indipolity

The Finance Minister in his Budget Speech proposed the merger of oil major PSUs into an integrated behemoth oil major, which will be able to match and outperform it’s international counterparts. But is such a merger even possible in the first place?

Let’s answer three key questions to understand the impact of this merger..

Firstly, why the merger of oil companies is necessary? Most Asian countries have just one national oil company integrated across the value chain. In contrast, there are 18 state-controlled oil companies in India, with at least six that can be considered key players – Oil India Limited, Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation and GAIL (India) and ONGC. Merging of few of these national oil companies, would make functioning and operations much more simpler.

So, what could be the benefits of the merger of HPCL, BPCL and ONGC?

It would create an entity that is better placed to compete globally for resources, and less vulnerable to shifts in oil prices.

The merger will give the new entity much stronger bargaining power with suppliers, and greater financial clout to secure oil resources.

There would be less need for multiple retail outlets in a single area. Transport costs could be reduced by retailers sourcing from the nearest refinery, rather than the ones they own. This would lead to overall cost-savings.

The integration of upstream, refining and retail companies would have the additional benefit of spreading the impact of oil prices movements across the various parts of the value chain, which would reduce volatility in cash generation.

A merged entity would also be able to share expertise for exploration and acquisition of resources.

But, why this merger is difficult to achieve?

Each entity has a different structure, operational system, and culture. Hence, it would be really difficult to merge all them together and come to a common consensus.

Personnel-related issues are likely to arise from the need to manage hierarchies and potential overcapacity in the integrated entity.

The major roadblock for these listed companies is with public shareholding ranging from 51 per cent-70 per cent, there could be some problems in obtaining approval from the 75 per cent of shareholders that is typically required to approve a merger. Private shareholders, may protect their own interests and resist this merger.

Private companies are increasing their market share from a low base, but could find it even harder to compete with a single large state-controlled company. Hence, they will try their best to oppose this merger.

The Final verdict..

While the merger will lead to the formation of a major oil behemoth, capable of competing with international oil majors. What remains to be seen, is how the state will handle the likely decline in competition after a merger. Consumers have benefited from competition among the state-controlled retail companies, which has supported improvements in service standards. After a merger, if the cost benefits are not passed on to the end consumers, then this single large entity could be a big failure.

The implications of the new IIM Bill..

Currently, all IIMs are separate bodies registered under the Societies Act. Since Societies are not authorised to award degrees, students admitted to their Master’s programme are given a postgraduate diploma in management or PDGM and those pursuing doctoral studies are awarded the title of a ‘Fellow’ at the end of their research.

The proposed law, once passed by Parliament, will make each of the 20 Indian Institutes of Management (IIMs) an ‘Institution of National Importance’ like the IITs, NITs and AIIMS. In other words, they will be able to grant degrees to students.

Let’s look at the key features of the Bill and it’s implication:

IIMs will now be able to grant degrees to their students.. Being societies, IIMs are not authorised to award degrees and, hence, they have been awarding postgraduate diploma and fellow programme in management. While these awards are recognised by the Association of Indian Universities and the HRD Ministry to being equivalent to an MBA and a Ph.D degree respectively, the equivalence is not universally accepted, especially for the Fellow programme. Once the Bill is passed, the degrees offered by the IIMS will have more global appeal and demand from countries outside India as well.

The Bill provides for complete autonomy to the IIMs, combined with adequate accountability.. The Bill bestows more autonomy than what the IIMs currently enjoy. The IIMs will be the first set of ‘Institutions of National Importance’ in which the President will have no direct role (In other institutions such as the IITs and NITs, the President acts as the Visitor who appoints the directors and chairpersons on the advice of the HRD Ministry).

The institutes will be managed by a Board, and each will have a chairperson and director which will be selected by the Board.. The Board of Governors (BOG) will be responsible for electing the chairperson and director of the Institute. Since, the Government cannot interfere in the decisions of the BOG, it will lead to better decisions based on merit and free from politics.

There will be regular review of the performance of the IIMs by independent agencies.. The results will be put up in the public domain and the review will take into account the long-term strategy and five-year plan of the IIMs.

The annual report of the IIMs will be placed in Parliament and Comptroller and Auditor General will audit their accounts.. This will bring in more transparency to the functioning of the IIMs. The report by CAG will include steps taken by the institute to fulfil its objectives and an outcome-based assessment of the research being undertaken the institutes.

