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RBI treads where Government fears - Views on News from Equitymaster
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  • Oct 28, 2009

    RBI treads where Government fears

    While the government of India could only pay lip service to the issue of CEO salaries , RBI, India's central bank and also the banking sector watchdog has decided to do a lot more to ensure sound employee pay policies for the banking sector. For starters, it is already working on Financial Stability Board (FSB) principles to formulate guidelines for the same. It is believed that highly unreasonable pay packets for CEOs of large financial institutions in the western world were one of the main reasons for the global financial crisis.

    Apparently, the focus while arriving on the variable compensation was too much on factors like trading profits that led to these firms taking risks that were detrimental to the long-term health of the institution and ultimately, led to their downfall. The FSB report, which has also been approved by the G-20 nations, aims to correct this very anomaly and has proposed linking total variable compensation to the overall performance of the firm and maintaining a sound capital base. However, India's central bank will have to be also wary of market realities while putting into place employee payment guidelines. Otherwise, the banking sector might lose talent to other industries.

    Moment of truth for telecom companies
    Can a soap company remain profitable by giving out the soap for free and charging for the bath? Highly unlikely, isn't it? However, a few months from now and the telecom companies in India may perhaps have to do exactly the same thing and still remain profitable. Of course in this case, the soap would mean voice calls and the bath would mean value added services like roaming, messaging, song downloading etc. As per a leading daily, local calls on mobile phones cost 40 paise per minute and they are likely to go still lower. Infact, low enough for the country to may be become the pioneer in the world of a concept that is known free voice calls.

    It would be na´ve to assume that the CEOs of telcos in India were not aware of this fact. They indeed were and this explains their move towards trying to reduce their dependence on voice calls. It should be noted that more than 30% of the revenues and 50% of profits of companies that have existed in India for quite some time now already accrue to them by way of value added services. The others that have fallen behind will have to quickly play catch up. Otherwise, with the kind of capital intensity the sector demands, it will not be long before they start bleeding. While such a scenario will be good eventually as it will lead to the much needed consolidation in the sector, we will have to go through a lot more uncertain times in the interim. Little wonder, telecom stocks are being taken to the cleaners these days.



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