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10 ISSUES AND INSIGHTS
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MUMBAI | WEDNESDAY, 21 MARCH 2018 1

Lengthy arguments, hasty decisions retire and there was no time to discuss
the issues with his brethren. Two days
before retirement, Justice Krishna Iyer
wrote a few “hurried” lines on Urban
> CHINESE WHISPERS

One Supreme Court bench is bearing all constitutional burdens
break. Naturally, minds of those who
attend the hearing tend to wander and
speculate on what would happen in
the coming months.
Chief Justice Dipak Misra, who presi-
des over the bench, has listed before
himself a formidable array of cases.
After the Aadhaar case, the bench has to
decide at least nine other cases of
immense importance. They include the
OUT OF COURT LGBT rights, adultery as a crime, entry
of women into Sabarimala temple in
M J ANTONY Kerala, whether a charge-sheeted leg-
islator must be disqualified, and what
In view of the heavy burden falling
on this bench, the work could have
been distributed among other senior
judges. After all, the roster is a man-
made arrangement. It is not clear
whether it was made by the CJI himself
as “master of the rolls” or in consulta-
tion with other judges.
The court declares on its website that
“chronology is based on the date of ini-
tial filing”. However, the selection of
cases from 40 Constitution matters
looks random. Cases pending for
decades are gathering dust in the record
distribution of work tend to support alle-
gations of opaqueness and confounds
the running controversy kicked off by
the four judges on allocation of work.
Returning to the perils of long hear-
ings, the court could not be unaware of
unsavoury episodes in its history. The
celebrated Kesavananda Bharati case
went on for five months in 1972-73 and
the judgment was hurriedly delivered
only on the last working day of the
then Chief Justice. Justice Y V
Chandrachud, the junior-most judge
among 13, opened his judgment stat-
Land Ceiling. Old-timers remember
caustic comments written by Justices Mattress matters
M M Punchhi and V Khalid in similar
circumstances.
If a judgment is not delivered when
all the judges who heard the case are in
service, it would have to be heard again
by a new bench. Normally such situa-
tions are avoided. There was one recent
instance when a judge happily retired
without writing judgments. There was
another case in which a judge hurried-
ly left to fight elections, leaving his draft
judgment in his files. One CJI was sus-
pected of malingering and getting
admitted to hospital at the last moment

T
he truncated hearing of the Aad-
haar case by a five-judge consti-
tution bench of the Supreme
Court started on January 17 and as of
now there is no end in sight. The
Supreme Court does not set a strict
time schedule for arguments unlike
its counterparts in the US and some
other countries. So arguments drag on
for months. It is a convention which
no Chief Justice has been able to
happens when one bench declares that
a coordinate bench had passed an order
ignoring law. According to the roster
published by the SC following the press-
er of four “rebel” judges, all these cases
including the Ayodhya logjam can be
heard only by the CJI’s bench. This rais-
es serious doubt as to whether it would
be able to decide such momentous iss-
ues in some 60 sittings available before
the CJI retires in October.
room. Some of them, for instance, are
clarification on the meaning of “indus-
try” in the Industrial Disputes Act, fed-
eral principles in the liquor trade and
right to property. If chronology was the
criterion these issues should have been
put on the front burner long ago. If
importance is the test, then the privacy
issues involving social media and RTI in
judiciary should have been given prior-
ity. However, the present selection and
ing that “counsel all round consumed
so much time that very little was left
for us to elucidate ours…The court will
be poorer by the retirement of the CJ
and that has set a dateline... There has
not been enough time for an exchange
of draft judgments”.
That was not a unique instance. In
2013, Justice Anil Dave wrote in the
NEET case that he had to be “quick
and short” because the then CJI was to
as the trend was against his views.
There is still time for the CJI to
share the constitutional burden with
senior judges by relaxing the roster. It
is true that the number of judges is
dwindling amidst the stand-off bet-
ween the judiciary and the executive.
That is all the more reason that the
CJI leaves a healthy convention which
would be remembered as a silver line
in these troubled times.
Vipul Ambani, president, finance, of
Nirav Modi-led Firestar Diamond, pleaded
before the court to allow a “soft” mattress
in his jail cell citing health issues. Ambani
is in judicial custody because of his alleged
role in the $2-billion fraud at Punjab
National Bank. Replying to the plea, the
judge asked for time to seek the opinion of
jail authorities on whether the mattresses
already provided to him were “extra soft”.

