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Indian Capital Market

Definition of Corruption – The abuse of public power for private benefit – world bank

Shadow of the Law

Anti-corruption laws aimed at India Inc have been largely ineffective. But two changes are unfolding: anti-corruption measures are acquiring a global hue and focus is shifting to the supply side of corruption, reports

Transparency International, the global civil-society coalition against corruption, had been pursuing National Aluminium Company, a navaratna public sector undertaking, to include integrity pacts (Ips) in its procurement processes for quite some time. The company deputed a junior officer to sign up, but TI India insisted that Nalco’s chairman & managing director ought to make the affirmation for it to make meaningful impact down the line. “Strangely, the CMD’s office was reluctant and we left it at that,” recalls Ashutosh Kumar Mishra, Director (IP), TI India. “Later, this February, the CMD was arrested by the CBI on charges of corruption. Nalco now wants to adopt the IP process.” A relatively new concept in India, IP is a global tool developed by TI. Companies and vendors sign an undertaking that no bribes, gifts, kickbacks or facilitation payments will be asked for or given during procurement.

Members of civil society, designated as independent external monitors (IEMs), function as neutral overseers; in the event of a violation, they are the first stop for grievance redress. Take the case of Central Coalfields, which invited tenders for a coal washery. Monnet Ispat won the bidding, but a competitor, Aryan Coal Beneficiations, was unhappy and demanded re-tendering. The management asked the IEM to step in. The IEM heard out all bidders, inspected documents, consulted experts, made his evaluations and upheld the decision. It was accepted by all, preventing the issue from spiralling out of control, leading to delays and litigation. An IP is a legal document and a process. Forty PSUs have signed up. ONGC was the first in 2005; by 2010, the oil major had referred over a 100 cases to IEMs, who oversaw contracts worth . 150,000 crore. Although private firms bid for PSU contracts in large numbers, the private sector hasn’t really bitten into the concept. “Many of the private companies, barring multinationals, look upon IPs as merely another set of documents to be signed with the tender papers,” laments Mishra. “It’s a fig leaf for them.” The efficacy of IPs in India remains untested. “If you ask me if IP is working, maybe it is, considering the drop in disputes and litigation,” says DT Joseph, former secretary, ministry of shipping, now IEM for the Shipping Corporation of India. “But if you ask me if bribery and corruption has gone down, I just don’t know. It’s difficult to gauge.” TI India is in the process of conducting an impact study on IPs. While TI grapples with its work on hand, the introduction of IPs and the Nalco episode underscores two significant trends: globalisation of anti-corruption initiatives and the shifting of focus to the supply side of corruption.

BEYOND BOUNDARIES

Anti-corruption initiatives are increasingly acquiring a global hue, be it of the voluntary kind like IPs, the UN Global Compact’s 10th principle and the Extractive Industries Transparency Initiative, and also newer legislative measures like the Bribery Act of the UK, the implementation of which transcends national boundaries. The new UK bribery law, introduced from July 1, is similar to the Foreign Corrupt Practices Act (FCPA) of the US; in fact, it’s more severe, even disallowing facilitation fees or ‘speed money’, which finds safe harbour in the FCPA. The UK law puts the onus on companies to prevent bribery and corruption, also by individuals associated with them. And it goes beyond borders. A company headquartered in India with operations in the UK, or one that employs British citizens, is now answerable to the British Serious Frauds Office even if the offence has no connection to the UK. The FCPA, especially in the last decade, has ensnared a host of multinationals for bribing officials in the US and emerging markets, including India.

In 2010, companies in violation of the FCPA paid $1.8 billion in penalties. For instance, the London-headquartered liquor major Diageo Plc, in July, agreed to pay $16 million to settle bribery charges against it for offences in India, Thailand and South Korea. Diageo India was quoted as a ‘relevant party’ in the FCPA case, which involved illicit payments of $1.7 million “to hundreds of Indian officials”, including those from the military’s canteen stores department. By comparison, India has a rather inadequate Prevention of Corruption Act, 1988, and the Prevention of Money Laundering Act, 2002. “We also need to be more prescriptive in our regulations,” says Arpinder Singh, head of forensic at Ernst & Young. “The UK and the US Acts have well laid out procedures, which we lack.” The Indian government, to comply with the demands of the UN Convention against Corruption, which it recently ratified, has introduced a rudimentary Bill on prevention of bribery of foreign officials—something on which Indian companies are among the worst offenders from the leading economies (See graphic: Corruption Inc).

