What India should learn from the Rajat Gupta case?

Oct 26, 2012

In this issue:
» Just a quarter of India's workforce fully employed
» Will this gentleman be Buffett's successor?
» The premature death of the power sector boom
» Mukesh Ambani does it 5th time in a row
» ...and more!

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A very famous quote by legendary value investor Warren Buffett goes thus: "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." We were reminded of these lines when we read what former Goldman Sachs director and McKinsey & Company Managing Partner Mr Rajat Gupta said just before being sentenced: "I have lost my reputation that I have built over a lifetime."

Just day before yesterday, Mr Gupta was sentenced to two years in federal prison in one of the biggest insider trading cases in the US. His crime was that of leaking confidential information to a hedge fund manager at the height of the financial crisis.

An article in Business Today has pointed out some very pertinent lessons for India from this entire episode. Crime and corruption are universal. They are as rampant in the US as in India. But what differentiates the two is the robustness and efficiency of the judicial system. Take this insider trading case. The quickness with which he was tried, found guilty and sentenced is indeed commendable. To give you a gist of the timeline, the trial began on May 21, 2012. On June 15, the jury found him guilty. And on October 24, he was sentenced to 2 years of imprisonment and a US$ 5 million fine. Period.

What if Mr Rajat Gupta was facing a trial in India instead of the US? It would, without any doubt, drag on for years. Remember the Satyam scam? Mr B Ramalinga Raju, the former chairman of the company which is now Mahindra Satyam, had confessed to fudging its accounts back in January 2009. As per the magazine, the Central Bureau of Investigation (CBI) had taken up the issue in February 2009. All the 10 accused have served about 18 months in prison as undertrials. There are matters still pending with several regulatory bodies including the Securities and Exchange Board of India (SEBI). In all likelihood, it will take a long time before the final verdict is out. And this would be no exception. Judicial cases in India are known to go on for years, sometimes decades. But does delayed justice have much value? As the legal maxim goes: "Justice delayed is justice denied."

Do you think an efficient judicial system would help reduce crime and corruption in India? Share your comments with us or post your views on our Facebook page / Google+ page

 Chart of the day
In a recent study, polling firm Gallup has revealed that only about 26% of Indians aged 15 years and above had full-time employment of at least 30 hours per week in the first half of 2012. It also suggests that workers between the age group of 15 to 30 years are five times more likely to remain unemployed and twice as likely to be under-employed compared to their older counterparts. This is indeed a shocking revelation at a time when the developed economies are struggling with dwindling growth rates and high unemployment concerns. The problem of youth unemployment and under-employment can assume monstrous proportions in a highly populated country like India and can lead to disastrous socio-economic consequences. Indian policymakers really need to find a way to unlock the so-called demographic dividend before it starts becoming a huge liability.

Data source: Business Standard
*% of entire population of employed full-time for an employer;
**% of workforce which is looking for work or available for work

A lot of successful people possess multiple qualities we believe. However, sometimes the media spotlight is quite intense on just one of these qualities. As a consequence, the other accomplishments slide into the background. Warren Buffett would perhaps be one of the best examples of this phenomenon. He is an extremely successful investor no doubt. But what often get ignored are his managerial skills. It is precisely this attribute of the Oracle of Omaha that makes the decision of succession planning so difficult for him. For people who excel in both investing as well as day-to-day management are very hard to find indeed. However, the popular magazine Businessweek argues that a gentleman named Ted Wechsler may be the answer to this dilemma.

Wechsler is the portfolio manager that Buffett hired recently to oversee a part of Berkshire's investments. There are shades galore of Buffett in Wechsler, argues the magazine. He concentrates his investments in only a handful of companies and is a stickler for annual and industry reports. Besides, he is also seen carving out a bigger role for himself in Berkshire than being just an asset allocator. All of this has given enough fuel to the fire of whether Wechsler is a strong contender to eventually replace Buffett. We doubt whether it matters so much so long as the Buffett legacy is preserved at Berkshire Hathaway.

