AYODHYA & VODAFONE: CAN THE JUDICIARY SAVE US FROM OURSELVES?

October 2nd, 2010

NO BEEF

I’m not religious. I believe in God, but also that faith is not proven only through ritual. I enjoy my alcohol and am an occasional meat eater (mostly white). The only ‘Hindu’ belief I follow is to not eat beef – that too because it’s the only thing my grandmother ever asked me for. Besides I don’t like red meat, rarely ever eat mutton and so this beef ‘tyag’ rarely impinges on my lifestyle. Now had she asked me to give up crispy bacon…. it would have been a different story altogether!

 

So why am I boring you with my lack of religiosity today? Because the events of this week have left me disturbed. And because I heard the word ‘religiosity’ being used 10,934 times on television on Thursday!

 

NO SNOBBERY!

Yes, like most urban Indians - not South Bombay though, which in its own quiet way can often be very rabid; rabid Jain, rabid BJP – I too would like to leave the mandir-masjid issue behind and prefer to experience the same fury of debate on, let’s say, the lack of drinking water, sanitation facilities, rotting foodgrain, industrial pollution, good governance or any such issue of basic survival.

 

But that would be snobbish. To believe that my priorities, or atleast what I think should be national priorities must prevail over what thousands or millions of other Indians believe. If they believe religion is as much a priority, I have no right to snigger at them.

 

RAMALINGA RAJU ON NEW ACCOUNTING STANDARDS!

And so, even though I’d prefer to bury the Ayodhya conflict and move on, India would rather perpetuate it, helped generously by power-hungry, vote bank driven political parties and in some part also by desperate TRP seeking television anchors! No, I’m not being harsh on my own fraternity, but there’s no other way I can explain why one english news channel carried a peace platitude near its logo but invited Uma Bharti to spout her ‘bhavya mandir’ views. She’s not even a party leader any more. Her only significance is the criminal act of destroying the Babri Masjid. It’s like inviting Ramalinga Raju on a discussion on new accounting standards!!!

 

NOT ANOTHER KASHMIR?

Well anyways, to get back to the point – my lack of religiosity cannot mean that other Indians, who are religious, are wrong to be so. Which means whether I like it or not, Ayodhya is an issue we have to deal with. Saying that roti, kapda, makaan are the need of the hour, is like sweeping the issue under the carpet – which is a temporary solution, not a lasting one. Well-known historian Ram Guha said on tv this Thursday that he’d be happy if the Ayodhya case pends with the Supreme Court for another decade, by which time another generation would have passed and India would have outgrown the mandir-masjid issue. I say that is ‘wishful thinking’ for a dispute that refuses to go away despite the passage of time. Yes, the conflict’s most violent and criminal manifestation occurred 20 years ago, but the conflict itself has existed for hundreds of years. So what makes Mr. Guha believe that future generations will not be as religious? If that were the case, wouldn’t the Israel – Palestine conflict have petered out? That too, is about land and religion. As is Kashmir. Different conflicts, but all arising from a common issue of religious identity. I see no proof of any trend that points towards a substantial and continuous decline in religiosity across the world, or in India. And so, Ayodhya must be dealt with, soon.

 

PROVE THAT RAM DID NOT EXIST?

How? And by whom? Can a court rule on matters of faith? In a property dispute that dates back several hundred years, with no concrete evidence of original ownership, can the application of unemotional, clinical, sterile law produce a ‘fair’ result?

 

The Hindu parties involved are rejoicing that the Court has upheld the existence of Ram. How foolish! Would Ram have not existed if the Court had said otherwise? Can anyone prove that Ram did exist? Or, can anyone prove that he didn’t? And can any proof increase or diminish the faith that exists or doesn’t, in those who believe in the Maryada Purushottam? It is an absurd reaction.

 

The Muslim parties involved claim that because in recent times a masjid existed on that land, the land is theirs. Let me ask this – if a thousand years ago, the Church had taken over Mecca and built a cathedral there, would Muslims be wrong in asking for the land back today?

 

Or if today, an important Hindu structure is torn down by Muslims, who believe it is of great, religious importance to them, will all those peace-loving, laddu-stuffing Hindu leaders forgive them?

 

WHEN HUMANITY FAILS…

There are no rational answers to the questions above. Only those that emerge from the generosity of spirit and the ability to co-exist. When faiths clash, rationality goes out of the window. And that’s why what the Lucknow Bench has pronounced is the only available judgment to make, when an irrational, emotional matter of faith looks for a clinical, legal resolution.

 

For those who criticise the Lucknow Bench Judges I say – when humanity fails to achieve reconciliation, how can law succeed? Law is ultimately based on humane principles of fair play!

 

SC TO THE RESCUE!

The problem, I suspect, is of over-dependence. At a time when conventional forms of governance are crumbling and civil society is greedy and apathetic, the burden of bizarre, unreally high expectations has been placed on our judicial system. A system that is struggling to overcome its own weaknesses and inefficiencies.

