Editor Musings – ‘Slumgate’ Corruption at the highest levels in Delhi

India’s “Slumgate” as we are calling it is actually good news for India and the rest of the world’s perception of Indian corruption. Good news you may be asking? Well yes, if a small time canteen contractor can openly operate within the halls of power in Delhi and accumulate 50 luxury cars with VIP license plates (which he drove one to work every day), Rs 17 lakh in cash and about 7 kg of gold without anyone in the Delhi Assembly “noticing”; then maybe the days of outright corruption are coming to an end. I say coming to end because if someone were arrogant enough to operate a small canteen business and own 50 luxury cars while working under the noses of India’s political elite, then one can reasonably assume said canteen owner had tacit approval.

However, someone turned in the alleged criminal Ashok Malhotra and remarkably the matter was not swept under the rug. In the past, a matter with this scope that potentially will ensnare officials at all levels of the Delhi government and the Delhi Development Authority (DDA) would have been quickly dismissed or twisted such that only the sacrificial lamb would have been convicted.

Five DDA officials have already been arrested pertaining to the resettlement of the Hudson Lines JJ colony in North Delhi. Under a DDA scheme, all slum-dwellers were supposed to be given a plot each (measuring 20.9 square metres) at Dheerpur, Phase-I in north Delhi.

"However, the accused DDA officials allotted a number of these plots in the name of fictitious persons, using forged identity documents, allegedly at the behest of Malhotra, who subsequently sold these plots at exorbitant rates," said an official.

“Some incriminating documents have also been recovered from his Mukherjee Nagar home in north Delhi, but we can't reveal the details pertaining to the scam as investigations are still underway,” an official added.

One can’t get more low than stealing from the displaced poor. This outrage should be investigated thoroughly without political privilege. In fact The BJP State president Dr Harsh Vardhan said, “A scam of such scale would not have been possible without the connivance of the Chief Minister.” That may be a political play and a statement made in haste, but if the scope of the crime is as we suspect, it’s impossible to believe that those throughout the ministry didn’t have some knowledge of the crime. However, as I said earlier, this is good news because the CBI has exposed the scam where once it would have been dismissed as a "low level petty threat scam". It appears the CBI is serious about cleaning up flagrant corruption.

The Editor

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Maharashtra’s new housing policy could open the flood gates for corruption

By Vipin Agnihotri

Maharashtra’s new housing policy proposes that every project, whether private or public, a minimum of 20 percent of the space should be set aside for Lower Income Group (LIG) and Middle Income Group (MIG) and MIG housing, in return for additional FSI and tax benefits for the builder or developer. The pivotal factor here is that it applies to any construction, one building or many.

If experts are to be believed, the policy defines LIG units as flats spread over a maximum of 30 sq metres and MIG as those with 50 sq metre area. In my opinion, this is addressing the housing shortage from the wrong end. What is actually required is an environment that creates additional supply across the board and not reservations.

“Such kind of reservations becomes difficult to implement especially in up market locations. It is high time the government realized that any controls would lead to corruption,” pointed out Sheeba Mehrotra, MD, Pushpa Development Limited.

In my opinion, trying to impose this on a free market would lead to devaluing the property and would be especially tough in small projects. While in-principle housing for the poor, sounds good, eventually the market would determine their use. They may end up in different uses, which they were originally not meant for.

It is worthwhile pointing that if there is demand and the incentives are provided, then supply will become available. But to make it compulsory on builders to provide low cost housing is not very logical. It has come into the notice that lower income groups who have been reserved flats in small complexes in a high-end localities, will invariably sell and move away.

“The main objective of the housing policy is to create surplus supply and thereby provide affordable housing. Hence the government should quickly implement enabling acts and laws, so that this happens,” pointed out Rahul Khetan of Rahul Realty.

The welcome features in the policy say builders, are the additional FSI granted, which would lead to more meaningful development, developers developing infrastructure as part of housing projects and the boost to satellite townships. The other laudable features of the policy are the sale of flats on carpet area basis. Point to be noted here is that all around the world flats are sold on carpet area basis, which allows for more transparency in transactions and increase in confidence of the people.