CORRUPTION REDEFINED

The Extractive Industries Transparency Initiative (EITI) is of particular relevance to India, in the wake of scams and disputes that have hit the mining and the oil sectors lately. The Norway-based EITI, launched in 2003, is a coalition of governments, companies and civil society. It seeks to ensure that natural resource benefits all, by outlining standards and deploying external financial, physical and process audits in extraction operations. EITI supporting companies include Areva, ArcelorMittal, BHP Billiton, BP, DeBeers, Exxon Mobil and Shell; countries include Australia, Canada, Germany, Japan, Norway, Qatar, UK and US. India, however, has been stalling. “In recent years, a number of efforts to engage the government of India and companies like ONGC in the EITI were undertaken,” reveals Samuel R Bartlett, director-Europe and Asia, EITI. “To date, the government hasn’t expressed any interest in becoming an implementing country.” This when the EITI is making headway in fostering transparency and curbing corruption in mining and oil. For example, In Nigeria, an EITI audit in 2006 confirmed a hole of $67 million in royalty payments to the government.

The mining and the oil sectors, globally, have come under the scanner of corruption initiatives like never before. In fact, a change in the very definition of corruption is being sought to reflect new realities.

The working definition of corruption put forth by the World Bank and TI, respectively, is “the abuse of public power for private benefit” and “the misuse of entrusted power for private gain”. A recent paper by Norway’s U4 Anti-Corruption Resource Centre, titled ‘Grand Corruption in the Regulation of Oil’, broadens the scope and redefines corruption as “the manipulation of framework conditions to attain exclusive benefits to individuals or groups at the cost of social benefits”. The paper explains the inherent complexity of regulations in the extractive sector. This is something that has parallels with the spate of controversies unfolding in India—the telecom 2G spectrum scam, allegations of gold-plating of costs in the D6 gas fields in the Krishna-Godavari Basin, and the plunder of iron ore mines in Bellary.

This para on ‘grand corruption’ from the paper does touch a chord: “The oil industry is usually governed at the highest political levels, and corruption usually involves political representatives at this level. These actors have different opportunities to benefit from corruption as compared to, for example, civil servants. They will not necessarily bend rules in secret, but will rather alter the rules of the game quite openly, or decide on significant exemptions from written regulations. The benefits they obtain through some form of corruption may be far more than a personal bribe, and may be tied to development aid, macroeconomic loans, party contributions, various political and diplomatic quid pro quos, intricate arrangements to increase revenues controlled by incumbents, or support of industries where politicians have personal stakes.”

SUPPLY SIDE OF CORRUPTION

The second significant trend is the turning of the spotlight on the private sector itself and its players—the supply side of corruption. There is evidently a rather reluctant—but growing—urge to look inwards, especially in the wake of the nationwide campaign against corruption triggered by Anna Hazare. As in most cases, in the Nalco case too, the probe lights were on the bribe-taker, the company’s CMD. The alleged bribe-giver, the Bhatia Group, is given a rather benign view, although some minor official was arrested and questioned. At the macro level, the stifling of competition by a few companies that influence the legal and policy environments is a serious concern that is beginning to be articulated. In recent times, a small clutch of business leaders like Ratan Tata, Deepak Parekh, Anand Mahindra, NR Narayana Murthy, and Anu Aga have been vocal about it. Speaking at a Harvard Business School meeting in Mumbai last week, Ratan Tata said: “Corruption has become worse after liberalisation…Prior to 1991, corruption was in the form of granting licenses. Now, it’s replaced by the award of contracts and in changing the terms of contractual obligations.” This trend is what the World Bank experts often term as ‘state capture’. It is now agreed that, in a ‘capture economy’, a few companies benefit in the short term—at the expense of the long-term health and growth of the private sector. A World Bank study says the overall growth rate of firms in a capture economy is about 10% lower than a non-capture economy over a three-year period. Several recent Indian industry surveys suggest the tide is turning.

A 2011 KPMG survey says corporate India now believes it is time the supply side of corruption is tackled head-on. About 68% of respondents in the survey said that corruption was induced by the private sector. “Companies resort to different ways and means to gain business due to heightened competition,” says Deepankar Sanwalka, head of risk and compliance at KPMG. “These include facilitation payments, cartelisation and (ensuring through illegitimate means) repeat procurement contracts.” An ET-Synovate survey, which polled 181 middle managers in eight cities from August 19-23, reflects the challenges and dilemmas of the Indian private sector. Only 36% of the managers polled felt their company would refrain from offering a bribe at the cost of losing business; 54% felt otherwise. The survey further shows the private sector has been unable to meaningfully address the issue of bribery and corruption. About 55% of the respondents were unaware about their company’s policy or stand on bribes, and 56% said they had never discussed the ethical dilemma of bribery with their top management. The industry chambers also have done precious little to address this issue in a comprehensive manner. Around the time Hazare began his fast, the Confederation of Indian Industry (CII), issued a hastily drafted ‘code of business ethics’ as a guide to each employee of CII member-companies. The CII code is a compendium of good intentions, starting with the need to serve national interests. But the mere issuance of codes and signing on the dotted line cannot stamp out bribery and corruption. It only creates a smokescreen and delays robust action, legislative or otherwise. Little wonder, Deepak Parekh, chairman of HDFC, thinks it’s about time for a UK Bribery Act sort of law for India with a clear focus on the corporate sector.

