Time to get cracking on chit funds

Posted on May 3, 2013 by Thyagarajan

Does money grow on trees? Yes, it does. That is what my parents thought when they invested Rs 600 in my name in a collective investment scheme floated by Esskayjay Plantations Ltd in August 1992. With its slogan “Money does grow on trees”, the company promised that “Rs 600 will grow over Rs 1,00,000 on tree in just 20 years”.

Fast forward to 2013, when time came to reap the benefits of our investments, we realised that the company had gone bust. Repeated queries at the company’s registered address in Kolkata yielded no response. Last heard about the dubious firm is that market regulator Sebi has initiated prosecution proceedings against Esskayjay Plantations Ltd and its promoters for violation of Sebi’s (Collective Investments Scheme) Regulations, 1999.

The plight of gullible depositors of Sharadha Group is not surprising as many of us have been victims of Ponzi schemes, chit funds, illegal multi-level marketing , etc. The modus operandi of all the schemes is different from each other. While debate is on whether Saradha Group’s schemes can be labelled under the chit fund category, the spotlight is back on chit funds.

Widely popular in hinterland, chit fund is a vehicle for savings and borrowings and provides easy credit to meet your urgent fund requirements like marriage, health, education expenses, etc.

While households dabble in chit funds mainly to save cash on a daily basis to meet future needs, small traders and businessmen are big players in the industry as it offers them access to easy finance apart from saving their excess cash.

RBI defines chit funds as “when a company enters into an agreement with a specified number of subscribers that every one of them shall subscribe a certain sum in instalments over a definite period and that every one of such subscribers shall in turn, as determined by tender or in such manner as may be provided for in the arrangement, be entitled to the prize amount.”

To elaborate on the business model- assuming that 20 depositors agree to pool in an amount of Rs 2,000 for 20 months i.e. for a total chit value of Rs.40,000/-, each depositor will get his chit amount when his turn comes by draw of lot or by auction.

During auction every month, the chit amount is given to the bidder who bids for the highest amount, not exceeding the maximum limit.

The amount, foregone by the subscriber is distributed as dividend amongst all the subscribers in every draw, after deducting 5% commission to be paid to the company or agents. 40% is the maximum bid allowed and the duration of chit is normally between 12 months to 50 months.

Suppose the winning bidder bids for Rs 25,000, he would get this amount and, the rest of the amount i.e. Rs. 15,000 is divided among the 20 depositors. This discount of Rs. 750 (i.e. 15000/20) is then returned back to each member. So the next month’s contribution would be Rs. 1250 (Rs. 2000- Rs. 750). The member winning the “prize money” must continue making payments each month but can no longer participate in the auction.

According to the All India Association of Chit Funds, there are about 10,000 Chit Funds registered in India with annual subscription of Rs 30,000 crore per annum and bulk of them operate in Tier II and Tier III towns. What explains this flourishing financial market that offers sky-high returns only to vanish?

Chit funds tapped into segments that banking channels thought was not lucrative. Lack of access to banking services and post office branches for investing their daily savings forced poor people to turn to their neighbourhood chit fund. Also, strong backing from local politicians, as evident in the Sharadha scam, allowed them to operate unhindered.

But it would be wrong to paint the entire chit fund industry as sham. Registered funds are regulated by the Chit Funds Act, 1982 under the control of state governments. Despite the industry’s history of scams and collapses, many genuine companies like Shriram Chits and others offer saving and borrowing options for the unbanked rural people and small businesses, thus furthering the cause of financial inclusion.

Since many chit funds have deeply penetrated into rural markets, only increased regulation can weed out fraudsters like Sharadha group. With state governments woefully ill-equipped to administer chit funds, it is time to bring chit-funds under the purview of Securities and Exchange Board of India (Sebi). On its part, the market watchdog needs to strengthen its monitoring mechanisms at the grassroot level to protect poor people from investment crooks.

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FLSRC: Government’s writ on monetary policy is suicidal

Posted on April 10, 2013 by Thyagarajan

The sweeping recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) headed by Justice B N Srikrishna has stirred a hornet’s nest. Prima facie, the report gives an impression that it is aimed at clipping the wings of the Reserve Bank of India (RBI) Governor and seeks greater role for the government in financial regulation, especially in monetary policy affairs.