 

Taj Mahal at risk, SC to the rescue

Police Reform lagging, SC to the rescue

Sexual Harassment, SC to the rescue

Too many Mayawati statues, SC to the rescue

 Hindu – Muslim Dispute, SC to the rescue

The (higher) Judiciary is among the few institutions that the Indian public still has faith in. And so when the law falls short, is shoddily or vaguely written, when governance fails and politics disappoints, we look towards the Courts. We expect Judges to plug the gaps, weed out the inequities, re-balance the system and offer some relief when all else has failed. We ask them to be fair and just in situations where the fair and just outcome would be acceptable to noone or would wreak havoc.

 

The same argument applies to a very non-religious, commercial matter.

THE VODAFONE TAX BATTLE!

Every tax expert and counsel I speak to, has high praise for the intellectual superiority and technical sharpness of Justice Chandrachud who has ordered that, though the Vodafone-Hutch deal is an overseas transaction that cannot be taxed in India and though the law recognises form over substance, there is some nexus in India and hence tax must be apportioned. Several experts have commented on a seeming lack of connectivity between the beginning of the judgment, which upholds legal theories that do not support taxability and the end, which concludes that there is taxability.

 

Without meaning any disrespect to the Honourable Judge and imputing motives to him, to me his judgment reads as if he knew, in his heart and head, that this transaction was all about India and an Indian asset, without which there would have been no transaction. But the law did not support taxability. And so using a ‘middle of the road’ approach he has ruled taxability, but not full, only partial. Giving both sides some reprieve and making an already complex matter even more so**!

 

When the law is lacking and companies would rather avoid tax*** (whereas the rest of us middle-class Indians, with no access to Cayman Islands or Mauritius, pay through our noses) what else can a judge do?

 

We have come to depend on judicial activism* - I use the term loosely to describe instances of when the Judiciary steps up to fill gaps not of its making - to save us from ourselves. When even Lord Ram needs a lawyer, Vodafone should not feel too bad (or grumble about Harish Salve’s bill!)

 

 

*
Justice P N Bhagwati

The judge is not a mimic. Greatness of the bench lies in creativity. It is for this reason that when a law comes before a judge he has to invest it with meaning and content. There are cases where a decision one way or the other will count for the future, will advance or retard sometimes much, sometimes little, the development of the law in a proper direction. It is in these types of cases where the judge is to leap into the heart of legal darkness, where the lamps of precedent and common law principles flicker and fade, that the judge gets an opportunity to mold the law and to give it its shape and direction. This is what we have been trying to do in India.

 

**
Prime Minister Manmohan Singh

March 2006

“I feel that judicial activism must be used in a restrained manner to fill up any institutional vacuum or failure and to clarify legal positions, retaining its character as a powerful but sparingly used instrument for correction.”

***

Tax Geek on Vodafone Issue (Identity withheld on request)

Post crisis – equity, fairness, etc… are becoming cornerstones in the construct of tax and fiscal laws worldwide. Courts are institutions of our society and cannot ignore the broader sentiments of society on a matter that has larger public interest. Those sentiments maybe inconsistent with extant law, in which case the courts should point that out and rule in favour of the law – but for that you require gumption. I believe the Supreme Court, as the highest judicial institution, will have that gumption.

 

The gentleman quoted above suggested a more provocative title for this blog

Ram, Vodafone & Harish Salve…

Once I know for sure that the neither Ram nor Salve will sue me I’ll change the heading. I can’t afford to anger the former and simply can’t afford the latter!

VODAFONE LOSING?

September 28th, 2010

I don’t quite understand why the Supreme Court has asked the tax department to raise a demand on Vodafone, whereas the issue currently under contention and under appeal at the SC, is that of ‘jurisdiction’. Will Vodafone have to pay some tax before the case proceeds on October 25th? Without a final decision by the SC on jurisdiction?

So I called several tax consultants and lawyers for their opinions. One tax consultant told me that “Revenue argued that in any other case the assessee would have to pay some portion of the tax claimed, before appealing the order, so Vodafone should do the same. And the SC agreed.”

But I thought this case was different - and that the Court itself had asked for the jurisdiction issue to be decided first (remember when Vodafone first went to BHC, then the  SC, then back to Bombay High Court and then awaited the IT order?)

Could it be that the SC wants to expedite the case and hence thought it best to get the demand process underway as well? One tax lawyer agreed only partly with my hypothesis. The other part of his explanation I couldn’t understand. Something about ” The SC will send this back to the Department Appeals  process as Vodafone has jumped those steps”.

But Vodafone was told by the BHC to jump those steps and appeal the tax department’s order directly in the High Court!

Could it be that the SC agrees with the BHC and hence this move? “That could also be it!” said another senior tax counsel.

CORE COMPETENCY OR DIVERSIFICATION?

August 17th, 2010

Hi everybody…for a change I’m posting a question…

It’s an an age old one and at the core of reams of research on corporate strategy…should companies focus on their core competency or diversify?

In other words and in context of the big deal announced yesterday - Is Vedanta’s diversification into oil&gas a good idea or not?

waiting to read your views…

THE CLUELESS AND THE CORRUPT!

August 5th, 2010

I can’t believe what I’m hearing! Breaking news story on CNBC TV18 - the Ministry of Corporate Affairs may consider making CSR (Corporate Social Responsibility) mandatory as part of the new Companies Bill, which is being examined by a parliamentary committee.

