For decades we’ve lived in the belief that we have to earn our daily bread–daily.
Opinion in Outlook Money

Wednesday, August 14, 2002

Homelessly happy

A roof over the head does give security -- if it's your own. But taking on debt to fund that roof? In these times?
Gautam Chikermane
I’M BUYING a house.’ That’s my friend who, like me, would shudder at the prospect of using a credit card, leave alone taking a home loan. He’s not even looking at one of those EWS (economically weaker section) houses. The one he has in mind is worth Rs 24 lakh–a sizeable multiple of his salary. And his reasons are hardly original: the taxes and the rent I pay will get converted into a monthly instalment, though I could suffer for 15 to 18 months till I get possession. He reminds me of another friend, who just six months ago, moved from Mumbai to New Delhi, more specifically from a rented place in Bandra to a posh Rs 50 lakh apartment south of New Delhi. "I save taxes, I save on rent..." went the predictable argument, when I questioned her courage to take on such a huge loan.
They are not alone. If data is to be believed, amid the job losses and the recession and the business uncertainty and industrial slowdown, the one sector that has done well is housing finance. At a growth rate of about 35 per cent last year and an expected 50 per cent this year, this is one industry that seems oblivious of and untouched by the R-word plaguing the rest of India–from farmers and workers to entrepreneurs and bankers. As an industry, it is probably one of the safest in the financial sector-–individual households with so much of their wealth at stake in a single asset are least likely to default. Compare that to the Rs 75,000 crore of financial assets stuck with corporations, for which a new ordinance has had to be introduced. But I’m not interested in the profits or losses of companies.
Opinion in Outlook Money

Wednesday, July 31, 2002

Knowledge vs Money

Does a man who hasn't made his millions have the moral right to advise people on how to manage their money?
Gautam Chikermane
The man with the peaceful smile gazed at the two friends chatting next to him.
Doer: But how much money have you made?
Thinker: Not much.
Doer: Do you have a house of your own?
Thinker: No.
Doer: And you drive that rickety Maruti 800?
Thinker: Yes.
Doer: In what capacity, then, are you giving me financial advice?
Thinker: As someone who has some knowledge of finance.
Doer: That’s no good. If you want to advise people about money, you must be rich yourself. That is, if you want them to take you seriously.
Thinker: But my being poor has nothing to do with the knowledge I have or the advice I give.
Doer: Of course it does! If you’re really knowledgeable, you should be rich.
Thinker: By that logic, all finance ministers, fund managers, analysts, economists should be rich.
Opinion in Outlook Money

Sunday, June 30, 2002

Give us a break!

The new tax returns forms, running into 10 pages (and nine more of explanatory notes), make a travesty of the word Saral.
Gautam Chikermane
Mr Yashwant Sinha
Finance Minister
Ministry of Finance
North Block
New Delhi - 110001
Dear Mr Minister,
Thank you for convincing me that I’m no common man: I’m one of only 20 million taxpayers in this country, which makes me a very rare specimen of our species indeed. Someone the government ought to treat with samman–to borrow one of the many meaningless words in the dense tax lexicon –for thanklessly financing its profligacy. A man who, even as he bears the weight of the economy and pays for the sins of tax evaders, is at the rock bottom of the pecking order of political attention. Way below the various vote banks, money banks and muscle banks.
The list of injustices done to tax-paying citizens is long and unending, but the latest crude and insensitive joke is Saral ITS-2 and Saral ITS-3, a particularly warped variant of the form released in July 1999. These are forms individuals have to fill while filing their tax returns. A sample of disclosures we’re expected to make:
Column in Outlook Money