The state of Chhattisgarh is not known for being very progressive in terms of infrastructure. Hence we were rather surprised to learn from an article in Economic Times that as many as 61 power projects were planned in the state. That was until 2009. Four years later, the number of power projects that are likely to be commissioned are barely 15! Neighbouring states Jharkhand, Orissa and Madhya Pradesh also had ambitious plans. 24, 30 and 49 power projects were to be erected in these states, respectively. Coal shortage, inadequate funding and land acquisition hurdles have kept most of these projects on paper. Another key reason for the projects being unviable is the crash in power rates. The State Electricity Boards (SEBs) are willing to pay just Rs 3 per unit of power. This is half the rate of Rs 6 to 12 per unit paid between 2006 to 2009. In fact, given the precarious financial health of most SEBs, any payment from them is uncertain.

Across India, the situation of new power projects is rather grim. Around 65,000 MW of thermal capacity across the country runs the risk of turning into bad assets. Given a capital cost of Rs 50 million per MW, projects of approximately Rs 3 trillion are at risk! Moreover, power projects are typically heavily leveraged. Hence, their unviability has affected the financial system as well. What the situation unveils is not just the poor infrastructure execution capabilities. But also how this power boom became a money laundering vehicle. It fuelled corruption amongst politicians, bureaucrats, bankers and local officials. And finally reduced a critical infrastructure sector into a get-rich-quick business avenue.

Flipping through newspapers and magazines, you would have definitely come across advertisements of car manufacturers also offering vehicle financing at interest rates much lower than what any bank would offer. This process has helped manufacturers in making prospective customers view them as a one-stop shop offering bundled services. This trend has not gone down well with banks! Especially given that earlier they had tie-ups and partnerships with auto companies. Majority of the latter now have their own captive financing units or specialised tie-ups with NBFCs (in association with the respective car brands). It has now been reported that banks are looking to drag the finance arms of several car manufacturers to the Competition Commission of India (CCI) , alleging them for using unfair trade practices. Banks claim that such finance arms have pretty much hijacked the booming auto finance business. In India, where nearly 8 out of 10 vehicles are financed and where the auto sector has been booming, banks are believed to be losing out quite a bit from the Rs 400 bn car loan market.

Attaining top slot is a difficult task. But after reaching the pedestal maintaining one's position over there is also equally challenging. Not if you are Mukesh Ambani. The Forbes richest Indians' list is out. And for the fifth time in a row, Mukesh Ambani has claimed the title of being the richest Indian on earth. His net worth stood at US$ 21 bn for the year under consideration. Second in the list was ArcelorMittal's Chairman, Lakshmi Mittal. However, Bharti's Chairman, Sunil Mittal and Adani Group's Chairman, Gautam Adani were out of the annual list of 10 richest Indians. The telecom scam and power woes saw share prices of their companies tumble which eroded their net worth. Dilip Shanghvi of Sun Pharma was a surprise entry into the list. In fact, he entered the top 5 for the first time.

It is interesting to note that the collective wealth of India's 100 richest Indians increased 3.7% to US$ 250 bn. And this increase in wealth is approximately 14% of the country's nominal GDP. In a country, where majority of the people live below poverty line, such a concentration of wealth in hands of few people is really astounding.

Meanwhile, indices in equity market of India were trading below the dotted line with the BSE-Sensex lower by about 127 points at the time of writing. Barring auto stocks, all sectoral indices were facing selling pressure with stocks in the consumer durables and pharma sector leading the losses. The key Asian indices closed in the red today. European stock markets were also trading weak.

 Today's Investing Mantra
"There are more problems with having the wrong manager than the wrong compensation system. It's enormously difficult to run a big company, so the greater sin is having the wrong person." - Warren Buffett

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    20 Responses to "What India should learn from the Rajat Gupta case?"

    Capt VK Bakshi

    Oct 30, 2012

    The only reason for the rampant corruption in India is the virtual non existence of delivery of justice in a timely manner. As long as the system of payment to advocates based on court appearances is there the incentive to drag on cases for decades will be there. The legal system has to cure itself as in India it is on its last legs. There is no fear of retribution as criminals know that cases can go on for their lifetime. Adjournment to adjournment.I am sure that bringing back the Jury system will go a long way towards reducing the backlog as cases will be brought to a faster conclusion.Even murderers die a natural death as the system of appeal upon appeal and finally a president who dithers upon a decision to reject a mercy petition for months contribute to this denial of justice to the aggrieved. Justice delayed is justice denied but in mera bharat mahan that is regrettably the norm.