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Editor Musings – CEO Salaries, Jhunjhunwala interview, Corruption Index

India CEO’s are Paid Less

Did you know that CEO’s in India are paid $30,000 a year less than their BRIC (Brazil, Russia, India, China) counterparts? A recent study by the Hay Group (a global management consulting firm) divulged the disparity. India’s executives make on average $92,000 while their Russian, Chinese, and Brazilian peers made significantly more.

According to the Hay Group report (adjusted for taxes)

• Russian executives averaged $157,000
• Chinese executives $126,000
• Brazil executives $124,000

The report defined pay as total cash, which is equal to base salary plus any annualized short-term variable incentive.

According to the report, "India benefits from a large tier of well educated, English-speaking local talent, making management pay more immune to the international market." The report also said that Executives in India can expect annual pay increases of up to 20% due to the increasing scarcity of executive talent.

Rakesh Jhunjhunwala Interview

Recently, Jhunjhunwala gave an interview to Mumbai Mirror. We analyze the interview below and provide our analysis where appropriate.

Juhnjhunwala on the Sensex reaching 15,000: “It was just a milestone. There are so many more milestones that are to come. I am bullish on India. The markets could see periods of corrections, consolidations, when they go down. But I am not going to lose hope. Because India is in a very initial stage of economic growth. Indians are ready for global exposure. The world is still looking at India. They know that a lot of economic potential lies here – we are a large, economic superpower for the world.”

India Street Analysis: India is not a superpower yet, and he is incorrect in stating as such. In fact, were it a superpower India would have much more open and transparent markets and have a much larger global trade numbers. However, we do agree that the Sensex 15,000 is just a milestone and predict that Sensex will reach 25,000 soon.

Jhunjhunwala on what he reads to stay abreast of the market: I read magazines, newspapers, etc. But definitely The Economist. That keeps me in touch with the business world. Then I read broker reports, research reports, like that. On an average, it takes me two hours daily for this – religiously. Not number-crunching. I don’t know what that is. Investment is not number-crunching.

India Street Analysis: He certainly sounds like the Warren Buffet from the US. Buffet relies more on his “readings” of executives and whether a stock is over-priced or not. He doesn’t do a lot of number crunching, but reads a lot of periodicals and reports that cover the equities of interest. Jhunjhunwala appears to be a disciplined reader and makes intuitive investments based on the information he gains from the sources he quotes above.

Jhunjhunwala expands on his investment philosophy: I think it’s independent thinking. It’s about patience. You’ve got to be ready for setbacks. You have to be down-to-earth. The markets anyway teach you to be down-to-earth.

India Street Analysis: He is being modest here and not revealing much about his true investment philosophy. You can bet after a financial set back he is researching the reasons behind the missed stock pick or economic forecast and trying to minimize those losses in the future.

Jhunjhunwala on his future: Well, I hope we have capital account convertibility. Then I can replicate what I have done here all over the world. For now, I am trying to improve myself by building an organisation with capital. But I need capital account convertibility to take my money abroad. I cannot invest outside till then… I may stay someday abroad – tax-wise it’s very favourable.

India Street Analysis: We could not agree more. But let’s add the ability of foreigners to invest directly into the India Stock Markets which will help the India market become truly global.

The full interview can be found here

Corruption in India versus the West

Corruption in the less is far less than in India or China however, if you expand the definition of corruption to political contributions and quid pro quo’s corruption in the West begins to equal that of India or China. Unlike India however, powerful Europeans and Americans can be caught and thrown in jail just ask Martha Stewart, Paris Hilton, or Dennis Kozlowski. It’s very rare to see a powerful Indian executive convicted of bribery and further locked behind bars.

Most of the corruption cited by international surveys deals with everyday occurrences and it isn’t good for the India economy. Police bribery, local tax evasion via bribery, special “insider pricing” for Government land sales are all examples of corruption that takes place in India but rarely happens in the West. This is due to stricter corruption enforcement and a free press that is able to investigate without fear. Moreover, corruption in the West is ostensibly not an accepted practice thus business ethics are ingrained into Western society.

India “VIP Syndrome” however allows those with the right connections to move to the front of any queue, get “sold out” tickets to important events or first dibs on special Government contracts.