There is also a provision of Coordination Forum of IIMs as an advisory body.. The 33-member Forum of the IIMs will not be headed by the HRD Minister. Instead, “an eminent person” shortlisted by a search-cum-selection committee, will be appointed as the Forum’s chairperson for a term of two years.

All the recommendations are well aligned with the general interests of the IIMs. The new IIM Bill will not only give more global importance to the degrees offered by the IIMs but will also let the IIMs a free hand in deciding the best approach for their respective institutes. Minimum interference from the Government will go a long way in the transition of the IIMs to world class institutes.

BCCI vs Supreme Court : 3 key questions answered..

What led to the feud between BCCI and the Supreme Court?

The face-off between the BCCI and the Supreme Court began in 2013 with the IPL spot-fixing scandal that rocked Indian cricket.
Three Rajasthan Royals players were arrested on spot-fixing charges revealing a deep nexus between franchise members, players and bookies. A follow-up probe led to the arrest of Gurunath Meiyappan, team principal of Chennai Super Kings (CSK).
The Mudgal Committee, which was appointed to investigate the spot-fixing case founded that IPL chief operating officer, Meiyappan and Rajasthan Royals owner Raj Kundra were guilty of betting. The Committee’s report pointed fingers at BCCI chief N. Srinivasan as well.
In January 2015, the apex court appointed a panel headed by retired justice R.M. Lodha to suggest reforms for BCCI as well as determine punishments for those guilty in the IPL spot-fixing case.
Justice Lodha panel suspends CSK and Rajasthan Royals for two years and hands a lifetime ban to their owners.

What are the recommendations made by the Lodha panel?

The following are the recommendations of the Lodha panel, which aims to bring more credibility and transparency in the world’s richest cricket board:

One association of each state will be a full member and will have the right to vote.

It recommended separating the governing bodies of the Indian Premier League (IPL) and BCCI. It also proposed restricting the powers of the IPL Governing Council.

The panel stated that BCCI office bearers must not be ministers or government servants and that they must have not held office in the BCCI for a period of nine years or three terms. No BCCI office-bearer can have more than two consecutive terms.

Office-bearers in BCCI should not be beyond the age of 70 years.

The panel also recommended legalisation of betting with an inbuilt mechanism.

The report also proposed the constitution and establishment of a players association.

For the sake of transparency BCCI has to upload all its rules and other details on the official website.

The panel stated that an Ethics Officer will decide on conflict of interest.

The panel suggested that the BCCI should come under the purview of the Right to Information (RTI) Act.

According to the panel, cricketing matters of the BCCI should be handled by former players while non-cricketing matters would be handled by CEO along with six assistant managers and two committees.

What has been the consequences of not accepting the recommendations of the Lodha Panel?

On 28 September, the court had given the BCCI an ultimatum to adhere to the Lodha panel’s recommendations for the overhaul of Indian cricket. But BCCI had rejected key recommendations of the Lodha Committee, like one-state one-vote, a maximum age limit of 70 years and a cooling-off period of three years. The Supreme Court was adamant that the recommendations be adhered in ditto and no modifications be entertained. As a result of the non-adherence by the Board, the following consequences were faced by BCCI:

Lodha panel asked the banks to stop disbursing money from BCCI accounts to state associations, which had put India-New Zealand test match in Indore at risk. The panel later changed its stance and clarified that banks will release funds for daily operations.

The SC ordered the removal of Anurag Thakur from the post of BCCI President for not complying with court orders. The apex court also removed Ajay Shirke from the post of BCCI Secretary.

The BCCI has decided to indefinitely defer the auction of Indian Premier League (IPL) media rights as it has not received the go-ahead from the Justice Lodha committee.

The most powerful cricketing body in the world is finally getting a huge re-moulding in it’s structure and way of operations. It shall bring in more transparency to the system and also led to lesser corruption in the richest body of Cricket in the world.

All of this should surely make any cricketing fan happy !

(If you found this post useful, then please leave your suggestions in the comments section. For more insights, please subscribe to my blog)

The good, bad and ugly side of Demonetisation..