Singh seeks attention

Data-rich players turn digital lenders

There was a time when former Samajwadi
Party (SP) leader Amar Singh was much
sought after by the media. But Singh, now
an “independent” Rajya Sabha member
after the SP had thrown him out, knows a
thing or two about attracting attention.
Increasing use of digital payments has led to critical data points for financial institutions to leverage it for credit scoring A question posed by him for the electronics
and information technology minister has
policies and business measures, all direc- product/services subvention built into been listed to come up in the Rajya Sabha
ted toward a common objective. the product pricing. on Friday. Singh has sought to know
Increasing usage of digital payments In summary, there are three specific “whether the government is aware that a
has led to critical data points for financial trends being observed. First, companies large number of Indian couples are
institutions to leverage it for credit scor- with captive base on consumer busi- engaging in live streaming of their sexual
ing thereby giving rise to FinTech firms nesses such as health care, retail and e- acts on porn websites for quick money”.
focusing on quick credit disbursement. commerce, and travel are venturing into Further, he also wanted to know whether
A recent research conducted by EY (EY digital consumer side financing, lever- the government has probed this and
FinTech Adoption Index 2017) shows that aging their captive customer data and unearthed details of such couples, and
India is ranked second globally in the offering “pay later” options. Second, “the number of persons who have been
SACHIN SETH adoption of FinTech services (at 52 per companies with captive base on SME arrested, as transmitting a sexually explicit
cent), second only to China (at 69 per side (suppliers, distributors, dealers) act is a crime under Section 67A of the IT Act,
2000”. The answer is awaited, but it will

T
he Indian payments landscape has
evolved rapidly over the past few
years, driven by an increase in the
number of digitally initiated consumers,
rising personal consumption expendit-
ure, increase in use cases supporting dig-
ital payments, urbanisation and improve-
ment in technology and mobile data
usage. While in the past banks played a
central role in providing payments serv-
ices, the landscape today has evolved
with active participation coming in from
non-banks players as well. Increasing
smartphone penetration, reduction in
the prices of telecom data use, growth in
digital commerce and institutional sup-
port have been the key drivers for digiti-
sation of payments in India.
Growth in the adoption of digital pay-
ments has also been supported by imp-
rovement in the supporting infrastruc-
ture. A combination of access to 4G data,
mobile phones (cost reduced to near zero
with telecommunication companies off-
ering subsidised 4G-enabled phones),
Aadhaar and Unified Payments Interface
(UPI) has catapulted India to a payments
growth trajectory. From market players’
perspective, banks, non-banks, govern-
ment and institutional bodies have been
driving and enabling digital payments
adoption through several favourable
cent). FinTech adoption in India is aston-
ishingly high—more than half of our
sample of Indian consumers claimed to
have used more than two FinTech prod-
ucts in the past six months. Some
Fintech products are helping validate
background checks for employment,
directors of the company (in case of
SME), fraud detection, bank account val-
idation and statement analysis to auto-
mate the customer onboarding and loan
approval journey in a straight through
processing (STP) manner.
Payment services are the most popu-
lar among the Indian consumers, who
have embraced tech innovations such as
mobile wallets and UPI platforms for
their day-to-day payment transactions.
However, when it comes to borrow-
ing, a large part of the Indian population
continues to rely on primitive methods
such as borrowing from family and frie-
nds, chit funds and moneylenders.
Unavailable or incomplete credit scores
(which are obtained through ineffective
means such as credit cards or loan repay-
ment history) deny bank loans to this
population segment (consisting mainly
of SMEs, students, consumers seeking to
consolidate debt and new-to-bank con-
sumers), which accounts for app-
roximately 90 per cent of the market.
such as retail and consumer goods man-
ufacturers are venturing into digital sup-
ply side SME financing leveraging their
captive SME side (suppliers, distribu-
tors, dealers) data. This could have a
blockchain play in the near future as
multiple players come together to col-
laborate in a larger ecosystem of indus-
try, financial institutions and logistics
players. Third, small finance banks and
payments banks could use payments
transaction data for flow-based financ-
ing of small-ticket daily/weekly busi-
ness loans to the unorganised sector
Alternative lending business refers to The borrowers also have the option to using digital payments infrastructure
digital platforms that provide low-cost repay the loan through multiple flexible like UPI platform.
loans, which are simple to obtain for the repayment options. While the jigsaw puzzle of doing KYC
large unaddressed market segment in Leveraging digital platforms, there and underwriting (based on customer
India. These modern alternative lending is a new trend of financing by service ability and intent to pay, social media
companies determine the providers who have footprint, bureau tradelines and fraud
credit worthiness of appli- About 90 per cent of the strong captive customer checks) is getting solved, a new challenge
cants by using advanced data loan seeking population connect from business- for digital lenders is to find an innovative
analytics and innovative data comprising SMEs, es like health care, trav- low costs digital mechanism for collec-
sources. Moreover, the grow- students and new-to- el, retail, food delivery, tions, especially defaults in the case of
ing volume of digital pay- bank consumers are auto and consumer high-volume, low ticket size product.
ments allows these alterna- denied loans because goods. This is expected
tive lenders to access many of unavailable or to give a significant (With inputs from Vinay B Narkar,
more digital data points for incomplete credit scores competition to incum- senior manager, EY)
credit risk assessments. As bents given these play-
they use digital solutions, the speed of ers could have lower cost of acquisi- The author is partner, financial advisory,
loan disbursal also increases manifold tion and competitive pricing due to and digital, fintech and innovation leader,
as compared to the traditional methods. historical transaction data points and EY. Views are personal
ensure Singh some media coverage at least.
No work, no dinner
Rajya Sabha Chairman M Venkaiah Naidu is
upset at the stalling of any business at the
Upper House for 12 days because of frequent
disruptions. Sources said Naidu, who is also
the Vice-President, cancelled a dinner he
was to host for Rajya Sabha members on
Wednesday. Naidu has been appealing to
political parties to allow the House to run.
Sources in his office said preparations for the
proposed dinner were put in place last week.
Naidu had also spoken to President Ram
Nath Kovind, Prime Minister Narendra Modi,
Rajya Sabha Leader of the House Arun Jaitley,
Leader of the Opposition Ghulam Nabi Azad
and floor leaders of political parties to invite
them for the dinner. He expected the Rajya
Sabha to resume normal functioning before
sending out the invite, and expected a
turnaround on Monday, but it was not to be.
Sources said the specialist cooks, who had to
come from Andhra Pradesh, were on Sunday
asked to cancel their train reservation. Naidu
had also refused to inaugurate a badminton
tournament for MPs at the Constitution Club
last week, sources said.