As Edward Luce writes in the book “In spite of Gods: the Rising Modern India”, “know who” seems to be as important as “know how” in India. He cites the example of India’s telephone industry, where it would take 2 years for most of the regular Indians to receive a telephone line while India’s VIP’s received the lines within days. Once India privatized the telephone industry, the waiting time became much less. His lesson for us: Shortages can often create favoritism and corruption.

In order for India to truly be recognized as a global player with true transparency, India will have to become less corrupt. Right now it’s institutionalized and ingrained into business society (but it’s getting better). As India opens to the rest of the world and allows all of its citizens to become VIP’s corruption will become less and India society will be better off. According to the 2006 Transparency International annual corruption perception index, the US ranked 20th and India came in at 70th. Both countries don’t come off well, but India needs to improve in order to be taken seriously.

The Editor

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The India Street: Editor Musings about TAN/PAN, Jhunjhunwala, Corruption, Rupee, Politically Incorrect Statement of the Week

The Facts about TAN

I found this on the Labnol blog TAN - Facts you should know which describe why you need a TAN or Tax Deduction and Collection account number (a unique ten digit alpha-numeric number) that is required to be obtained by anyone responsible for deducting or collecting tax. Unlike PAN, the TAN card is used to by persons responsible for collecting or deducting your tax at the source of said collection whereas PAN is to be obtained by the individual to track his/her own taxes.

Most Politically Incorrect Item of the Week

One will never get away with this statement in the US or Europe, and especially if done by a Government organization, which is why I was amused or dismayed to see the following:

“Q3. Who can apply on behalf of minor, lunatic, idiot, mentally retarded, deceased and wards of court? Ans. Section 160 of IT Act, 1961 provides that a minor, lunatic, idiot, mentally retarded, deceased, wards of court and such other persons…..“

I found this statement here - Well, I’m not a politically correct person, but this seems a little harsh considering that it’s coming from a Government organization in India. Especially so when the subject pertains to collecting money from people with the descriptions above.

Is a Strong Rupee Good or Bad for India?

The India Street has written on the Rupee and how we predict the stronger valuation vs. the dollar to continue. FDI is streaming into India at an unprecedented rate. In fact July’s inflow will be over $6 billion. Some attribute the Sensex plunge this week to the RBI’s attempt to moderate the Rupee from strengthening. While a stronger Rupee makes Indian exports more expensive, it also allows Indian companies to set up outside of India at a less expensive rate. It also forces Indian companies to be more competitive and thus more profitable over the long run.

Jhunjhunwala Involved in Tops Security Investment?

For our latest Jhunjhunwala watch for the week, The India Street noticed that ICICI Venture Funds and Indivision picked up nearly a 20% stake in Tops Security. You should know that Rakesh Jhunjhunwala owns 16% in the company. There’s a lot of smart people invested in this company now, one should take notice.

Corruption in India

Retired academic Robert Priddy (Philosophy and Social Sciences, University of Oslo) was the chief of Norway’s Sathya Sai Organization (Wikipedia reference). His article Avoidance of the law in India discusses how difficult it is for those in power or those that have wealth to be brought to justice in India.

When I was growing up, I often tried to understand how the wealthy got wealthy and was brought up to believe it was done through smarts and hard work. It pains me to see some that have achieved wealth did so nefariously or worse, those that have achieved power or wealth are still cheating.

The India Street condones fair play in India and we will use our platform to expose corruption that is hurting investors that play by the rules. We have noticed that there are not a lot of articles or stories in the mainstream press about corruption yet we know it takes place frequently. In fact India has been improving as late in the global rankings, but still stands far behind Western Nations. Corruption has been directly linked to poverty “Corruption traps millions in poverty,” said Transparency International Chair Huguette Labelle. “Despite a decade of progress in establishing anti-corruption laws and regulations, today’s results indicate that much remains to be done before we see meaningful improvements in the lives of the world’s poorest citizens.”

Thus there are even more reasons to expose corruption. By exposing it you embarrass and bring shame to those that knowingly cheat you and me. Maybe they won’t be prosecuted in today’s India, but we see a future where all Indian citizens will be treated equally.

- The Editor

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