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Reliance Retail to Rejig Top Deck Ahead of FDI

Ex-Walmart China execs Cissell & Gray set to join as CEO & COO in second reshuffle in two years

The retail subsidiary of India’s largest private company is set for a top-level churn for the second time in two years as the country gears up to open its food and grocery retail market to foreign companies. Reliance Retail has named Rob Cissell, former chief operating officer of Walmart China, as CEO. Shawn Gray, vice-president in-charge of store operations of the same company, will join the Mukesh Ambani firm as COO, the company said in an email to its top executives on Saturday.

The two Walmart China executives will join in September, according to the email whose contents were described to ET by people familiar with it. They spoke on condition of anonymity because the changes had not been publicly announced.

The Reliance Retail spokesperson declined comment.

Gwyn Sundhagul, incumbent CEO of the retail arm who was hired from the Thailand arm of British retailer Tesco early last year, will move to Reliance Industries’ consumer businesses comprising insurance and telecom. “RIL is sharpening its focus on consumer businesses—retail, telecom and insurance—because it wants to balance its portfolio and derisk its core business. You will see many senior-level hires across these three businesses as they are top priority for the company now,” a company insider said, requesting not to be named. He said RIL has no plans to sell out or form a joint venture with a foreign partner if food and grocery retail is opened to foreign companies.

“Both digital and physical retail are priorities for us,” the company executive said. Large-scale expansion will begin next fiscal onwards.

Cissell and Gray have resigned from Walmart China over the last three months. The two were part of the top team of Walmart’s China arm that has around 333 outlets, generating $7.5 billion revenues, or 1.8% of the Bentonville, Arkansas-based company’s total sales of $420 billion last year. Cissell was responsible for store operations, merchandising, merchandise development, marketing and supply chain for all retail and Sam’s Club formats at Walmart China. Before going to China, Cissell held senior positions in Europe with 10 years of senior executive experience in both Kingfisher Plc and Argos. He was also the chief executive of B&Q Plc and managing director of Comet Group Plc. Rocky Ride for Retail Sector

Gray was with Walmart for over 19 years, having spent nearly 13 years in China where he led the team that opened and integrated hypermarkets.

Launched in 2006, Reliance Retail has had its share of ups and downs. It runs about 1,000 stores across formats in 86 cities. It has a line of specialty stores such as Trends, Timeout, Digital, Footprints and Jewels. Its other retail chains include joint ventures with Marks & Spencer, Vision Express and Hamleys.

Like most other organised retailers, Reliance Retail has faced political opposition to its expansion.

The Uttar Pradesh government ordered closure of Reliance Retail operations in 2007 while it was also forced to shut several of its grocery stores (Reliance Fresh) in Kolkata and Jharkhand due to political agitation against large organised retailers perceived as threats to small kirana shops.

Besides, Reliance Retail was hit hard during the economic slowdown in the autumn of 2008 following the global recession. Retailers, including Reliance Retail and Aditya Birla Retail, had expanded rapidly, opening many stores without putting the vital supplies in place. But when the economy slowed, these companies shut hundreds of stores and sent home thousands of employees to stay afloat. Subhiksha, once the largest retail chain in the country, went bankrupt.

Reliance Retail went through a series of restructuring, which ended in a complete clampdown on expansion and the appointment of a new management team from Thailand entrusted with the task of consolidating operations.

CEO Sundhagul led a team of 25 executives, mostly from Tesco’s Thailand arm who joined Reliance Retail two years ago, to streamline operations in value retail formats—Reliance Super, Reliance Fresh and Reliance Hyper—that sell goods such as soaps, biscuits and vegetables and account for nearly 70% of the total sales of Reliance Retail.

Earlier, Sundhagul had helped Tesco Lotus secure market share in Thailand, which once resembled India’s retail market with its freshly-minted organised players competing with a well-entrenched network of kirana shops. “We have cleaned up the company and put processes in place. It is time for speed and execution now,” a company insider said, confirming the two new appointments.

BETTING BIG ON RETAIL

In the recent past, Reliance Industries has unveiled major initiatives in telecom and retail.