BUSINESS LIFE > LETTERS

What we didn’t learn from the Bear Stearns collapse
Sifting through the conventional wisdom 10 years later
BARRY RITHOLTZ
This weekend marked the 10th anniver-
sary of the collapse of Bear Stearns Cos.
The proximate cause of the disaster was
a combination of excessive, subprime
mortgage-concentrated leverage and
poor risk controls. But the overall econo-
mic, monetary and regulatory environ-
ment were the broader reasons.
On this anniversary, it is worthwhile
to review what happened and what less-
ons were and weren’t learned. Let’s start
by looking at some of the broadest fact-
ors in effect during the pre-crisis era and
how they contributed to the collapse.
„ Monetary policy: The role of former
Federal Reserve Chairman Alan Green-
span in setting rates at ultra-low lev-
els—and keeping them there for a long
time—cannot be understated. Credit
boomed, especially consumer loans and
mortgages, as did items priced in doll-
ars, such as commodities, especially
food and energy. Greenspan was No. 1 in
my book, and for good reason.
„Flat wages: Ultra-low rates did not occ-
ur in a vacuum; they took place in an en-
vironment where real wages had been
flat for at least three decades and in-
come inequality had been growing. Few
people were willing to admit they were
sliding lower on the socioeconomic lad-
der or lower their standard of living, so
they turned to debt to fill the gap.
Lenders made it easy, especially the
non-bank underwriters who were not
constrained by either Federal Reserve or
Federal Deposit Insurance Corp. rules
and regulations. Speaking of which:
„ Deregulation: The prior few decades
were an era of radical deregulation. The
Commodity Futures Modernization Act
of 2000 allowed derivatives to be treat-
ed unlike any other financial instru-
ment: no exchange need, no reserve
requirements and no disclosures nec-
essary. The Securities and Exchange
Commission’s Net Capital Rule (Rule
15c3-1), which limited investment bank
leverage since 1975, was overturned.
Glass-Steagall, which separated invest-
ing and savings banks, was repealed.
The federal preemption of state anti-
predatory lending laws also contributed.
„ Bad economic theory: Greenspan’s
“oops” moment came when he told
Congress he found a flaw in his idea
that bank executives would never do
anything that would hurt the reputat-
ions, never mind the survival, of their
institutions. This was a basis (perhaps
excuse is better word) for the now-
laughable belief that banks could self-
regulate. The reason was a stronger
force existed, namely:
„Incentives: This may be one of the fun-
damental laws of economics: Incentives
matter. From “I’ll be gone bonuses”
based on trades that blew up long after
employees have left the firm, to the run-
of-the-mill emphasis on short-term com-
pany stock movements, the incentive
system was utterly misaligned. It still is.
Perhaps the most startling lessons
from the crisis are those that stubborn-
ly refuse to be learned. There is a long
and not very distinguished list of what
did not cause the meltdown. Some of
these explanations are tortured exam-
ples of cognitive dissonance: a stubborn
refusal to accept a fact that directly con-
tradicts a belief system or ideology in
which you have invested a lot of time,
effort and energy. Other factors are what
I called “The Big Lie”—a false narrative
blaming people and issues that had
nothing to do with the crisis, but make
for convenient scapegoats.
Let’s state this unequivocally: Poor
brown and black people did not cause
the financial crisis. There have been nu-
merous attempts to claim they did, but
each is so easily dispatched as to be
laughable:
„Community Reinvestment Act (CRA):
This 1970s anti-redlining legislation is a
favorite boogeyman of critics. But as we
noted previously, had the CRA been the
cause of the crisis, home sales and prices
in urban, minority communities would
have led the national home market
higher, then led the nation in foreclosu-
res. This is not what happened. Instead,
inland California, Las Vegas, Arizona
and South Florida were initially the big-
gest gainers and ultimately experienced
the biggest losses in the housing deba-
cle. To say nothing of the fact that much
of the rest of the world experienced an
even greater housing boom and bust.
You can blame the CRA, but only if
that stands for Credit Rating Agencies.
„ Fannie Mae/Freddie Mac: The other
favorite boogeyman is these two gov-
ernment-sponsored agencies. Many
pro-deregulation commentators refuse
to accept their own roles in the crisis,
and casting about for others to blame,
found easy marks in these two.
Not that they were blameless: They
were poorly run, sloppy finance firms
that were notoriously mismanaged (my
firm was short the GSEs pre-crisis). But