Demonetisation(DeMo) has been termed as one of the boldest moves taken by the Government of India since independence. While we have mixed reviews about it, the audacity to term 86% of the currency in the economy as void post Nov 8 midnight, itself showed the strength of a powerful Government. It showed that the Government can take unpopular and bold decisions if required.

Why Demonetisation was needed?

To lower the cash circulation in the country which is directly related to corruption in our country..According to the data from Income Tax Department, only 1.4 million people (or 0.1% of the total population) pay 80% of income tax in India. The total personal income tax collections in FY16 was only 2.2.% of GDP.

To eliminate fake currency and dodgy funds which have been used by terror groups to fund terrorism in India.. Rs 400 crore worth of such fake currency was in circulation in the country before DeMo.

The move is estimated to scoop out black money from the economy..
India’s black money has been estimated to be roughly Rs 30 lakh crore (20% of GDP).

DeMo was a well planned move to a series of actions that the government had taken to curb black money in the last two years..

Supreme Court Monitored Special Investigation Team (SIT) on black money.
Jan Dhan Yojna.
Information Exchange Agreements with Tax Havens, such as Switzerland.
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 for Foreign Black Money.
Income Disclosure Scheme, 2016.
Benami Transaction (Prohibition) Amendment Bill.

The impact of DeMo on key indicators..

GDP: Short Term (Negative) – Consumption and investment demand to see some dent as the cash based economy feels a crunch. Long Term (positive) – Increased direct tax collections to create room for investment spending. The Tax to GDP ratio which is currently at 16.6% will increase in the long run.

Inflation: Immediate Impact (Negative): Downward pressure on prices due to lower demand, especially in rural areas and for sectors such as housing, transport and food where share of cash transactions is high.Sharper fall in rural inflation Vs urban is possible. Long Term Impact (Neutral): To have minimal impact in the long run, as demand will bounce back up with increased government spending and positive impact on employment and incomes.

Fiscal Deficit: Immediate Impact (Neutral): To take time for tax officials to claim tax on the deposits made by people. The one-time impact on tax collections could be high. Long Term Impact (Positive): Income tax collections expected to see a kick-up as funds earlier unaccounted for enter the banking system and eventually get taxed. About 23% of the economy estimated to be unaccounted for. Additionally this involuntary declaration of income to invite 30 to 120% tax rate, depending on the source of income will be positive.

Current account deficit (CAD): Immediate Impact (Positive): Gold demand already dented due to policy restrictions. This step will additionally bring down gold import because demand is mostly driven by cash (about 80%). Long Term Impact (Negative): Pent up demand for gold may lead to higher imports. People might chose to hoard gold instead of cash. This can widen CAD.

How demonetisation has stalled the economic growth of India..

Automobile sales have dipped by 18% in December over a year ago, the steepest fall since 2000.
Residential plot sales across top eight cities dropped by 44% in the October-December quarter even as new launches fell by over 60%.
Over 3 lakh MSMEs, reveals 35% job losses and a 50% revenue dip in the 34 days since November 8.
At 422 projects, new investment proposals during the quarter ending December 2016 fell to their lowest levels since June 2004, recording a contraction of 28% YoY.
Projects proposals fell by 42% from the average of INR 2.18tn (since May 2014) to INR 1.27tn.
Quarterly project completion rate fell to its lowest level since September 2008. Only 262 projects were completed in quarter ending December 2016 versus 319 in the previous quarter.
The stock of stalled projects remains almost at an all time high of INR 11.71 tn.

‘Demonetisation a great move weakened by bad execution’

The total currency in circulation was Rs 16.42 lakh crore and the value through Rs 500 and Rs 1000 notes is Rs 14.18 lakh crore. If one assumes that 20% of it is black money and therefore, will not come back to the banking system for replacement, it is a gain of Rs 2.84 lakh crore.

The pitfalls..

The government and the RBI were not able to communicate properly about the “currency exchange limit“ of Rs 4,000 (increased now to Rs 4,500).
Since existing bank account holders were allowed to deposit old currency notes without any limit, this restriction was applicable only for the unbanked people and that should have been spelt out clearly.
The introduction of Rs 2,000 notes was a bad idea and the people who got Rs 2,000 notes were still not able to use them because change in lower denominations was not available. Instead, RBI should have flooded the banking system with more Rs 100 and that would have calmed the situation faster. The entire delay due to ATM recalibration (i.e.new Rs 2,000 notes are of different size and therefore, ATM can’t dispense them without recalibration) would also have been avoided by this strategy.
Several people deposited money into their bank accounts on November 8 itself and thereby escaped income tax scrutiny (i.e. as of now, government has said that any deposit above Rs 2.5 lakh made after November 9 will be reported to the income tax department).To trap them, government should ask banks to report Rs 2.5 lakh plus cash deposit from October 1 itself. By doing government could have also caught several money laundering transactions with backdated receipts.