Companies with Rs 500 cr networth/Rs 1000 cr sales/ Rs 5 crore profit - will have to devise a CSR policy and spend atleast 2% of average profits on CSR - say sources to Siddharth Zarabi of CNBC Tv18

Good story Siddharth - but absurd proposal. 

Dear Mr. Government this is a very bad idea…

Morality cannot be mandated. You either have a conscience or you don’t!

If you force companies to find a conscience, they’ll also find a way to violate it. Promoters will get their aunts, uncles, chachas, bhatijas, neighbours, NRI friends or POLITICAL BENEFACTORS… to set up NGOs and chunnel the money to rubbish, fake causes!

Unless ofcourse the Ministry will also spell out exactly how the money must be spent. But then it has to monitor the process. Tall task that! For starters let the  government try and keep track of the several thousand crores frittered away by the corrupt CWG team!

Problems don’t go away by throwing money at them. Well, atleast non-political ones don’t! The funding needs to be accompanied by capable execution…or else it’s just another Consolidated Fund of India!

Good projects will get corrupted by bad money… and those NGOs that are infact pursuing a worthy cause will get eclipsed by the several unworthy ones chasing that 2% CSR allocation.

I think our politicians should stop trying to impose lofty, and often unattainable, moral standards on our companies when they themselves are so often caught with their hands in the cookie jar.

Let’s aim for honest business practices first. No point telling the business leader who’s lobbying your government for sectoral favours and lining your election kitty to curry favour, that his business needs to have a conscience.

Maybe this is some new way for politicians to make money, earn a living. Hire a jholawala, set up a charitable trust and wear khadi kurtas on tv! Call yourself the next big social cause and trade political favours for 2% CSR money.

60 years after Independence even the most basic level of good governance evades us - at the city level, at the national level. Everyday there’s a new headline on yet another corrupt politician. All around us infrastructure is falling apart. Business practices don’t live up to very high governance standards either. Why can’t we focus on fixing the nuts and bolts stuff? Because that takes hard work. So much easier to change a law and get someone else to pick up the bill!

RNRL: TO BE OR NOT TO BE?

July 5th, 2010

I believe this existential crisis has faced RNRL ever since it was first created in 2005/06. And to my mind, had RNRL not been created, there was maybe a chance that this gas fight between the 2 brothers would not have so severe.

The very creation of RNRL surprised me at the time - I was covering the Ambani split saga in 2005. Let me explain why…

During the course of June, July & August 2005 it became clear (i.e.: sources told me) that the family split in assets was to be executed via a de-merger of Reliance’s telecom, financial services & energy business. As I learnt then (from sources again) the de-merger would create 3 new companies, whose shareholding was to mirror that of RIL. I had double-checked this with a variety of sources on both sides and was pretty confident that this was the final structure the family split was going to follow. I reported it on CNBC TV18 and a few weeks later the story was publicly confirmed when Mukesh Ambani laid out details of the de-merger in his AGM speech on August 3, 2005. Here’s the relevant excerpt

Mukesh Ambani 31st AGM Speech
3rd August, 2005
The Board has now proposed to de-merge from RIL the power, financial services and telecommunication services businesses.
I would like to take you into confidence about the broad principles of this de-merger scheme.
RIL’s holdings and interests in these businesses would be de-merged into separate entities.
RIL shareholders would be entitled to equity shares in these entities, in the same proportion of their equity holdings in RIL.
For example, if you have 100 shares in RIL, you will, in addition to your shares in RIL, get shares in each entity equivalent to RIL’s shareholding in these businesses.
Such a scheme of de-merger would help focus management attention to the specific needs of each growing business.
RIL has appointed CRISIL, Deloitte Haskins & Sells, Amarchand Mangaldas & Suresh A. Shroff & Co. and JM Morgan Stanley to assist in working out the details of the de-merger.
Once the detailed proposal is approved by the Board, we will meet once again for your approval as part of the court-determined process

Mukesh Ambani made it clear that day that the Board and its appointed advisors would deliberate on final aspects of the de-merger before asking shareholders to vote on it. Most of us expected that would take maybe a month. But that evening Anil Ambani pulled a surprise. Not only did he hold a press conference to provide de-merger details his brother had not revealed. He also announced the creation of a 4th company as part of the de-merger - Global Fuel Management - the first avatar of RNRL. Anil Ambani said GFM would hold gas supply contracts from RIL. When asked why a new company had been created to hold gas contracts that were to be signed by REL, Anil said, if I recall correctly, that it was in the interest of transparency and governance that the gas supply committed to by RIL, be held in a separate company than REL. He also elaborated that GFM would also build other fuel assets.

By Friday August 5, the news was confirmed by the RIL Board (imagine the absurdity…events were happening in reverse) and GFM was described as

RIL Press Release
August 5, 2005
Global Fuel Management Services Limited for gas based energy undertaking. The book value of RIL investment in this company is not significant.