that does not mean they were a signifi-
cant causal factor. Even Greenspan ad-
mitted they were no more or less resp-
onsible for the crisis than any other big
and poorly run bank.
That’s the short overview—if you
think you understand the crisis, you can
take this simple test. If we want to avoid
the next crisis, there are still a few steps
we need to take.
© 2018 Bloomberg
Weak Cong leadership
With reference to “Break ‘walls’ within
Congress” (March 19), Congress President
Rahul Gandhi’s rhetoric of breaking the
wall between leaders and workers sounds
ludicrous. He has expressed his grievance
over the denial of party tickets to hard-
working workers by the top leadership.
But thanks to dynastic politics his ascen-
dancy as the party president was prede-
termined. The Congress has not yet been
able to dismantle the wall erected bet-
ween the Gandhi family and other leaders
of the party. Therefore, it is a distant
thought for a party like Congress that can-
not even erase its dynastic tag.
Under Rahul Gandhi’s weak leader-
ship the national image of the Congress
party has been defaced. He led the party
to play the second fiddle to regional par-
ties in the Assembly elections in a num-
ber of states except Gujarat. The drub-
bing of the Congress in the recently
concluded Assembly elections in Tripura
proved that the entire organisation of the
party had been swallowed by the
Bharatiya Janata Party (BJP). Besides,
the poor show of the party in the by-elec-
tions in Uttar Pradesh cannot be a cause
of encouragement. Under Rahul
Gandhi’s leadership election defeats have
been the wont of the Congress since the
last Lok Sabha polls in 2014.
Rahul Gandhi has realised that
ahead of the Lok Sabha elections in
2019, assembly elections in states such
as Madhya Pradesh, Rajasthan,
Karnataka and Chhattisgarh are going
to be the acid test for the Congress. In
these elections, under his leadership
the party will have to fight the BJP
directly. His mother, Sonia Gandhi, has
come forward to his rescue. He has
compared the Congress to the Pandavas
who fought for truth in the battle of
Kurukshetra. He should not forget that
the Kurukshetra battle was won by the
Pandavas under the efficient comman-
dership of the great hero Arjuna. A flock
of sheep under the leadership of a lion
can emerge victorious against a pride of
lions led by a sheep.
Buddhadev Nandi Bankura
Empower RBI
The Reserve Bank of India (RBI) has
spoken about the need for ownership-
neutral regulation and supervision of
banks. The central bank has said that it
has no legal powers to appoint or
remove the CMDs/MDs of public sector
banks (PSBs), remove ineffective mem-
bers of the PSB boards, merge PSBs etc.
It has these powers in case of private
banks. Earlier, the Financial Sector
Assessment Programme carried out by
the International Monetary Fund and
the World Bank on the Indian financial
sector (its report came out in December
2017) also mentioned this anomaly.
Now, the Banking Board Bureau chair-
man has said the same thing and also
mentioned that the body has recom-
mended a slew of banking reforms
awaiting the approval of the finance
ministry. He mentioned that he has not
been able to even meet the finance min-
ister in this connection since July 2017.
> HAMBONE
These legal reforms should not be
delayed any further.
The RBI should be legally able to
approve the appointments of/secure
the removal of both MDs and board
members of PSBs. Not only should the
RBI be able to regulate and supervise
PSBs like private banks, but also the
conflict of interest resulting from offi-
cers of the regulator and supervisor
(RBI) serving on the boards of the PSBs
(including the big loan sanctioning
committees of the board) should be
urgently remedied by withdrawing the
officers from these positions.
The RBI supervisors are placed in a
difficult situation when they have to
point out infirmities in sanction and/or
follow-up of loans when its officers are
serving on the boards/committees of
the PSBs that have sanctioned these
loans. The government, as the owner
of PSBs and in the interests of better
corporate governance, should appoint
its officers/professionals to serve on the
loan sanctioning committees of the PSB
boards. It cannot exercise control over
the PSBs without accepting its respon-
sibility/accountability as the owner of
these banks. The RBI should be given
appropriate powers vis-à-vis PSBs and
then be held accountable for timely and
correct exercise of those powers.
Arun Pasricha New Delhi
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201 · E-mail: letters@bsmail.in
All letters must have a postal address and telephone
number
BY MIKE FLANAGAN
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OPINION 11
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Volume XXII Number 156