The Finance Ministry and the RBI Governor have always been at loggerheads. Current Finance Minister P Chidambaram’s run-ins with past Governor YV Reddy and his predecessor and current Governor D Subbarao is now part of financial folklore.

The proposals that have generated much noise are setting up of a unified financial regulator by subsuming current sectoral heads like Sebi, Irda, PFRDA and FMC. Regulators will no doubt be fuming, as they will be jobless once FSLRC proposals are implemented. It is debatable if multiple regulators have stifled growth in the financial sector or lack of innovative financial products.

But the over-arching proposals concerning greater accountability of the RBI and the government setting monetary policy goals for the central bank will have wide ramifications.

According to FSLRC, policy rates will be determined by a MPC (monetary policy committee) comprising of two members from the RBI and five members appointed by the government, thereby giving the government greater say over policy. This means, effectively, the RBI governor will no longer have the final word on monetary policy.

There is logic in this view, since in a democracy, an elected government must helm policy affairs. The objective that the central bank must pursue should be defined by the government. But vesting powers with the centre can be dangerous as politically-elected governments tend to favour cheap money policy, while economically sound central banks generally are far more conservative and look for macro-economic stability and not merely growth. Also, it is debatable if the government possesses the necessary expertise and domain knowledge to carry out monetary policy functions considering that they are not elected through merit.

The unified financial regulatory model has been prevalent in global financial system. But with global economy ravaged by one crisis after another, it is foolhardy to borrow a failed model. Rather, the Indian financial system, with its multiple regulators and stiff norms, had come in for immense praise after the global financial crisis in 2008. Isn’t it practical to stick to a model that has withstood the tough times?

The report said that there will be a quantifiable numerical target set by the government that must be met. In the Indian context, it is doubtful if it is feasible to set an inflation or growth target.

The committee has also suggested that the government will frame rules with respect to capital inflows like FDI, FII and NRI deposits against the present system of RBI. Four members of the panel have expressed their opposition to dilution of RBI’s powers on this front.

One area where unanimity seems to exist is the creation of a debt management office (DMO) for raising resources for the government which, at present, is managed by the RBI.

Many experts have warned of conflict of interest saying RBI’s role in monetary policy and managing the centre’s borrowing calendar may give the central bank a bias in keeping interest rates low. Creation of a separate agency will eliminate this loophole.

While FSLRC talks about accountability of the RBI, it is silent on seeking more answers from the government on fiscal policies. The government’s track record of fiscal deficit is there for all to see. The RBI, currently, enjoys the highest levels of credibility in the eyes of the public.

If the government, in its current form and public perception, takes control of monetary policy, the credibility and legitimacy of the entire process will be seen as suspect. Already, the government’s writ runs over financial regulators since almost all the current sectoral watchdogs are appointed by the government. Should we reward the government’s ineptitude with more responsibility? I think not!

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Banking for the poor: Will corporates do what PSUs failed to?

Posted on March 8, 2013 by Thyagarajan

In India, there are about 6,00,000 villages, but out of these only 60,000 villages have banking facilities which means 90 % of the villages are unbanked. Against such a grim background, the Reserve Bank of India’s (RBI) recent decision to issue new licences to private corporates and public sector entities has aroused renewed hopes of improving banking services in unbanked areas.

Since India has opted for a bank-driven model to achieve financial inclusion, banks will play a crucial role in the whole process of inclusive growth.

So far, RBI has made the right noises as far as improving financial inclusion is concerned saying banks must view it as a business opportunity rather than an obligation. While issuing guidelines for bank licences in February, RBI had said, “The business plan of applicants will have to address how the bank proposes to achieve financial inclusion.”

While the intent of institutions and regulators is little to doubt, they have all come a cropper as far as execution is concerned and it is high time that we differentiate the ‘doers’ from the ‘talkers’?

Financial inclusion has been a dud so far due to lack of technology, lack of a viable business model, higher cost of transactions and absence of reach and coverage, etc.

Every year, the government spends thousands of crores (Rs 14,000 crore in 2013-14) in recapitalising public sector banks to enable timely and adequate credit and other financial services to the weaker sections and low income groups. However, PSU banks have failed to extend basic banking services to the ‘bottom of the pyramid’ due to various factors like lack of clear policy framework and poor infrastructure and execution, resulting in financial inclusion remaining only on paper.