    Oct 29, 2012

    Undoubtedly, Yes. The delayed justice promotes corruption and crime. Going by the track record of Indian judicial system, cases are still in courts for decades crying for decision. People with criminal and corrupt mentality and aptitudes are encouraged to risks and go ahead with dubious plans to commit crimes thinking that they might not get cought since our inspection systems in normal course are not so robust; if they are cought, they will bribe the authorities to go skot free; and even if cought and tried, the court would take ages and they could get bail and be free moving in the society probably commiting crimes again. Even, our society accepts such people without much of hesitation or concern.

    Like (1)


    Oct 29, 2012

    Undoubtedly yes! The presence of an in-efficient judicial system is one of prime reasons for corruption getting a foothold in post-independent India. Referring to a recent article by Jaithirth Rao in Tehelka; normal, law-abiding citizens and business turn to corruption primarily to speed up the legal process. However, once corruption takes root, like it has in India, we are finding to our dismay that it has a life of its own, has its own parasitic demands, and if unchecked, may eventually kill the nation itself.

    Like (1)


    Oct 28, 2012

    A hundred times .... yes ... judicial delay and lackadasicaliness is the main reason for corruption. criminals and transgessors know they will be old or dead before they are convicted ...... and victims know they will be ruined or dead by the time they get justice ..... this is also why the "don" or "bhai" survives.

    anna, kejriwal , etc are all jokers who havent analysed the real problem. the real problem is the inordinately slow delivery of justice.

    this should be the election plank of all reformers so that corruption and inefficiency is brought down to manageable levels and becomes a rarity ..... rather than the life-sucking cancer that it has become.

    Like (1)


    Oct 28, 2012

    Cases like Rajat Gupta never come to light in India. Even though insider training is a serious crime, no body ever got caught for indulging in insider trading. Even those caught in much serious crimes are never get punished. Their cases may run for decades and ultimately nothing happens. It would appear that the system is being managed by crooks for their benefits. A very sorry state of affairs.

    Like (1)

    sudhir k mathur

    Oct 27, 2012

    YES!YES!YES!YES!.... the MAJOR reason for, all that is not good in our country, is the poor judicial system.every sphere of our civil life is affected adversely by delayed justice.when will our media wake up to this major flaw in our system and expose it , so that reforms are initiated

    Like (1)


    Oct 27, 2012

    There's too much to learn for us in India, unfortunately. So I don't know if we will learn anything at all. Having said that let's look at what we can learn:
    1. When the high and the mighty are found to be involved in reasonably dubious transactions - it's sufficient to convict them. Our judicial system would probably have never convicted a person with this amount of evidence!
    2. Our prosecutors will never be so self-powered and go after the case. We will even make routine transfers of the prosecutor if this were to happen. Can we change that?
    3. Do we ever have any case - where the arguments can be closed within a month of the origin of the case. It's just impossible in our system of perpetual adjournments! Can we change that?
    4. The biggest change - we need in some areas (especially corruption and cases against humanity - rape/ murder etc) - we need a jury system. That's the simplest way to make sure that society can judge what it wants. Today's system has become too much of the legal folks and hence the rich and powerful will be the only ones who can get away...

    Like (1)


    Oct 27, 2012

    There is nothing to learn at this stage. If at all we learn, it would be 'How to practice corruption in a better and safer way'.
    We, driven by our greed for material wealth & others approval are being transformed into 'asuras'/devils/monsters. The hereditary factors and ignorance make the control system,an unstable positive feedback type. and is bound to explode like an atom bomb in the near future. Life, again may begin from scratches.

    Like (1)

    Naushad Patel

    Oct 26, 2012

    What hope of getting an efficient judicial system in India, with 35 million cases in the courts!!

    Like (1)

    r v iyengar

    Oct 26, 2012

    Rajat Gupta said that " My reputation which I built over twenty years is ruined". Here the scamsters have no reputation to be ruined. Most of them only care about money. Once money is the driving force, reputation can be bought in India.
    As has been seen in several instances in the past the justice can be subverted here with active connivance of the authorities if the guilty party is well healed.
    In India practically every person is corrupt-- right from the rickshaw driver to the "most reputed" in the land

    Like (1)
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