ILLUSTRATION BY BINAY SINHA
MUMBAI | WEDNESDAY, 21 MARCH 2018

Proof of concept
Govt should consider a test case for bank privatisation

T
he state-controlled section of India’s banking sector continues to be
a major problem for policy makers. Not only is its slow credit growth introduction of a widely based goods and services tax
delaying the revival in private sector investment, which is crucial for (GST) would reduce effective progressivity even
more. Therefore, any new DTC should introduce
the economy’s return to a higher growth trajectory, but also recent new rates of 35 per cent and 40 per cent for brackets
revelations about allegedly fraudulent letters of undertaking (LoUs) being of ~10-30 million and above ~30 million respective-
issued to companies controlled by jeweller Nirav Modi have highlighted the ly. Presently, even a rate of 45 per cent above ~60 mil-
continuing problems with governance in these banks. No argument, practi- lion is justified. This will not be internationally
cal or theoretical, can be made now for such a large proportion of India’s incomparable.
banking sector to be in the hands of the government. There has been little First, that there would be flight of professionals

Revisiting direct
appears to be invalid since comparable countries
improvement in their functioning despite the introduction of various mech- have higher rates than India. And, second, any reac-
anisms aimed at improving governance in these banks and reducing their ten- tion from those who would be at rates of 35 per cent,
dency towards poorly judged or outright fraudulent lending. The most recent, 40 per cent and 45 per cent of unfair burden should
the Banks Board Bureau, is noticeably absent at this time of crisis, partly be addressed through enhanced tax administration

tax code — II
because the government seems to have forgotten about taking it seriously. It efforts to improve tax compliance and expand tax
payer number — especially the self-employed —
is ever more clear that privatisation of public sector banks is the only logical
while eschewing a strategy of search and seizure.
way forward. Only then the handful of individuals who declare
Yet there are many barriers to a programme of privatisation. For one, the
political risks are considerable for any government. In addition, the banks
Negative equity effects and complexity must be eliminated taxable income of ~10 million could be increased.
Separating employees from the self-

I
themselves will be unpalatable acquisition targets for any private sector enti- continue with a comparison of direct tax code basis. Income Tax Act (ITA) uses the concept of employed: In order to bring in the self-employed
ty. Many of them have books burdened with bad loans. This reduces their val- (DTC) 09 and DTC10 (while desisting from the notional rent. more successfully into the tax net, the self-employed
virtual DTC14) in the context of the currently The ITA (i) exempts one owner occupied resi- could be separated out from the salaried. Currently
ue. The government will naturally not receive a good price for them, opening
ongoing exercise that is revisiting the DTC yet anoth- dence from income tax; (ii) taxes second and higher in India, both the salaried and the self-employed
itself up to attacks from the political opposition — in some cases, it could be er time. Today, I also go beyond DTC09 and DTC10 numbers of owned residences; and (iii) allows deduc- are subjected to the same rate structure. Offering a
fortunate if it received any price at all. It is also worth noting that many of the and bring to attention selected remaining challenges tion of interest in case of the first, exempt self-occu- preferable rate structure to the self-employed such
banks are vastly over-staffed or staffed by employees with low productivity. that were inadequately addressed in both of them, pied property up to ~200,000. This results in an obvi- as individual proprietors may be considered in light
This excess employment cannot be easily shed by any acquirer. Bank unions nevertheless needing urgent attention. ous double deduction. It also implies an inequitable of the higher risks involved in earning income from
continue to be powerful and obstructive. They also have political influence. Wealth tax: DTC09 proposed charging wealth structure of income and wealth taxation of real prop- business compared to salary income.
tax on all assets, including financial assets. The law erty ownership. Exempting one self-occupied house A counter argument could be that the self-
Any programme of wholesale privatisation will have to deal with a combina-
was structured to be simple and irrespective of value subsidises employed are already preferred since they are taxed
tion of low valuations, a shortage of buyers and an aggressive campaign of implementable. A high threshold extremely high-income and high- on net profit while employees are taxed on gross
obstruction by bank employee unions and Opposition parties. These are, no of ~0.5 billion and a low tax rate of wealth owners, while taxing mid- salary; but note that standard deduction has just
doubt, part of the reason that, in spite of general exasperation over frequent 0.25 per cent were proposed. DTC10 dle income owners who may been restored. Note further that many self-employed
bailouts of public sector banks with taxpayer money, there has been no move- provisions were aligned to the exist- acquire additional properties later have recently come under the GST regime as servic-
ment towards a policy of privatisation. ing Wealth Tax Act, with a few addi- in the earning cycle. Further, es are now being additionally taxed at the level of
tions of some financial assets locat- aspect (iii) unjustifiably allows states. And even though the tax is designed to be
There is, however, one way to break this impasse. The government could
ed outside India. Wealth tax was deduction of interest on a large passed on to final consumers, the self-employed
select one of its weakest banks as a test case for privatisation. In fact, this could subsequently abolished. residence though not on a second often do not perceive it the way tax experts do.
be sold as a special case of privatising a public sector bank that has conspic- In a country like India — where small residence. Further, in the GST introductory stage, their com-
uously failed to perform; and since it will be a special case, political opposi- 0.001 per cent of the top wealth Hence it is suggested to intro- pliance costs have been significant.
tion to the move could be muted. If this bank performs well, the positive exam- cohorts are enjoying the most rap- PARTHASARATHI SHOME duce a monetary threshold above Minimise compliance costs: In both the GST
ple could open the door to further privatisation in future. Demand for erstwhile id increase in wealth concentration which a self-occupied residence and the income tax, perception persists of an
in the entire world — a tax on would be subject to (presumptive) increase in compliance costs, for example, recent
public sector banks might build up among possible acquirers, leading to the
wealth is imperative for equity. If appropriately con- income tax. This should be appropriately high, say requirements to submit balance sheet information
discovery of more remunerative prices. Each additional privatised bank will ceptualised and implemented, it should also gener- ~50 million. Second, interest paid on the exempted by relatively small income earners. There is an over-
buttress the argument, reducing opposition and increasing demand further. ate revenue. Net wealth definition of DTC09 should portion of self-occupied property should not be riding consideration regarding right to privacy.
This virtuous circle can be set in motion by the privatisation of a fairly small be reinstated, ensuring that all assets — real and deductible to avoid the mentioned double deduc- Without specifically attributing their actions to the
and poorly performing public sector bank. It is well beyond time for the gov- financial — are included, keeping the tax rate at 0.25 tion. Even if not self-occupied, interest deduction European Convention on Human Rights, European
ernment to at least begin the process of privatisation, even if it has to do it per cent between ~0.5 billion and 1 billion, and 0.5 per should be allowed up to ~200,000, with inflation tax administrations operate in accordance with it,
cent above ~1 billion. The tax rate should be kept very adjustment over time. possibly under the presumption that any disclosure
in stages.
low so that the wealth tax is successful in terms of Wealth tax (which has presently been abolished) of information could comprise prima facie breach of
both compliance and revenue collection. should separately exclude ~50 million from calcula- that right. In India, even if the disclosure demand is
Taxation of house property income — pre- tion of the wealth tax base to ensure consistency retained, disclosure should be demonstrated to be
sumption and exemption — and interest deduc- between income tax and wealth tax. necessary and not routine or disproportionate, in