Institutions must overcome primary challenges like high cost of transactions, huge initial investments to create the necessary infrastructure and other expenses like financial education for the poor before financial inclusion can yield dividends.

But in this era of cut-throat competition, where banks are constantly driven by higher interest margins and intoxicated by the ideology of profit maximisation, asking bankers and financial executives to opt for social banking is a conflicting proposition that makes for a great headline but will make little headway.

Past efforts like nationalisation of banks, Lead Bank Scheme, development of Regional Rural Banks and formation of Self-Help Groups to take banking services to the masses have failed to increase penetration. Even the much-famed business correspondents (BCs) model has been a laggard.

In this context, a critical question that matters is- will corporates be able to design and deliver innovative financial services at affordable cost?

Corporates must create better awareness about banking facilities and design products which are poor-centric to ensure that the poor shed their inhibitions while approaching a bank.

Another area that corporates must grapple with is the high clout that politicians and bureaucrats wield in rural areas. Driven by electoral gains, many politicians exercise undue influence to push PSU banks to extend agricultural credit and other goodies to rural households, particularly close to elections. (Example- Rs 52,000 crore Farm Loan waiver.)

In the case of the farm loan waiver, a lot of funds, aimed at poor farmers, were allegedly diverted by middlemen and politicians. The mandate for corporates is to use financial inclusion to effectively check corruption and empower the poor.

But since they have been mandated to open only 25% of the branches in unbanked areas, it is hard to figure out if they can make any meaningful impact in addressing financial inclusion.

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PSUBNKBEES 330.00 3.50 (1.07%) BANKBEES 1,275.00 4.18 (0.33%)

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Indian Telecom: Hope at last?

Posted on February 6, 2013 by Thyagarajan

The telecom sector is finally beginning to turn the corner after a difficult two years that was marked by weak operational performance, record low tariffs due to intense competition and regulatory hurdles.

Late last month, India’s biggest mobile carrier Bharti Airtel and Idea Cellular Ltd slashed discounts and freebies on offer to customers, effectively raising calling costs for mobile users. Vodafone India, the second biggest operator, has also hinted at raising tariffs.

Earlier in September, RCom had raised tariffs by 25% for both post-paid and pre-paid customers. Since these top four operators account for nearly half of mobile phone users in the country, more than 400 million subscribers will have to shell out more by way of mobile bills.

With the exit of players like Etisalat, Swan Telecom and Videocon, consolidation has already begun giving room for large operators to hike tariffs. The tariff hikes will come as a huge relief for the industry struggling with increasing regulatory costs and weak pricing power.

To improve their operational efficiency, many telcos have deactivated inactive subscribers and instead turned focus towards retaining active users rather than aggressively acquiring new ones. The move reflects an operational shift from volume/subscriber growth to increased focus on pricing/margin front.

On the regulatory front, liabilities with regards to one-time spectrum fee and spectrum re-farming are now clear although the exact payout is yet to be determined. News agency PTI has estimated that the government may get around Rs 23,177 crore by way of one-time spectrum fee from operators.

Spectrum re-farming would mean another blow for incumbent operators as re-allotment of spectrum in a higher frequency band will lead to higher capital investment to maintain current service levels.

If 2012 was a year of regulatory uncertainty, 2013 will be a year of a string of litigation as telcos are likely to contest several decisions like abolition of roaming charges, invalidity of 3G roaming agreements and spectrum re-farming.

The three leading operators and the government are fighting it out in the courts on offering 3G services in areas where they do not hold 3G spectrum. Even the reduction of up to 50% in the reserve price of spectrum in the 800 megahertz (MHz) band, used by CDMA operators, has irked GSM operators.

Removal of roaming charges, if implemented, will hit telcos further as earnings from roaming and STD charges will vanish. Coupled with higher re-farming costs of spectrum, tariffs will only rise further from the current levels despite TRAI’s warning that it may intervene in pricing by fixing a cap.

But the biggest turnaround will come once data revenues start picking up as earnings from voice services have stagnated. Future growth will revolve around data services through 3G and broadband wireless services. While currently, high pricing and higher cost of handsets are a major deterrent, accessibility will improve going forward and that would drive average revenues per user.