That same day a press release by the then newly formed ADAG Group went further to say

ADA Enterprises Press Release
August 5, 2005
Global Fuel Management Services Ltd (GFMS)
Over 23 lakh Reliance shareholders will receive 100 shares of GFMS for every 100 shares held in RIL.
GFMS will be the holding company, with contracts for supply of natural gas from RIL, which are proposed to be utilised for Reliance Energy Group’s power generation projects mainly in Uttar Pradesh and Maharashtra, and also other power projects in India.
GFMS will have an equity share capital of 122.3 crore shares of the face value of Rs. 5 each, aggregating Rs 611 crore (US$ 140 million).
This company will be listed in due course, providing liquidity to over 23 lakh shareholders.

It was clear by now that though Anil Ambani would not get any part of RIL’s large and lucrative gas fields, he would get an assured supply of gas to fire his power plans. The gas was meant for REL.

How then did GFM come into the picture? Why, when the gas contracts were eventually be signed between RIL and REL, was there need for a separate company to hold those contracts - like as if they were travelers in transit and needed to kept inside the airport…lest they run away! The gas supply was part of the Ambani Family MoU and if either party reneged on any promise in that MoU I’m sure there was due process laid out for resolution/damages etc…
Plus the gas wasn’t even available then…its production would take atleast upto 2009, as was commonly known. So why create a transit company (then GFM, now RNRL) to hold contracts of gas that was yet to be made available, and when available, was due to another company - namely REL? What transparency or governance cause did it help?  None I suspect. The real reason, in my assessment (and common wisdom at the time concurred) is that GFM/RNRL was created only to monetise the value of the gas contracts.
All that the gas contracts represented was an assured fuel supply to REL’s power plans and to that extent, yes, they enhanced REL’s value, but only inasmuch an assured supply of fuel supply would for any other plant. All power companies sign fuel supply agreements. Agreements that rarely make for market moving events. So why the big
deal about RNRL? 

Maybe Anil Ambani wanted his own gas play?  Remember RIL’s market capitalisation soared upon the discovery of gas, a gain that perhaps Anil Ambani wanted to share in but couldn’t, due to the family split. He couldn’t get any part of RIL or its gas fields, but he could try and create similiar value (to a lesser extent ofcourse) by holding the gas contracts in a separate company - RNRL, in the hope that it would benefit from a high market capitalisation, like other companies with natural resource assets. For the Ambanis, market capitalisation is an important currency…always has been. (Well I guess it is so for most companies, but maybe not to the same extent?!)

And to be fair…if that was Anil Ambani’s expectation…RNRL did deliver, not just for its majority shareholder but for all shareholders. As of last week’s data RNRL had a market capitalisation of over Rs 10,000 cr, this despite losing a prolonged court battle and FY 10 earnings of Rs 90cr!  

But what if the gas contracts did not materialise…wouldn’t RNRL be worth nothing! Didn’t both brothers know then (at the time of the Family MoU), that government approval would play a crucial role in making good the Family MoU? Did they not factor in the possibility of NO government approval?

Here’s what I think - that at no point did the Junior Ambani doubt that he would get the promised gas. Since it was part of the family agreement sanctioned and blessed by his mother, Mrs. Ambani, it was probably unlikely that Mukesh Ambani would renege. As for government permission maybe Anil Ambani was confident that he would get it. A possible indication of that is in the Bombay High Court Judgment, which includes excerpts of the Family MoU. The relevant portion is produced here

Bombay High Court Judgment
June 15, 2009

(viii) Kokilaben recognizes that a long term, stable source of gas from RIL,which has the largest find of gas, was absolutely essential for the growth plans of the Anil Ambani Group and in order to enable Anil to carry REL to even greater heights. Kokilaben has, therefore, specially stressed and impressed upon Mukesh and Mukesh shall personally ensure that at the time of finalisation of the binding gas supply agreement the terms provide the required comfort and stability in these agreements, even if that means some departure from the NTPC standard.

(ix) The gas supply/option agreements would be between RIL and a 100%
subsidiary of RIL, which would be demerge to the Anil Ambani Group as part of the Scheme of Arrangement. Such agreements would not be with REL.

(x) The gas supplied to the Anil Ambani Group by the Mukesh Ambani Group shall not be used for trading, other than trading within the Anil Ambani Group.

(xi) Swapping of gas is permitted.

(xii) (a) In relation to applicable governmental and statutory approvals, without in any manner mitigating RIL’s responsibility to jointly work towards obtaining such approvals, RIL will, if so required by the Anil Ambani Group, give an irrevocable Power of Attorney to the Anil Ambani Group/REL to apply for an obtain all such governmental and regulatory approvals as are necessary on its behalf.

(b) The definitive agreements will reflect that the Mukesh Ambani Group will act in utmost good faith and will make best endeavours to work for and obtain such approvals. If there is any action taken in bad faith for not obtaining/scuttling the obtaining of such approvals, Kokilaben reserves her ability to intervene again and the Anil Ambani Group would also have a claim for damages.

To me the above excerpt makes it clear that according to the Family MoU, Mukesh Ambani had to do everything he could to get Government approval for the promised gas supply. If he didn’t, there would be consequences. And maybe Anil Ambani was confident that, if not his brother/RIL, he himself would surely manage to get government permission for the supply of gas. Why else would he ask for a PoA to do so?
Maybe the belief was that if the 2 Ambani brothers were to lobby the government for something, it was unlikely that they wouldn’t get it?