Freeze-frame tion: DTC09 proposed taking gross rent as the high- Change in the income tax rate structure:
er of contractual rent or presumptive rent (calculated International indexes are revealing that there is a
at 6 per cent per annum of the rateable value fixed by wider dispersion in the distribution of income today.
particular for smaller economic agents.
To conclude, there are many other innovation
aspects in DTC09 such as those pertaining to the
Congress must articulate an alternative vision the local authority or the cost of construction of the Therefore the prevailing rate structure implies that financial sector that should be retained. And the bank
property). In DTC10, gross rent was the actual rent effective progressivity in income tax has declined. cash transactions tax (BCTT) should be reinstated

T
he Indian National Congress (INC) concluded its 84th plenary ses- received or receivable and not taken on presumptive Increase in the share of consumption tax with the reflecting the hard landing of demonetisation.
sion over the weekend. If one looks at legislative strength, the most
obvious parameter for a political party’s appeal, the Congress is at
its lowest point. The 2014 general election saw the party decimat-
ed, as its 10-year rule at the Centre ended with it winning less than 10 per cent
of the Lok Sabha seats. Four years on, the Congress has lost several state gov-
ernments as well. With just about one year to go for the next general election,
Expanding formal employment
this plenary, therefore, was an opportune moment for the new party president,