In short, it all depends on how telcos navigate regulatory headwinds and avoid a race to the bottom on the pricing front. Exciting times ahead!

BHARTIARTL 308.05 9.55 (3.20%) RCOM 113.50 5.20 (4.80%) IDEA 129.85 0.80 (0.62%)

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A Cloudy future for Indian IT?

Posted on January 9, 2013 by Thyagarajan

The national employability report 2011 compiled by Aspiring Minds revealed a shocking trend- the percentage of ready-to-deploy engineers for IT jobs is dismally low at 2.68%. Even though India produces more than five lakh engineers every year, only 17.45 % are ready to be employed in the IT sector. Revenues for Indian information technology (IT) and business process outsourcing (BPO) services companies is expected to cross $100 billion mark this financial year.

However, there are doubts over sustaining this multi-fold growth due to supply-side constraints like talent availability. The report notes that around 92% of graduating engineers do not have the required programming and algorithm skills required for IT product companies whereas 56% showed lack of soft skills and cognitive skills. To retain its competitive edge, the IT industry requires an industry-ready workforce. Sector-specific skill shortages have emerged with middle-management personnel possessing little domain experience.

The IT/BPO sector also faces threat in the form of competition from other offshore destinations who are ready to dislodge India. A number of alternative offshoring locations like Philippines, Eastern Europe, Latin America, and China are emerging as viable options for BPO delivery centers.

Philippines has superior English language and soft skills for customer service operations especially for US buyers, Eastern Europe offers language and time-zone advantages for European buyers.

These competing destinations also offer lower cost, provide quality talent pool and are offering fiscal and regulatory incentives to lure buyers away from India.

Mid-tier IT companies are facing problems of their own. Apart from over-dependence on few clients and increasing attrition, they are also plagued by non-availability of talent. Since the sector biggies get preference in campuses during recruitment, mid-cap firms lose out on top-quality talent. This has impacted their ability to execute projects effectively.

Also, the emergence of cloud computing has allowed companies to cut fixed costs in terms of buying software or high capital expenditure on IT infrastructure.

Even as cloud computing is yet to address key issues like data security, it has made crucial inroads into traditional outsourcing and the days of companies hiring thousands seems to be over as they no longer have to maintain assets such as servers and software.

Even as we dissect the industry on key parameters like order pipeline, demand outlook, decision-making cycle, client IT budgets, pricing power and so on, it is crucial to address the structural issues that plague the IT industry if it is to continue as the blue-eyed sector of the Indian economy.

Instead of resting on its laurels as one of the world’s top providers of IT and BPO services, companies must build new skills in its workforce to maintain its competitive edge and innovate.

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Too early to rejoice over retail FDI

Posted on December 13, 2012 by Thyagarajan

India Inc is euphoric as the red carpet for Walmart, Tesco and its ilk has been formally rolled out with reports suggesting Delhi as the first city to host the global retail giants.

Riding on the retail bandwagon, the analyst community and government voices have fuelled hopes of more measures in the coming weeks like passing of key financial sector reform bills, FDI in insurance and so on.

In a September, 2012 report, Crisil estimated that allowing 51 % FDI in multi-brand retail will result in investment of $2.5 billion-$3billion in the retail sector over the next five years.

FDI in retail will also address the issue of inflation as mandatory creation of backend infrastructure may remove bottlenecks and inefficiencies in the supply chain and pave way for better farm practices and higher prices for farmers.

But getting carried away with the ‘potential’ big investments would be foolhardy as FDI in multi-brand retail is at the discretion of states. With a busy election calendar for the next one year followed by the big Lok Sabha elections, FDI in retail is unlikely to get off the ground.

After the Gujarat polls in December, there are state elections in Karnataka, Meghalaya, Nagaland and Tripura in the first half of 2013 and Madhya Pradesh, Mizoram, Delhi and Rajasthan in the second half. This means implementation of FDI in retail is at risk in the near term as the reform measure will give way to populism. With the latest Walmart controversy over lobbying claims rocking Parliament, FDI in retail has attracted severe negative publicity and is being viewed as anti-people. On current mood, even Congress-ruled states would not invite the wrath of voters and woo global retailers.