So why didn’t they get it? Could it be that Anil Ambani’s attempt at monetising the gas didn’t go down well with the rest of the family/ powers that be? Could it be that the Ambani influence, or atleast Anil Ambani’s influence, over political powers waned over time? What went wrong?

Maybe we’ll never know the full truth but by 2008 it was clear the Government was not going to play ball …giving Mukesh Ambani/RIL cause not to supply the gas.
The court battle of the past 2 years is a well-documented one and I don’t need to remind you that Anil Ambani lost the right to that gas, unless supplied at terms agreeable to the Government and in keeping with its gas allocation policy. Since then all parties and policy have arrived upon a compromise…Anil will get gas (albeit at a higher price) but it will be supplied directly to his power plants and not through RNRL. Infact RNRL will cease to exist in a few months!

But what if RNRL had not been created at all?     
What if the gas contracts would have remained between RIL & REL?
Would the issue have been less controversial, more mundane, like any other fuel supply contract and passed government muster?
Maybe the Government would have still insisted a higher price be paid for the gas?
Would that have been a big hurdle for ADA’s power plans, considering that fuel is mostly a pass-through cost for power plants?
Or was it mostly of relevance only to RNRL as its valuations depended on access to abundant, CHEAP gas?
If it were just about the gas contracts, without the added complication of RNRL, would the matter have been resolved faster?
Now that it’s just about gas contracts, without the added complication of RNRL’s existence, isn’t the matter headed for resolution?

And so should RNRL have been created at all?

Author’s note: This article is based on my assessment of events and is simply an opinion of what may have occurred.
While the excerpts of Company Statements, Speeches & Court Judgments reproduced in this article are factual, the conclusions arrived at are mine and mine alone and may have no bearing on the truth!

The article does not reflect the views/beliefs of the author’s employer or any other person.

Readers please also note that in 2008 REL was renamed Reliance Infrastructure, but I have stuck to the earlier name to keep it simple.

And yes I do anticipate that many of you will disagree with me and argue that cheap gas was vital not just to the existence of RNRL, but to the fortunes of REL as well, as otherwise it may not have been able to win so many UMPP bids…go ahead… I won’t entirely disagree. But I do believe the monetisation of that gas and RNRL’s market cap was probably more valuable than the ability to bid cheap!

LESS TAXING CODE!

June 16th, 2010

For those of you interested in tax…here’s my version of the 2nd Discussion Paper on the Direct Tax Code, released today

MINIMUM ALTERNATE TAX (MAT)
To be levied on book profit (not on assets as earlier proposed!)
- So companies pay corporate tax (rate unknown) or MAT on book profits, whichever is higher
Verdict:  WOW!

EXEMPT, EXEMPT, EXEMPT 
EEE (income invested is exempt, interest earned is exempt, gains made are exempt) will now apply to 
Provident Fund contributions (Govt, Public, Recognised)
Pension scheme (administered by PFRDA)
Approved pure life insurance products & annuity schemes
- Existing products that enjoy EEE will continue to do so till end of term
Verdict: WOW!

CAPITAL GAINS
Long Term is now equal to 1 year from end of financial year in which asset is acquired
Deduction (rate not specified) will be available on Long Term Capital Gains arising from equity/equity oriented products, and post deduction remaining gains to be taxed at slab rates
Capital Gains on other assets (held for more than 1 year): Base date shifted from 01.04.1981 to 01.04.2000. Unrealised gains upto 01.04.2000 will not be taxed
FIIs: Income from sale & purchase of securities will be charged under Capital Gains. To pay advance tax
STT will be calibrated  based on new tax regime and fund flows
Verdict: BETTER THAN EARLIER PROPOSAL, WORSE THAN PRESENT SYSTEM

SPECIAL ECONOMIC ZONE
Exemptions grandfathered for existing SEZ developers & units. No new profit- based exemptions available
Verdict: EXPECTED. EXEMPTIONS NEED TO GO. N R NARAYANAMURTHY SAID SO HIMSELF!

RESIDENT
Definition of ‘resident company’ sharpened against earlier proposal. Now visiting MNC Boards no longer need worry!
Controlled Foreign Corporation (CFC) concept to be introduced. Bad news for intermediate overseas investment companies, as income will be taxed even if not distributed to Indian parent.
Verdict: GOOD

WEALTH TAX
Now to be levied only on unproductive assets.
VERDICT: POSITIVE

GENERAL ANTI-AVOIDANCE RULES
Diluted. To be invoked only in cases where arrangement is not arms length, represents misuse/abuse, lacks commercial substance or not for bonafide business purpose. Safeguards include
CBDT guidelines & threshold to provide circumstances under which GAAR may be invoked
Access to Dispute Resolution Panel
Verdict: MUCH MILDER & BETTER THAN EARLIER PROPOSAL

TREATY OVERRIDE
Has now been limited. DTAA will not have preferential status over domestic law when GAAR/CFC is invoked and when Branch Profit tax is levied.
Verdict: MUCH MILDER & BETTER THAN EARLIER PROPOSAL

Conclusion
The 2010 discussion paper is a much milder version of 2009 proposal. But it also means that reduction of corporate tax rate to 25% (as proposed last year) will now be tough, if not impossible, as this new tax regime is to be revenue-neutral!