Top 3 reasons for the ‘Sikka’ Feud

The Indian IT industry has been seeing a huge transformation in the recent past. The change of guard from the traditional methodologies of running business to the new age automation tools, has risked the very foundation of the so called IT business model in India. Vishal Sikka the first non-founder CEO of the $10-bn IT behemoth Infosys, has played a huge part in this transition of the IT industry. The former SAP head, has brought fresh ideas to the the desi-Infosys, and plans to make Infosys a $20-bn company.

But, recently there has been a clash of culture leading to which public statements have poured out and there seems to be a clear rift between Sikka and the Infosys founders. The founders have sought to take the high ground, arguing that their issues with Sikka and the board are about governance, principle, values and transparency. Let’s understand the real reasons of this rift:

The induction of Punita Sinha..

About a year ago Punita Sinha, wife of Union minister Jayant Sinha, was inducted as an independent director. Murthy abstained from voting on her appointment. While he emphasised that he had great respect for her as a professional, his objection was in the fact that during the entire history of Infosys, it had never invited the spouse of any active politician to the board. While the founders did not wanted any political agenda to be factored in the company, Sikka and the board’s argument to that was that she was eminently qualified -having been a fund manager with Blackstone, among others -and that the decision was taken solely on merit.

Vishal Sikka’s steep compensation..

The ratio between the highest compensation in the firm and the median salary should ideally be 50 to 60. The biggest concern for the founders has been the 55% increase in CEO compensation when average salary hikes have hovered in the single-digits of 6% to 8% for the rest of the employees at the company. Sikka’s compensation saw a sharp increase to $11million annually, in 2017 from $7.08 million in 2016. While Sikka says that he actually gets less cash now than when he was the CTO at SAP, the question is more about ideals. The ideals with which this company was formed and that is “compassionate capitalism”.

High severance packages to departing top executives..

A severance package is pay and benefits employees receive when they leave employment at a company. Ex-CFO Rajiv Bansal received a severance package of Rs 17.38 crore, equalling 24 months of pay. No CFO in India receives such a high severance package. Former general counsel (David Kannedy) who was with the company for a “very short period” was paid a very high salary and a high severance package. Infosys founders N R Narayana Murthy, Kris Gopalakrishnan and Nandan Nilekani had written to the board last month expressing their concerns over pay hike to Chief Executive Officer (CEO) Vishal Sikka and the severance package offered to the two former senior executives.

From April 2011 till January 2017, the shareholder value has not increased at all and the market capitalisation of the Bengaluru-based IT major has also remained at the same level during the period. No doubt that we can see global cultures in our desi companies. The induction of global leaders in high ranks is bound to bring in the West culture – “Lots and lots of money”. But such a culture cannot be withhold with large IT firms which believes in mass upheaval of society rather than a few individuals. Vishal Sikka and his team needs to learn from the likes of Narayan Murthy- A global leader who always believed in compassionate capitalism.

GST for beginners..

Goods and Service Tax (GST) is a comprehensive tax levy on manufacture, sale and consumption of goods and service at a national level under which no distinction would be made between goods and services for levying of tax. It will substitute all indirect taxes (17) levied on goods and services by the Central and State governments in India.

Benefits of GST..

There could be 0.9-1.7% increase in GDP growth due to the elimination of tax cascading. The exclusion of cascading effects i.e. tax on tax till the level of final consumers will significantly improve the competitiveness of original goods and services in market.

Revenue will get a boost as tax evasion will drop. Full input tax credit under GST will mean a 12-14% drop in the cost of capital goods. Input tax credit will encourage suppliers to pay taxes – States and Centre will have dual oversight – The number of tax-exempt goods will decline.