Saturday, June 15, 2002

More than meets the eye

Even before the dust has settled on the Enron-Andersen fiasco, we have the accounting misdeeds of WorldCom, Merck and Xerox in line. Can this happen in India? The idea is not as far-fetched as it might first seem. Readers are invited to write in with their views on the issue.
Gautam Chikermane
THE REVERBERATIONS of the accounting misdeeds of US companies have reached Indian shores. Even before the dust has settled on the Enron-Andersen fiasco, a series of new financial earthquakes, with their epicentres in the US, have begun to wreak havoc on international investors–WorldCom, which overstated profits to the tune of $4 billion; Merck, which did not account for $12 billion worth of sales; and Xerox, which claims it bribed Indian officials to get government contracts. The sheer scale of daring makes the Harshad Mehtas, the C.R. Bhansalis and the Ketan Parekhs look like petty pickpockets. Scams involving banks, stocks and allied regulators, RBI and Sebi seem like a waste of time, when so much more can be done by simply cooking the books.
Can this happen in India? Well, the idea is not as far-fetched as it might first seem. There are two institutions that participate in the publishing of balance sheets–the company’s management and its auditors. Once the balance sheet has been signed by the management, it is presented to all shareholders, and regulators like the Department of Company Affairs or Sebi (Securities and Exchange Board of India). The corruption of numbers, therefore, can be done by two sets of people–the management and the auditors. That is bad enough; what makes it worse is the ignorance of the regulators and the investors.
Opinion in Outlook Money

Money, sex and kids

By making money-talk taboo at home, we slow down our kids' progress towards financial literacy.
Gautam Chikermane
YOU MUST be out of your bloody mind. That’s the most perverted thing I’ve ever heard. Why do you want to corrupt the minds of these kids?" The shock was genuine, so was the anger. Not surprising when someone tells you that he wants to teach your children about money. "Money? For God’s sake, money is at the root of all evil... children must be kept away from it." But the same parents who so vociferously condemn this "misdirected enterprise" (to educate children about money) spend thousands of rupees– often dollars too–on them, and not just on necessities like their education, but on excesses like cellphones and ludicrously large libraries of video games. In their own lives, they certainly desire it. Lust for it. Worship it. Even fear it–perhaps because they don’t much understand it. Is that what explains this schizophrenic ambivalence about money: lust for it when you are an adult and do your damnedest to guard children from its "corrupting influence"?
Opinion in Outlook Money

Thursday, May 30, 2002

A date with death

If it's not going with me when I say my final farewell to the world, what's the big deal with wealth creation?
Gautam Chikermane
THE NURSE walks in. Pricks my vein with efficient ease. Pain. But I don’t have the energy to protest. Slowly, life starts flowing from the bottle, drop by drop, into my veins. As I stare at the white ceiling above, with no distractions other than the thought of a near-death experience barely an hour ago, I wonder what the whole business of life is about. That’s when I notice him, hovering immensely near the ceiling. Mighty, majestic, mysterious. "Who are you?" I ask. "The God of Death," he answers simply. As clinically detached from his answer as the doctor seemed from his patient when he introduced himself. The blood that has begun to course my veins again is suddenly turning cold. "What do you want?" I mutter, almost knowing–and dreading–the answer. "I’ve come to take you," the voice rumbles. Chilled by the certainty in his voice, I mumble: "But I’m not ready yet... is there any way I can get some more time...?" "Yes..." followed by a pregnant silence. What’s the ‘but’? I wonder. What is he not telling me? I am frantic, and in that fleeting moment, I wonder if I’d sell my soul to the devil if that was the price for staying on. And, then, "Answer these two questions."
* What do you leave behind when you die?
* What do you carry with you after death?
This couldn’t be happening, but it is. He couldn’t be there, but he certainly is. With no way out, and apparently nothing to lose, I decide to give it a go.
Opinion in Outlook Money