T
he Employee State Insurance Corporation broader debate of how health care will be financed employment from 10 per cent of the labour force to
Rahul Gandhi, to unveil his team for taking on the Bharatiya Janata Party (ESIC) is a monopoly for employer financed particularly after the budget health care announce- 15 per cent (as indicated by EPFO/ESI) to payments)
(BJP). What one saw instead was the same old guard of Congress politicians healthcare. This monopoly gives it a return ment. We acknowledge that neither the US nor UK or 25 per cent (as indicated by employers who pay
on equity (ROE) of over 17,000 per cent, which is models seem to work in meeting the conflicting GST) has been an important indicator of the lazy
who were rejected by the voters in 2014 and who had nothing new to offer.
worrisome since the ROE for great companies with objectives of quality, quantity and cost because, as cultural explanations for India’s informality.
Placing them in critical positions means the party will lack the fresh ideas it satisfied customers like Naukri.com, TCS, and health expert Nachiket Mor points out, health mar- Improved enforcement and big moves like demon-
needs to compete with the BJP and will remain a victim of its own groupthink. Hindustan Lever are 105 per cent, 33 per cent, and kets have three problems — Hyberbolicity (under- etisation, GST, Rera, FDI-limit raising, Shell com-
Even the so-called young brigade on display comprised all products of polit- 67 per cent respectively. The ESIC estimation of need), Coordination pany evisceration, etc have led to an increase to
ical dynasties. In effect, therefore, there was hardly any difference between the not only has millions of unsatisfied (market failure) and Information GST registered enterprises crossing 10 million. But
party that was rejected in 2014 and the one that now claims to be “the voice customers but offers poor value for Assymetry (between patient and only 1.3 million enterprises pay EPFO and ESI; with
money — the ESIC pays out less provider, provider and doctor, and structural reform to these organisations, this num-
of the nation”.
than 50 per cent of contributions as doctor and latest knowledge). The ber could easily triple.
Mr Gandhi’s speech, though combative, did not go beyond raking up old benefits while there is hardly an new national health insurance pro- But the current acceleration in formal employ-
allegations of scams such as the purchase of Rafale aircraft. He also kept Indian commercial health insur- gram is an interesting new vehicle; ment will surely slow without deep and broad
harping on the BJP-led government’s failure to keep the promises it had ance plan that has a claims ratio of maybe ESIC should hand over its changes to our labour laws. We have too many of
made to the nation, especially to farmers and the poor. But one would have less than 95 per cent. Its cash sur- cash balances to the government them, too many of them contradict each other,
expected the party president to figure out a way to capture public imagination plus of ~ 70 billion ever year on total — it represents unfair overcharging most need too much paper, and most confuse reg-
capital employed of ~1.5 billion has — and include all their members in ulation with supervision. Dropping the draft Bill
by articulating an alternative vision that went beyond making personal created cumulative reserves of over that scheme. that exempted small organisations from many
attacks against the prime minister for his “divisive ideology and his failings ~500 billion. Formal job creation MANISH SABHARWAL & Mandatory Employer financed laws was the right thing to do; it would have cre-
on the governance front”. Instead, Mr Gandhi sought to shape the contours of desperately needs labour reform RITUPARNA CHAKRABORTY healthcare has important implica- ated an arbitrage opportunity at best, and at worst,
his party’s election campaign for the 2019 polls as the battle of Mahabharata but instead of equating reform with tions for labour and healthcare mar- an apartheid. The lowest hanging fruit is a single
between the Kauravas of the BJP-Rashtriya Swayamsevak Sangh (RSS) — hiring and firing workers — the infamous Chapter kets. A cap on salaries in the United States during labour code (we really don’t need three or five), a
who are well organised with immense resources but are arrogant, indulge in 5B of the Industrial Disputes Act — we’d like to World War 2 had the unintended consequence of Universal Enterprise Number (another important
make the case that the best place to start labour exploding employer financed healthcare (American announcement of the budget that was missed by
falsehood, and are drunk on power — against the Pandavas of the Congress, reform is creating competition and reforming the companies are now liable for covering healthcare the commentariat; clearly many of them have not
who are humble, speak softly, and are fighting for truth. governance of the ESIC (also EPFO, but we will cov- insurance costs for two-thirds of the country’s pop- actually run businesses and dealt with pain and
In terms of policies, there was hardly anything new or path-breaking in er that in a future article). No modern private com- ulation. But this could explain the frequently quoted corruption of the more than 27 numbers that every
Mr Gandhi’s promises. If anything, he is leaning more to the left of the spec- pany in India has a return on equity of 17,000 per real wage stagnation of the US; health benefits from company has right now). The UEN should enable
trum than even his mother or grandmother. It is unclear, however, whether cent. Surely no government corporation should. employers now account for 20 per cent of total work- all labour laws to go paperless, presenceless and
ESI reform should start with three interventions er compensation (up from 7 per cent in the 1950s) and cashless from April 1, 2019. It’s sad that the Income
that is what India needs at this point, or whether that positioning will be
of fairness, governance and competition. First, like health care costs now approach an unaffordable 20 tax department beat the labour ministry in adopt-
enough to blunt the BJP’s edge. Mere aggression in his speech will certainly any health insurance scheme in the US, they should per cent of US GDP. An interesting recent develop- ing e-assessment; the least they can do now is
not help unless it is backed by a clear and granular action plan. Mr Gandhi, be required to return any premiums collected above ment is a partnership between Amazon, Berkshire copy it.
instead, banked on vague generalities and gave the impression that the par- an 85 per cent claims ratio to payers in the following Hathaway and JP Morgan that aims to deliver “sim- India’s formal jobs problem — the wage premium
ty’s approach still relied heavily on appropriating the ideas of earlier years and years. Second, we should fix the governance of ESIC; plified, high-quality and transparent health care at a — is often confused with a jobs problem. India’s
regurgitating them for modern-day audiences. As a result, the Congress a smaller board, a retirement age, a term limit of reasonable costs” evolved in response to what Warren labour laws need desperate surgery. The best place
eight years for board members, true employer rep- Buffet called “a tapeworm eating away at our eco- to start massively expanding formal employment is
embodies opposition to what the BJP stands for, but has failed to carve out a
resentation, etc. Third, we should create competi- nomic growth and prosperity”. We wish them luck but not breaking the back of formal employers but catch-
new identity. Mr Gandhi could have certainly done better. tion for ESIC by allowing individuals to buy health sense that it may take more than bulk buying to solve ing the neck of ESI.
insurance from other providers. After these three America’s health care cost spiral.
immediate steps, ESIC should be included in a Over the last few years the increase in formal The writers are with Teamlease Services