GST will lead to the formation of a common market. Currently, the market is fragmented along state lines, pushing up costs by 20-30%. The current 2% inter-state levy means production is kept within a state. Under the GST national market, this can be dispersed, creating equal opportunities for all states.

Ecommerce to get a boost. State restrictions and levies have complicated ecommerce. Some sellers do not even ship to particular states. All this will end with GST .

The GST Model in India..

The GST shall have two components: one levied by the Centre (referred to as Central GST or CGST), and the other levied by the States (referred to as State GST or SGST).

The CGST and the SGST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services.

Cross utilization of input tax credit (ITC) both in case of Inputs and capital goods between the CGST and the SGST will not be permitted except in the case of inter-State supply of goods and services (i.e. IGST).

Comparison of existing tax regime with GST :

– courtesy : taxguru.in

Currently, central excise is levied on a produce manufactured at a factory. The VAT is applied not on the ex factory office but at the rate arrived at including the cost of manufacture and excise duty. With GST, this cascading effect of tax will go away.

The final GST slab rates..

A 4- tier GST tax structure of 5%, 12%, 18% and 28% has been fixed by the GST council.

Essential items including food, which constitutes half the consumer inflation basket will be taxed at zero rate.

Mass consumer items such as spices, mustard oil, etc will be taxed at 5%.

Most items will be taxed under the 12% and 18% tax slabs. Processed foods, soaps, oil, tooth paste, consumer electronics, etc shall fall under this category.

The highest tax slab of 28% shall apply on white goods, luxury cars and sin products such as pan masala, cigarettes, etc.

Good news for e tailers, that the Tax Charged at Source (TCS), which was a point of worry for most etailers, have been fixed at only 1%.

GST has been planned to roll out from April 1, 2017. It is believed that GST will be a game changer for a highly tax non-compliant nation like India. With the inclusion of GST (post demonetisation), the idea is crystal clear – bring more people under the formal economy, create a wider tax base and eliminate black currency. The creation of an unified market and the reduction of red tape will boost local and foreign investor sentiments. Indian economy can only look forward and become better and greater under GST.

( THANKS to Atharva Joshi for his valuable insights.

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The ‘Brexit’ saga..

The European Union, is an economic and political partnership involving 28 European countries. It began after World War II to foster economic co-operation, with the idea that countries which trade together are more likely to avoid going to war with each other. It has since grown to become a “single market” allowing goods and people to move around, basically as if the member states were one country. It has its own currency, the euro, which is used by 19 of the member countries, its own parliament and it now sets rules in areas such as – the environment, transport, consumer rights,etc.

Why UK wanted to leave the European Union?

UK pays around 55 million pounds per day towards EU membership fee. This finance part of the EU budget is used for economic growth and other development initiatives of the members including that of UK. The proportion of EU spending on UK is far less than what UK pays as membership fees.

UK wanted to add a provision to the European treaties to ensure that the EU is a multi-currency bloc. That way the Pound and Euro could both be identified as major currencies, but the European union never agreed to this.

Britishers favoured lower level of migrants to UK from member countries whereas European Union supports free movement of people within its member states (https://en.wikipedia.org/wiki/Schengen_Area). Influx of low paid EU migrants to the UK cluster were increasing unemployment and poverty. They were also competing with Britons for jobs, hence, putting pressure on publicservices.

Almost, half of the UK’s export goes to EU. However, Britain wants to secure trade deals with countries including the U.S. and China, which if done will hurt other EU members interests.

Britain wanted to re-frame responsibility between the Bank of England, the Euro-zone, and the European Central Bank (ECB). This was aimed to stop further encroachment of EU authority over London’s banks. But the ECB wanted more influence over London, its main financial centre.

So, Britain just polled in a referendum to decide on Brexit..

A referendum – a vote in which everyone of voting age can take part – was held on 23 June 2016, to decide whether the UK should leave or remain in the European Union. Leave won by 52% to 48%. The referendum turnout was 71.8%, with more than 30 million people voting. For the UK to leave the EU it has to invoke an agreement called Article 50 of the Lisbon Treaty which gives the two sides two years to agree the terms of the split. Theresa May, the current Prime Minister of Britain has said she intends to trigger this process by the end of March 2017, meaning that the UK will be expected to have left the EU by the summer of 2019.

The After-shocks of Brexit..