Wednesday, May 15, 2002

A case for regulating real estate

The real estate market has to change from one that runs on 'trust' to one that runs via trustworthy institutions.
Gautam Chikermane
FOR MOST of us middle-class citizens of this country, the biggest asset we have is a house–four-and-some walls which become a place where we not only invest our hearts and minds and emotions and aspirations, but most of our money as well. I’d imagine that 70-85 per cent of our total wealth is invested in a house. The rest is largely confined to safe government-backed schemes and insurance, and a tiny fraction is either wasting away in savings bank accounts, earning a pathetic 4 per cent, or circulating among shares, mutual funds and other financial instruments. Unfortunately, the real estate sector, which houses most of the middle-class wealth, is the least regulated of all these markets. Witness the contradiction: our most valuable asset is the least governed and the least valuable asset the most regulated.
If our stock broker cheats us of Rs 1,000, we can report him to Sebi (Securities and Exchange Board of India) or to the stock exchange–and expect to get justice. But if a property dealer charges us a Rs 50,000 commission (2 per cent) on the sale of a Rs 25 lakh apartment, and the property turns out to be disputed, there is nothing we can really do by way of seeking redress. Of course, we continue paying our monthly instalments to the housing finance company. If the property dealer charges us one month’s commission (at an exorbitant 8.3 per cent, unheard of in any rational market) on an apartment we want to rent out for a year, and the tenant turns out to be a rogue, the dealer is simply not accountable. We can do nothing, get nothing, hope for nothing. Why? Simply because there is nobody to go to, no regulator to file a complaint with, no self-regulated organisation to report this mishap. Yes, we can appeal to the courts–and pray that at least our grandchildren get justice.
Column in Outlook Money

Tuesday, April 30, 2002

Don't kill your child's instinct to succeet

By giving our children everything they desire without any effort, we could be killing their instinct to succeed tomorrow.
Gautam Chikermane
THE FIVE children–two girls and three boys, age three to six–frolicked in the small, plastic pool. It was a delight to see them fight the early-summer heat by splashing water on one another, turning into mermaids, crocodiles and fish, as the colours of Holi turned the pool from yellow to red to green. It was also an experience that offered insights into the process of wealth creation. Four of the children were from well-off, even wealthy, homes. The fifth one–let’s call him Hari–was the son of a government clerk. What his family spent in a year would be about one to two months’ expenses of the others’. Hari did not have expensive toys like the other children did; he had never seen a home pool. The other children were completely unaware of the economic divide between him and them, and although Hari was conscious of the divide, the child in him rejected these artificial layers of separation that build walls between adults.
The quintet moved on, from the pool to the cycles to the lunch table to the mom-and-pop games. In all the activities, there was only one leader: Hari. He only had to see a toy being used once and he’d master it. He was the organiser of all kinds of games: making a ‘house’ with dining chairs for walls and bedsheets for a roof, teaching them to pedal more efficiently, hold their breaths underwater and blow bubbles, and generally creating magic out of the ordinary. Hari, I felt, characterised the spirit of enterprise: he had nothing, not even a knowledge of how the remote-controlled jeeps and the other gadgets worked. But he created conditions under which the other children became his followers, chanting "Hari bhaiya, Hari bhaiya", doing what he told them to and having a great time. If he keeps at it, he could end up very wealthy.
Column in Outlook Money

Monday, April 15, 2002

'We are watchdogs, not bloodhounds': ICAI president

Pointing out fraud is for the regulators. Our job is to give them the information. What they do with it is their business.
Gautam Chikermane
When Ashok Chandak took charge as president of the Institute of Chartered Accountants of India (ICAI) on 5 February 2002, his role, it seemed, was cut out. A month into being in office (on March 8), against the backdrop of the dubious role of Andersen, the Enron auditors, in the US energy giant’s debacle, he passed his first resolution, which stated that an accounting firm cannot charge a company higher fees for consulting than for auditing its accounts. As head of the first accountants body to do so in the world, Chandak has caught the post-Enron-and-the-resultant-clean-up bus running. In an interview with Gautam Chikermane, Chandak touches upon the various aspects of regulating accountants. Scalded by criticism of the ICAI’s regulatory role (See 'Make accountants accountable'), Chandak began the interview on the front foot. Excerpts:
Do you think the accounting profession is accountable?
In the past 50 years, we have had the best self-regulatory mechanism–1,650 cases have been sent to the high court, an equal number would have been punished by the institute. The total number of cases considered: more than 10,000. Now, you tell me how many have been found guilty in other self-regulated organisations. I would say that we have the best record of regulation in the country. Besides, you should not look at statistics alone. You should consider the quality of regulation.
Why then are aspersions being cast on the profession today? Why is it felt that accountants are not accountable?
You say that auditors don’t do their jobs. Fine. Can you give me just 10 audit reports where the various regulators who get these reports (Registrar of Companies, Income Tax authorities, banks, RBI, Sebi or the stock exchanges) have taken action on the basis of the auditor’s qualifications? You won’t be able to do that because nobody takes these reports seriously. We are not regulators–and we don’t want to be regulators.
Interview in Outlook Money