Last year, Reliance Industries picked up a majority stake in Infotel Broadband Services, originally owned by Mahendra Nahata of Himachal Futuristics, for close to . 4,800 crore, to offer high-speed data on mobiles and computers.

It is also acquiring Bharti Enterprises’ stakes in two insurance joint ventures with France’s AXA Group to move beyond its core energy business. In an interview to ET in May, Reliance Industries Chairman Mukesh Ambani had described energy and consumer sectors as the two pillars of his growth strategy. The consumer initiative has major parts, telecom and financial services, he had said.

At the 37th annual general meeting of Reliance Industries in June, Ambani had outlined ambitious plans for retail. “We are positioning Reliance Retail to be the undisputed leader in retailing in India,” he said.

Asserting that the company has already become the largest food retailer in the country, Ambani said all the specialty formats of the company would attain top positions in their respective segments in next two years.

Reliance Retail reported revenues of close to $1 billion (around . 4,500 crore) for the year ended March ’11.

The conglomerate plans to invest aggressively in its retail business and will launch cash & carry, or wholesale outlets, Ambani said. The company had exited cash & carry business in early 2009 to conserve cash in a deteriorating market.

India’s cash & carry market has attracted global retail behemoths such as Walmart, Tesco and Metro. The global giants see it as an opportunity to enter India where foreign direct investment is barred in direct-to-consumer retail.

Ambani also said Reliance Retail already has the largest portfolio in terms of number of formats and 25 lakh customers were shopping at the company’s various stores every week.

The company is also focusing on large formats, with 13 hypermarkets already operational and another 20 under different stages of construction. “As India grows rapidly, transformation is at the top of the Reliance agenda; a talent transformation that will endow Reliance with new competencies in new business domains and attract best talent in India and abroad,” Ambani had said.

Reliance Retail is known to have attracted talent through huge compensation packets in the past, thus creating exit barriers for executives.

In 2006, the company reportedly roped in top performers such as Gunender Kapoor and the late Raghu Pillai at pay packages as high as . 3-4.5 crore, the highest in the industry then. Shanghai-based Marie Jiang, retail analyst with Pacific Epoch, had reportedly said the departures of Cissell and Gray could cause some concern to Walmart China.

“The psychological impact [of the departure of the executives] is seen to be larger than the material as employees of its China operation may see an unstable top management team,” she said. Walmart International grew 11.5% in the first quarter of this year, key growth drivers being markets such as China, Chile and Mexico, the company said in a statement in May.

Walmart entered China in 1996 and now has 333 stores, including 104 stores operated by Trust-Mart, in which it bought a 35% stake in 2007. The retail giant competes with France’s Carrefour and the UK’s Tesco in China.

Zuari further raises stake in Nagarjuna, Texmaco

Fertiliser manufacturer Zuari Industries (ZIL) today said that it has further increased its stake in Nagarjuna Fertilisers and Chemicals (NFCL) and Texmaco through open market transactions.

While ZIL increased its share in NFCL to 6.79%, the company’s stake in Texmaco rose to 5.01%.

ZIL till June 20, held 2,85,25,314 shares or 6.66% in NFCL, while its stake in Texmaco in the same period stood at 4.95% or 63,04,401 shares.

The company in a filing to the Bombay Stock Exchange (BSE) said that it has acquired 4,75,716 shares or 0.11% stake and 1,00,000 shares or 0.02% stake in NFCL on June 21 and June 22 respectively, through the open market.

After the acquisition, the total shares of NFCL with ZIL stands at 2,91,01,030, the filing added.

In a separate filing to BSE, ZIL said that it has further increased its stake in Texmaco to 5.01% after it acquired 62,662 shares or 0.05% stake and 13,889 shares or 0.01% stake through the open market on June 21 and June 22, respectively.

The total shares of Texmaco with ZIL, after the acquisition stand at 63,80,952, it added.

Earlier, ZIL had on June 17 and June 20 had bought 0.09% and 0.23% stake, respectively, in the Andhra Pradesh based company, NFCL.

Likewise, on June 20, it had bought 0.22% stake in Texmaco. Both the company’s are part of the newly launched Adventz group that is led by Saroj Poddar.

In March this year, ZIL’s Managing Director Suresh Krishnan had said that the Adventz group has planned a total capital outlay of $2 billion (around Rs 10,000 crore) in the next four years for business expansion.

Of the total investment planned, a majority of funds will be utilised for setting up a new fertiliser plant in Karnataka and for acquiring assets in the fertiliser business, he had said.

ZIL manufactures urea and complex fertilisers and has forayed into cement, hybrid seeds, engineering consultancy, financial services and oil tanking through subsidiaries and joint ventures.

Shares of the company today closed at Rs 634.25 apiece, down 0.38% from its previous close on the BSE.