The pound remains near a 30-year low.
Britain also lost its top AAA credit rating, meaning the cost of government borrowing will be higher.
The Bank of England cut interest rates from 0.5% to 0.25% – a record low and the first cut since 2009.

Expected negatives post Brexit..

Exports to Europe are expected to become expensive, as more tariffs will be imposed by the EU; this would negatively impact UK’s current account deficit, which is currently at 7% of GDP.
UK’s unemployment should inch higher as some businesses would move to EU countries due to unfavourable trade norms. UK’s unemployment rate is currently at 5%.

Expected positives post Brexit..

Britain would save $12 billion a year in EU budget payments.
Freed from the cumbersome EU regulations, Britain would attract greater investment and become a more dynamic economic hub — particularly if it still had full access to the EU’s tariff-free single market.
Leaving the EU would allow Britain more control over how many migrants are allowed to enter the country.

Effects on Global economy post Brexit..

The fact that there will now be considerable uncertainty in EU-UK economic linkages, overall global growth is also likely to be affected adversely. IMF lowered its global growth projection in April to 3.2% YoY (from 3.4% YoY previously). Consequently, against the backdrop of Brexit, global growth projections may see further downside.

Brexit was not a hasty decision, rather it’s seeds were sown in 2012. Leaaders like David Cameroon and Theresa May were against Brexit, hence this shows the deep roted problems that Brexit may pose in the future for Britain.

Hence we are all hoping for a ‘soft Brexit’ that protects the global interests !

(Please like and share your comments on Brexit)

The curious case of Cyrus Mistry !

TATA sons is the holding company of the TATA group. About 66% of the equity capital of TATA sons is held by the TATA Trust (Sir Dorabji Tata Trust and Sir Ratan Tata Trust), 18.4 % is held by Shapoorji Pallonji Group (Sterling investments corp. and Cyrus Investments) and the rest is held by other Tata companies.

The decision to sack Cyrus Mistry as chairman of the TATA sons, less than four years after he occupied the $103 Billion conglomerate was not a sudden decision. On August 26, the Board inducted Ajay Piramal (Piramal Enterprises Chairman) and Venu Srinavasan (TVS Motor Chairman), which were seen as a move to tighten the grip of the TATA trusts on the TATA sons board. This was the beginning of the fall of Cyrus Mistry.

Let’s discuss the major reasons/events which led to the ouster of Cyrus Mistry as Chairman of the board:

Cyrus Mistry was seen as a capitalist leader by the Board. He focused more on the cash cows (TCS, JLR, etc) of the Tata group and started pruning the other Tata companies. This was against the basic ethos of the Board, which is philanthropic in nature. Mistry was seen as insolent, precocious and out to destroy “the core values that the group stood for, for close to 148 years“.

In June, Mistry had cleared Tata Powers $1.4 Billion acquisition of Welspun’s solar farms without seeking the approval from either Tata or other key shareholders. One of the Tata insiders quoted, ” Tata Power is a cash guzzler but generates very little profit. Yet, when embarking on it’s biggest buyout, a principal shareholder is kept in the dark. That’s unprecedented in Bombay House (Tata Group Headquarters)“.

Though Ratan Tata had handpicked Cyrus Mistry for the Chairmanship four years ago. There was a fundamental disconnect between Ratan Tata and Mistry. Mistry was asked to spell out his vision, five-year plan, etc. But, his responses were always vague and non-specific.

Mistry disposed some of Indian Hotel Co’s overseas properties. This did not go well with Tata Trusts as many of the properties were seen as Ratan Tata’s legacy that helped the group revenues top $100 billion. The decision to sack Indian Hotels managing director Raymon Bickson, who was perceived to be close to Ratan Tata had made matters worse. Mistry’s comment on the necessity of “tough love” within the organisation was considered overtly aggressive by all Board members.

The decision to shut down the TATA Steel UK operations, had come in for heavy criticism in Britain. The Board believed that Mistry had not been able to take into account the sensitivity of the shareholders as well as the global ecosystem in which the companies operate. A person close to Ratan Tata said, “Tata was unhappy with the decision to shut down or sell the group’s steel business in Europe. He wanted the group to turn around the loss-making business rather than sell it“

In 2009 Ratan Tata had signed a legal contract with DoCoMo, according to which which the Tata’s had to buy back DoCoMo’s shares in Tata at (atleast) half the acquisition prices in five years. In 2014, when DoCoMo decided to exit India, it asked Tata sons to buy back the shares but it refused saying that the pay at the pre detemined prices was not possible as the RBI norms did not follow the same. DoCoMo sued the Tatas in London court and UK under arbitration charges. Finally, Tata sons had deposited $1.2 billion with the Delhi High Court in July last year. The Tata group is well known across the world for keeping it’s word instead of litigating around it. By not honouring the contract, the brand image of Tata was put under risk.