The fine art of valuation throughout the book may be uncon-

BOOK REVIEW
NARAHARI HANSOGE
As I usually do in my class, let me start
with a simple example. Consider a com-
pany that will generate an equity free
cash flow of ~100 next year with a per-
petual growth rate (g) of 4 per cent and a
cost of capital (CoC) of 10 per cent.
Based on these parameters, the equity
value today is ~1,667. If you increase g by
1 per cent or decrease CoC by 1 per cent,
the value jumps 20 per cent to ~2,000. If
you decrease g by 1 per cent or increase
CoC by 1 per cent, the value decreases
14 per cent to ~1,429.
A seemingly small change in one of
the inputs changes the final value by a
relatively large amount. Not surprising-
ly, students find this challenging to
understand and are often left with an
impression that valuation is a meaning-
less exercise where any value can be
obtained by tweaking the inputs. If you
have faced a similar conundrum, then
this book is for you. Indeed, this book is
a must-read for anyone even remotely
interested in finance. Like many, I con-
sider Aswath Damodaran one of the
foremost valuation experts in the world
and this book is a distilled summary of
his experiences and valuation wisdom
spanning more than 30 years.
The essence of the book is easily
captured in the following sentence in
it: “I think of valuation as a bridge
between stories and numbers, where
every story becomes a number in the
valuation and every number in a valua-
tion has a story behind it”. Professor
Damodaran’s usage of the first person
ventional for a business book but is
entirely warranted as he draws exten-
sively on his own experiences of valu-
ing different companies.
Professor Damodaran demarcates
the world into two “tribes” — the story-
tellers and the number crunchers.
While storytellers can communicate
their narratives effectively, they have a
tendency to forget reality. Numbers pro-
vide the perfect antidote to runaway
stories but a valuation model built by a
number cruncher, who ignores the
company’s story or narrative, will
always be on shaky ground. Professor
Damodaran argues that for a well-
thought-out valuation, it is necessary to
combine the strengths of both types
and avoid the pitfalls of each.
Like all good teachers, Professor
Damodaran exhorts the reader to focus
on the valuation process rather than the
end result. He achieves this effortlessly
by walking the reader through multiple
valuation case studies — starting each
case study with the big picture and sys-
tematically narrowing down the narra-
tive to hard numbers. He considers a
wide range of companies including
Ferrari (a mature company with an
established business model), Vale (a
mature company exposed to the
vagaries of macro factors), Alibaba (an
emerging market online behemoth),
and Uber (a young company with a new
business model in a new industry).
For me, the highlight of the book is
his valuation of Uber and his exchange
with Bill Gurley, an early Uber investor.
Professor Damodaran uses this episode
to drive home three important points.
First, valuations are not static but are
extremely dynamic. As new informa-
tion is revealed or as new developments
take place, it is critical to update the val-
uation narrative and the valuation
numbers. Second, in order to do that, it
is vital to keep the feedback loop open
and avoid getting stuck with one’s origi-
nal narrative or model. Third, valuing
young or private companies (especially
in nascent industries) is challenging
due to the inherent uncertainty and
data unavailability. However, the poten-
tial rewards (both monetary and intel-
lectual) are highest in this space.
Towards the end of the book,
Professor Damodaran discusses his nar-
ratives and numbers approach in the
context of valuation driven by macro
factors and how the approach can be
applied to companies based on their
position in the corporate life cycle. For
example, the valuation of a start-up will
be driven mostly by its narrative,
whereas numbers play the dominant
role in the valuation of a mature compa-
ny. Although most of the book is written
for investors, he also provides a few tips
to corporate managers on communicat-
ing the right story and relevant infor-
mation so that the market can value the
company fairly.
One thing that is missing from the
book is a good discussion on estimat-
ing the cost of capital. Professor
Damodaran takes a rather simplistic
approach to arrive at his cost of capital
estimates. Even though discussing
cost of capital estimation might have
got technical, I would have liked to see
a non-technical summary of various
cost of capital models along with a dis-
cussion of applying the narratives and
numbers approach to estimate the
cost of capital for different types of
companies.
Coming back to the example I gave
at the beginning, a valuation approach
that simultaneously incorporates
aspects of narratives and numbers pro-
vides a stronger understanding and a
sound base to valuation practitioners.
Of course, there is no guarantee that
such valuations will always make mon-
ey for their analysts (capital markets
have a mind of their own!) but the itera-
tive process of ensuring consistency
between the valuation narrative and the
valuation model will invariably lead to
better thought out valuations.
The reviewer is assistant professor, finance and
accounting, IIM-Trichy
NARRATIVES AND NUMBERS
The Value of Stories in Business
Aswath Damodaran
Columbia University Press
288 pages; ~1,098