Direct Tax Code 1.0 (2009) - P Chidambaram style
Direct Tax Code 2.0 (2010) - Pranab Mukherjee style

MEMORIES OF 2010

June 15th, 2010

What a year it has been to date…new crises, old corruption, new peace, old tragedies, new law, old politics?

What will you remember 2010 for?
Greece on the brink
Lalit Modi & IPL
Sharad Pawar & IPL
Ambanis makeup
Bhopal Verdict
New Tax Code
Khap Panchayats

Wait there’s 6 more months to go!

go to thefirm.moneycontrol.com

May 11th, 2010

For those of you wondering why I haven’t blogged on the Supreme Court Judgment in the RIL v/s RNRL case… I have, except that this time I’ve chosen to write a more formal coulmn for  ‘The Firm’ website…

If you’d like to read it do visit
thefirm.moneycontrol.com

But that’s not all I have to say on the issue… I’m working on another piece and will soon share it with you…

Meanwhile if there are any interesting observations you have, please write in…

Menaka

CRICKET SATYA(M)

April 26th, 2010

And the IPL is finally over! Atleast the on-field action is. The off-field games will continue some more I suspect.
I have zero interest in the sport (yes, I’m an aberration I’ll admit) and so when the Modi-Tharoor ‘battle of egos’ first came to light, I had only a passing interest in it. But then I watched curiously over the past few weeks as the allegations flew thick and fast, the armies expanded and everybody pointed fingers at everyone else.  I watched as reporters filed stories about slush money and hawala transactions with not one shred of proof (guys, just because its routed via Mauritius or any other, equally picturesque tax haven, it’s not necessarily illegal!). I watched as the BCCI (the ‘baap’ of IPL in filmi lingo) clammed up, yet leaked news of a Modi witch-hunt, without fully understanding the consequences of alleging wrongdoings in the IPL. I mean. If the BCCI had no clue what Modi was upto (assuming that he was upto mischief) then isn’t it equally to blame? And I also watched Modi do an Obama as he took the podium earlier tonight and began “I had a dream…”. A very poor version of Obama I must add.

I have no love lost for Lalit Modi, nor BCCI. I don’t know if anyone in this high stakes game has done anything illegal. And from what I read in the papers and watch on TV, noone, despite all the wild allegations, seems to have any proof to show for the crazy stories being concocted. Let me repeat here, not all money invested through tax havens is illegal. IF that were the case, our stock markets would shut down.
But in a country where every road contract is beset with corruption and kickbacks, I wouldn’t be at all surprised if the IPL comes with its fair share of under-the-table deals. Cricket is infested with politics and politicians, drawn to the money, power, limelight and now, thanks to IPL, even larger amounts of money, power and limelight.

In many ways this whole sordid IPL saga reminds me a lot of Satyam. The similarities are striking.

Ramalinga Raju’s mega multi thousand crore rupee scam would have never come to light had he not tried to push through the crazy Maytas deal (or atleast it would have taken us longer to find out).

Modi scripted (or should I say tweeted) his own downfall when his differences with Tharoor came to light (his own doing!).

Just like Raju thought he’d get away with the Maytas acquisition and use the transactions to cover some holes, Modi thought, having created this giant money making machine, that he was invincible.

Raju was blessed with a ‘mute’ board of directors. I say mute, because I have no proof that they were complicit. But it’s clear that, by approving the Maytas transaction – one that consumed substantial amounts of Satyam’s cash (didn’t know then that there was none) and led to an unjustified diversification from I-T to Real Estate, the Board was, at the very least, ASLEEP AT THE WHEEL! Let me add here, the desire to diversify, to do so in Real Estate, to spend large amounts of cash in doing so and to do a transaction with another Raju family owned company, all these important decisions, laden with conflict, were all taken in one Board Meeting!
Raju was lucky. His Board had no clue what he was trying to pull off, nor did they question it. Ignorance, stupidity and negligence, are sometimes, just as bad as complicity. The Board can pick what it was guilty of.

Modi, if he has truly indulged in kickbacks and proxy ownership as alleged, is equally lucky. The IPL Governing Council and the BCCI has played along in quite the same way as the Satyam Board did. Ignorance, stupidity, negligence, complicity…whatever they choose to be guilty of, it all equally damming!

Satyam’s audit firm claims innocence, even as two auditors languished in jail (now out on bail I think). This one is even more mysterious. Yes, maybe the Board of directors didn’t check whether the company’s bank balances were fact or fiction. But what in heavens were the auditors doing? Over many many years that too!!! Were they blind?

The same can be asked of the auditors of IPL/BCCI. Didn’t they scrutinise bid documents? Didn’t they spot proxy ownership? (if it exists, as alleged) Didn’t they question a ‘facilitation fee’? (if it was paid, as alleged).