Under Mistry’s leadership, there was a 30 % CAGR over last 3 years in operating cash flows of the company, the net debt was decreased by 3.3 percent, TCS had doubled it’s profits. Most of the Tata group stocks had performed well under him. Hence, he was not ousted based only on performance. But because his focus was biased to the cash cows of the Group and this led to the negative growth of companies like Tata Power, Tata coffee, Tata Teleservices, Tata Global Beverages, etc. Mistry needed to understand that the Tatas did not believe only in profit-making but also in the general improvement of society.

“Mistry’s way of functioning was simply not the Tata-way of doing things”.

(I would love to hear your thoughts on why Mistry was sacked. Please leave your suggestions in the comments section)

H-1B visa reforms 2017: Impact on Indian IT industry

The H-1B is a non-immigrant visa in the United States. It allows U.S. employers to temporarily employ foreign workers in speciality occupations. On the other hand, the L–1 visa is a temporary non-immigrant visa which allows companies to relocate foreign qualified employees to its U.S. subsidiary or parent company.

Key reforms suggested in the H-1B Visa are..

The minimum salary of H-1B visa holders is to be doubled to $130,000. (The raised salary level – to approx. $130,000 – is more than double the current H-1B minimum wage of $60,000, which was established in 1989 and has since remained unchanged)

Remove the ‘per country‘ cap for employment-based immigrant visas, so that all workers are treated more fairly and to move to a system where employers hire the most skilled workers without regard to national origin.

The legislation sets aside 20 percent of the annually allocated H-1B visas for small and start-up employers to ensure small businesses have an opportunity to compete for high-skilled workers.

It requires employers to first offer a vacant position to an equally or better qualified American worker before seeking an H-1B or L-1 visa holder.

The Department Of Homeland Security will have additional oversight authority to investigate fraud and abuse and also to increase penalties for companies that violate the bill’s requirements.

The Indian IT industry..

Currently the annual quota of 65,000 visas, plus another 20,000 for employees with advanced U.S degrees, is awarded by lottery. If the process becomes market based, better -paying employers such as Apple Inc., Alphabet Inc., Amazon Inc. will get additional advantages over the IT cos.

Infosys and TCS, the top three visa sponsors would either have to increase the wages or settle for a much reduced scale of business in their most important market (USA).

For example, if Infosys raises it’s salary for the 25,000 applicants it sponsored last year from $81,000 to $130,000, it would have to shell out an additional $1.2 billion for it’s labour bill. If Infosys, cannot pass out that cost on to customers it would have to reduce almost half of it’s annual operating profit.

The traditional Indian IT companies (like TCS, Infosys, Wipro, HCL, etc) enjoy a 10 percentage operating margin advantage over companies like IBM corp., Accenture. The harsher the Immigration policies, the faster this gap will reduce.

Clients are spending much more on artificial intelligence, business analytics, cloud etc, hence the budget for legacy IT services such as application maintenance declines. Indian companies have to invest a lot in new technologies, automation, etc to gain significant market share in the future.

IT shares have fallen drastically after this announcement..

Market leader TCS has lost 4.5% of it’s market cap. TCS is trading below 16 times expected earnings, the lowest since 2008 ( while writing this post TCS was trading at INR 2,238).
Infosys has lost 2% of it’s market cap and the other IT companies are also in a similar situation.
The BSE IT index closed at 3% lower valuation flushing out approx 33000 cr in one day- the biggest loss among all BSE indices.

Negotiations with the Trump Government are on track. NASSCOM, the IT regulatory body in India has recently said that it’s executives will meet Trump administration to discuss the H-1B Visa Bill. Prime Minister Narendra Modi, is also expected to meet President Trump and discuss over this issue. Let’s wait and see how things span out.

We all hope the “Best friends” (India and US) will sort it out soon!

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