Friday, March 15, 2002

Make accountants accountable

The checks and balances that govern the accountants' working are not enforced with any rigour.
Gautam Chikermane
AT RS 50,000 crore, the most valuable company on the Indian stock exchanges is Hindustan Lever. About 2.5 million of its shares are traded every day. There are 131 mutual funds–investing on behalf of hundreds of thousands of investors–that hold this company, of which 111 have it among their top 10 holdings. Together, they have invested almost Rs 2,000 crore in the company. This is aside from over Rs 10,000 crore other investors have invested. Why? Because this MNC has been among the best companies in India. Why do I say that? Consistently good performance– over the past 10 years, its sales have grown at 22 per cent and net profits at 34 per cent per annum. Who says so? The company’s accountants, A.F. Ferguson and Lovelock & Lewes. As a financial journalist, it’s my job to study the balance sheets and profit and loss statements of companies. When I pore over an annual report, I assume that the accountants who have passed the accounts written by the company have checked the numbers, tallied them and presented them so that an investor can make an informed decision to buy or sell the stock; lenders can decide whether the company has the capacity to pay back; and tax authorities can see whether it has paid the taxes due.
But what if Lever’s accountants were wrong? Worse, what if they had been conniving with the management to deliberately misinform, say, by overstating profits so that the share price did not plunge, or understating them and diverting the excess money into the pockets of the directors (and themselves)? Will the Lever stock that has appreciated over 15-fold in the past decade inspire the same loyalty in future? Will it continue to be sought after? Will it continue to be valued higher than peers Procter & Gamble or Nirma, whose PE (price-to-earnings) ratios are 20 to 25 points lower? Will it continue to attract the top talent from business schools and from across corporate India? The recent high-profile debacle of Enron has all the answers.
Column in Outlook Money

Wednesday, January 30, 2002

We need our luxuries, if we can call them that

Our notion of 'basics' and luxuries' is not cast in stone. The big car that is a luxury today will seem to be necessary tomorrow.
Gautam Chikermane
IF BEYOND the basics, everything is a luxury, the question is: what are the basics? Quite like the definition of ‘terrorist’ (one man’s terrorist is another man’s freedom fighter), the definition of ‘basic needs’ varies–one man’s necessities are another man’s indulgence. The Random House dictionary defines ‘necessity’ as "something necessary or indispensable" and ‘luxury’ as "a material object, service, etc., conducive to sumptuous living, usually a delicacy, elegance, or refinement of living rather than a necessity". Unfortunately, in their application, these definitions take us nowhere–the possibilities of stretching them to suit our beliefs are so high that they might as well not exist.
What is necessary? At one level, just food, clothes, shelter, education and healthcare. But my definition is just as subjective as any other, even though for millions around us even two meals a day is a daily battle and shelter certainly a luxury. The point of this exercise is not to arrive at absolute definitions, but to underline the relativity of the various shades of meaning a word acquires in its context–the context, in this case, being our station in life, which must condition our perception of ‘basic needs’ and ‘luxuries’. When I was in college, I would, like all my friends, travel in a DTC bus. As we stood waiting at the bus stand, I would hope first, to be able to get on the crowded bus; then, get a corner to lean my backside on; then, to find someone who would be considerate enough to share his seat with me; then, get a seat to myself; then, have a pretty girl sitting next to me; and so on. How quickly luxuries become necessities! Everything we already have is a necessity (but of course), and the next thing we aspire to will become a necessity soon as we have it.
What is a luxury? Christopher J. Berry, professor of political theory at University of Glasgow, explores the meaning of luxury in his 1994 book, The Idea of Luxury: A Conceptual and Historical Analysis. He defines luxuries as objects of desire that provide positive pleasure (as against necessities, which are utilitarian objects that relieve an unpleasant state of discomfort). So, while we may get along fine without our car, our computer, our cellphone and so on, before we knew it, each of these things became a necessity in our lives. We can continue to survive on food, clothes and shelter, but that car is no longer a luxury. At what point did that happen?
Column in Outlook Money