Also, riders like minimum $100 million investment, 30% sourcing from small industries, etc may act as barriers for global retailers.

However, retail stocks have been flying high in the last few months on hopes that FDI would help them forge partnerships with global retail chains and bring in funding and technology for the sector.

While FDI in retail will attract capital inflows in the long-term, it is miniscule when compared to India’s annual requirements. C Rangarajan, Prime Minister’s Economic Advisor was quoted as saying in October that India needs capital inflows of up to $ 70 billion annually for the next five years to bring its Current Account Deficit (CAD) down to 2.3% of GDP.

Apart from acting as a sentiment booster, FDI in retail is unlikely to change the fundamental equations at the ground level like elevated inflation, high fiscal and current account deficits and a weakening currency.

For the economy to decisively turnaround, structural reforms like addressing coal and power sector issues, fast-tracking investment proposals and land acquisition and green clearances are crucial.

BRANDHOUSE 2.35 0.10 (4.44%) CANTABIL 18.55 0.05 (0.27%) KOUTONS 5.10 -0.45 (-8.11%) SHOPERSTOP 369.85 0.00 (0.00%) TRENT 1,043.00 -6.35 (-0.61%)

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Gold trumps stocks for third Diwali in row

Posted on November 7, 2012 by Thyagarajan

The yellow metal is on course to record sparkling returns for third year in row despite a strong year for equities.

While investors in gold have reaped over 15% returns since last Diwali, the returns from Sensex has been a fixed deposit-like gain of about 8.5 % for the same period.

While the precious metal has risen from Rs 26,700 levels last Diwali to Rs 30,700 currently, the BSE benchmark Sensex has risen from near-17,300 levels to 18,755 since last Diwali. Gold prices have also more than tripled from Rs 10,000 levels to Rs 31,000 in the last five years. India is the largest consumer of gold with an annual demand of about 700 tonnes.

The fact that gold jewelry and investment demand remains robust despite the rising prices is a reflection of the inherent desire among Indians to hold gold driven mainly by its alluring appeal as a jewelry and as a safe-haven against inflation that erodes both savings and income.

The impact of the European sovereign debt crisis, inflationary pressures and the still-shaky outlook for economic growth in developed countries is driving high levels of investment demand for the precious metal.

From gold coins, gold jewelry to MFs and ETFs, robust consumer appetite in gold’s cultural heartlands, India and China, has seen global prices rise from $270 an ounce in 2001to more than $1700 an ounce as on November this year. India, the world’s largest gold consumer and China account for over 55% of global gold jewelry demand and 52% gold investment demand.

Gold is being seen as a safest hedge against credit risk, currency risk and inflation that has besieged the financial world in the last decade. With the financial world navigating from one hurdle to another like the mortgage crisis to the banking crisis to the current sovereign debt crisis, investors have sought refuge under gold to protect their wealth.

Apart from sluggish growth in stock markets and high inflation rates, a spurt in central banks gold buying since 2009 after being net seller for over two decades has also contributed significantly to demand and thereby prices.

Off late, gold ETF investments are gaining ground at a rapid pace and are increasingly emerging as preferred route for long term investment in gold.

Despite the Finance Ministry’s measures to discourage investments in gold, assets under management of gold ETFs crossed the Rs 11,000 crore mark in September this year from Rs 10,701 crore in August and Rs 5,000 cr in May 2011, reflecting the robust appetite for the yellow metal.

Even as jewelry demand has been declining due to the volatile prices, a reflection of the price-sensitive nature of this segment, the rush for gold ETFs has meant that AUMs have soared from Rs 138 crore in April 2007 to Rs 11,198 crore in September, 2012 — over 80 times in 5 years.

With Diwali and Dhanteras round the corner, festive flavor is expected to add more color to the yellow metal and garner greater portfolio share of investors.

GOLDBEES 2,508.30 10.40 (0.42%)

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India’s subsidy trilemma threatens growth

Posted on October 3, 2012 by Thyagarajan

The subsidy hole that India has sunk itself deep into threatens to kill its famed growth story. The major subsidies in the system at present are on fuel, fertilizer and food that corner 95% of subsidy share.