Raju was rumoured to have substantial political backing. Both, as a leading I-T entrepreneur and as one of Andhra Pradesh’s largest landowners.

BCCI has politicians running it (covertly & overtly).

To perpetrate a fraud of this size, Ramalinga Raju surely had help. From within and outside.

If Lalit Modi has done as alleged, he couldn’t have done this alone. He must have had help. From within and outside.

And finally…

We’ll never know the whole truth about the fraud at Satyam. Raju already spends more time in hospital than in jail. And last I heard he was merrily accepting visitors. The stakes are high, the vested interests many and the involvements murky…the full truth will never be uncovered. Consciously so. And someday like Sanjay Agarwal of Hometrade or Ketan Parekh or countless other crooks…Ramalinga Raju too will disappear. Or, atleast fade from public memory.

Nor will we ever know the whole truth about IPL, BCCI and Lalit Modi. For a while I thought they won’t harm Modi, because if he goes down, he will surely take others with him. After all, there is significant corporate and political interest at stake. Noone will want their dirty laundry out in public. But now I’m quite convinced that Modi will cease to matter soon. Even if he blabs…it’ll engage the journalists and entertain the masses only for a short time. Till the next big story hits the headlines!

 

 

PUBLIC APPEARANCES!

March 23rd, 2010

The week before last was a rather unusual one for me. I spoke at two very contrasting events…one on International Women’s Day and the other was an informal chat with a group of visiting Tax experts.

Unusual for a couple of reasons !!!

First - public speaking makes me nervous. Few people believe me when I say that. After all, I do do this for a living as a television journalist/host. But somehow on camera, in a studio, it’s different. If it’s a televised public discussion (with audience) the nervousness comes back.

Second - I usually do the asking…so having to answer questions is a curious place to be in. (I’ve always wondered how is it that newspaper editors looked so comfortable commentating on tv!)

Third - I don’t know why anyone would want to know of my views on a financial, political or tax issue. Except my mother ofcourse!

The tax event invitation came a month ago. My first instinct was to decline. What in heavens could I, a non-tax person, have to say that would be of interest to visiting international tax experts? What if they asked questions on Transfer Pricing? (apologies to those who practice it but Transfer Pricing is NOT fun, NOR interesting!)

I was promised that all I had to do was offer an objective macro-economic view to the visitors. The ‘big picture’…kinda thing. I took the plunge and accepted. Only to be plagued by instant regret!
And so for a month after that I spent hours every day wondering how to get out of the commitment. Maybe all airlines would go on a week long strike! Maybe some big M&A news would break hours before I had to leave (though that’s a useless wish because I would still have to prepare., my thoughts and my nerves, in the off-chance that no deal happened!). Not my luck. So in the first week of March I started working on some talking points…just like I would for any journalistic assignment. The moment I did that my nerves calmed. I felt a little more at home with the assignment and as the research gathered momentum the confidence slowly came back.

The other speaking commitment was a little easier to accept, but came with a different kind of jitters. An MNC investment bank asked me to talk to their employees on the occasion of International Women’s Day. Women equality and all that. I don’t why I said yes. It was like one of those mass suicide moments. Do one, do all! If I was going to do one speaking assignment, may as well go the whole hog and do two!
Atleast this one was easier. I had to talk about being a woman! Now that should come naturally right? Wrong!

I grew up in a liberal middle class home. Girls = boys. Financial independence was everyone’s goal. Work was passion. And I found mine early in life. Great employer. Equal opportunities. Progress and success based on merit, hard work and initiative. Life’s been good. Very un-womanlike if you compare it to those that are denied an education, not allowed to work or choose their path in life, including life partner. Tortured, harassed, beaten, violated! No, thank you god, but I’ve been blessed with a pretty regular life. Which is great otherwise but not when you have to talk about quite the opposite. And so I spent Sunday preparing for that…some reading, lots of thinking, mostly reminiscing about what it was like to be a young reporter (female!) 10 years ago.

I’m not going to bore you with the details of what I said those two fateful days… But I will recount the gist of what I wanted to communicate (the purple portions in this blog: skip if you want less technicality and more anecdote) and a couple of interesting experiences at both events.

WOMEN’S INTERNATIONAL DAY
GENDER EQUALITY
Talking points
Don’t try to be equal. Be YOU. Don’t feel pressured to be like a man to compete with men. Be YOU. Draw your own lines, set your own limits and if something feels unnatural then let it go.

Junk the guilt! This is the 21st century…everyone has a life, you are entitled to one as well. 14 hour workdays are passe (unless like me you enjoy working in an absolutely empty office, in the dead of the night). Switch off the phone, take Sundays off. What the heck, take Saturdays off too if there’s no work. Don’t try to be everything to everyone all the time…good mom, good wife, good friend, good employee…there will be nothing left of YOU.

Before offering equality let’s try treating people like individuals. Not typecast to a gender, cast, community, creed. Just individuals. The working mother who goes home early is not laidback and unambitious. She just has many, equally important, priorities. The single woman who works hard is not some ladder climbing, power hungry, witch. She’s just passionate about her work. The rich girl who goes hiking every other weekend, is not just time-passing in this job, she has other interests. And just because she has money that doesn’t mean she’s going to slack off at work.

All the above apply to men as well. The day we start treating each other as individuals, with different priorities, interests, needs and ambition levels…equality will have a chance.

 

As I summed up all these hard learnt lessons I posed a question to the HR head of the bank… a woman (I didn’t know that before hand… I just asked the audience who the HR chief was?).

‘What if 2 candidates interview for a position. Both equally capable, driven, talented, qualified. The guy, just married, keen to move up in life. The girl, ambitious but a few months pregnant (yes I know noone asks those questions in a job interview, but suppose she volunteers the information). Who would you give the job too?

 

 

The HR chief responded without hesitation and picked the male candidate. But a gentleman in the back row seemed upset at my question. He thought it was politically incorrect, that noone asked such questions or volunteered such personal information in a job interview, that just because she was pregnant there was no reason to deny her an opportunity. That his wife had returned to work just fine after having their children.

His irritation amused me. Her answer impressed. By picking the candidate who would get the job done (because the female candidate would undeniably take longer due to maternity leave) the woman HR head was thinking like ‘a man’. Isn’t that equality?

He on the other hand was being politically correct and considerate…maybe honestly so…by giving the female candidate a chance. Isn’t that equality?

Its a poser I hope I never have to answer!

TAX CONFERENCE
Talking Points

The targeted deficit reduction for FY11 will come easier than thought…

-40% of it from lower one time expenditure items (pay arrears, farm loan waiver, fertiliser subsidy).
-About 50% of the deficit reduction will be achieved through higher taxes (a combination of higher revenues due to higher excise rates, fuel duties and more aggressive direct tax targets for FY11).
-And the remaining 10% of deficit reduction will come via revenue earned through disinvestment and the 3G auction.
(This is sourced from both Moody’s and a Kotak equities research report)

The out year targets of 4.8% (FY12) and 4.1% (FY13) will be tougher to achieve. Already we have marginally underperformed FY10 tax collection targets. For next year, FY11 that is, the FM has projected an 18% increase in tax revenue, without counting on any extra compliance or widening of the tax paying base. For the years after, he will need an even higher increase in tax revenues (the pop from higher excise and fuel duties is a one time one)and an even sharper reduction in expenditure to meet the deficit reduction targets. The former two depend on strong GDP growth. A measure that will also influence stock market sentiment and hence the success of the disinvestment programme.

Higher taxes, successful disinvestment and lower expenditure…we need success on all counts, simultaneously, to achieve the deficit targets. Since the first two are predicated on growth, it seems counterproductive for the government to introduce any tax measure that could substantially hurt the growth environment. A change in Capital Gains Tax for instance, as envisaged in the DTC. Could that spook markets and hurt the disinvestment programme? And if yes, then would the government want to risk it?

There is tremendous opposition (read: lobbying) against the proposed MAT on Assets. It might have to be introduced in a substantially diluted form if industry is to swallow it. That means lower revenue than anticipated and that makes it tough for the government to deliver on a lower Corporation Tax Rate of 25% as proposed in the DTC.

 

(For the DTC to be revenue neutral - the lower corporate tax rate has to be accompanied by higher revenue from MAT on assets, higher capital gains tax revenue and no profit-based incentives. To tinker with any one part of part of this equation would impact revenue neutrality)

That makes me wonder how this Government will push through any of the more contentious aspects of DTC? I doubt it will…though on the other hand, I do believe the era of profit based incentives is over, as evident by the lack of any extension for software exports. Smaller measures like Anti-Avoidance (hopefully, a slightly watered down version of what’s in the DTC) and Treaty Override could more likely become reality…and will help bring in some more revenue (less revenue, more litigation I suspect!)
GST, if implemented right, can add to GDP growth by 1-2%, say experts. So that could come as a revenue booster. And considering that the FM is a ‘master of consensus’, if anyone can make GST happen on time, with few gaps, it’ll be him.

So net net my message to the visitors - ‘the FM is GAMBLING ON GROWTH to help solve the fiscal deficit problem! He also needs the GST BOOST and so this new tax will become a reality, but DON’T COUNT ON DTC much! If the economy doesn’t deliver on growth, then expect a heightened environment of tax aggression, in desperation to shore up revenue’.

 

At the end of my slightly rambling, yet mostly on-course speech/presentation, I was to answer questions. It was meant to be an opportunity for the foreign guests to familiarise themselves with India. Instead most of the questions came from the Indians in the audience. The foreigners were either bored, didn’t care for my seemingly un-expert assessments or were stuporified by the rice and curry lunch. I can only hope it was the latter.

But here’s the BIG REALISATION…even if it was boredom…I’m didn’t feel hurt or offended or discouraged. Because I realised that in the course of just one week I had overcome one of my biggest fears! My new found confidence at public speaking deserved celebration.

If I’m truly bad at it, then the upside potential (to use market lingo) is tremendous. If I’m good (as both my audiences enthusiastically claimed) then what the heck…BRING ON THE INVITATIONS AND HAND ME A MICROPHONE!

The FM is GAMBLING ON GROWTH to help solve the fiscal deficit problem! He also needs a GST booster, though don’t count on DTC much!