Reducing subsidies is critical from the resource point of view, as, subsidies have been very high as a percentage of GDP. The subsidy bill in the current financial year is expected to rise to 2.4% of GDP from 1.9% estimated in the budget, Finance Minister P Chidambaram said last month.

The government’s major subsidy burden has ballooned over the years from Rs 67,498 crore in 2007-08 to Rs 208,503 crore in 2011-12.

According to the budget proposals, the government’s subsidy bill on food, petroleum and fertilizers is estimated at Rs 179,554 crore for 2012-13 fiscal, which is sure to be surpassed.

High crude oil prices, pending reforms in the fertilizer space and the proposed National Food Security Bill are further expected to swell subsidies.

In 2011-12, the revised estimates (RE) and budget estimates (BE) highlight the government’s failure to rein in subsidies. Petroleum subsidy rose from Rs 23,640 crore in BE to Rs 68,481 crore in RE. The RE for food and fertilizer stood at Rs 72,823 crore (against BE of Rs 60,573 crore) and Rs 67,199 crore (Rs 49,998 crore), respectively.

Apart from the size of such subsidies, other factors like strains on government finances, target group of such subsidies and their after effects on economic growth have dominated the discussion around subsidies.

The food subsidy has swelled in recent years due to widening gap between the central price of wheat and rice and the economic cost of delivering these food grains. Huge stocks and the carrying costs associated with it have driven subsidies further.

The LPG subsidy is completely unfounded as bulk of it benefits people in the middle and upper income classes. Only about half the kerosene distributed through the PDS actually reaches the farmers or the poor and the massive under-pricing is only leading to large scale diversion for adulteration with diesel and petrol.

The cost of India’s agricultural input subsidies as a share of agriculture output almost doubled from 6.0 per cent in 2003-04 to 11.6 per cent in 2009-10, driven largely by subsidies to fertilizer and electricity.

In the process of subsidizing the so-called ‘poor farmer’, state electricity boards have run into massive losses and have recently landed a Rs 2 lakh crore bailout.

Fertilizer subsidy as a ratio to the value of crop output, which hovered between 3 to 3.5 per cent during 2000–06, rose to 4.8 per cent in 2007–08, and to more than 10 per cent in 2008–09 due to a spike in the price of imported fertilizers.

Fertilizer subsidy should be on nutrient basis, and ideally given directly to farmers. The sector must be freed from price controls and fertilizer imports must be opened up for the private sector through low import duty. This will help in rationalizing and containing the subsidy bill.

The poor must be insulated from price hikes, which should be directly targeted, but energy prices cannot be delinked from global prices, especially at a time when dependence on imports is rising.

Direct subsidy to a target group of small and marginal farmers is ideal against the present system of uniform indirect subsidy, which tends to benefit the larger farmers more.

Even as you and I continue to enjoy the current ad-hoc subsidy regime, the intended subsidies do not even reach the deserving segment. The subsidy dilemma has now started impacting the country’s growth in the form of persistent inflation, high fiscal deficit and high rural wages.

And since growth is a pre-requisite to eliminate poverty, as acknowledged by PM Manmohan Singh, the economy may dive into a downward spiral if the current regime of distorted subsidies is not uprooted.

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How Crony Capitalism Scammed India

Posted on September 6, 2012 by Thyagarajan

It is the season of scams and the cozy nexus between the Great Indian political class, babus and corporate India has exploded. Apart from unraveling the Indian style of doing business, the expose threatens to lay bare ‘the dirty picture’ of crony capitalism. The coal block allocation scam is the latest loot of national resource in various sectors like coal, oil, gas, power, mobile-phone licenses etc.

The sharp spurt in economic growth has been matched by an equally sharp increase in the quantum of frauds. While the ruling Congress-led UPA has sunk deep into corruption, history reveals that other parties like the BJP, SP and other regional parties are not any better.

Just like the 2G scam where a scarce resource like spectrum was doled out by Union Telecom Minister A Raja to his hand-picked companies, the latest CAG report on coal block allocation shows how land was given at throwaway price to GMR’s Delhi airport, coal was given to private players like Essar Group, Jindal, Adani, ArcelorMittal and Tata Steel without bidding. TATASTEEL 313.80 0.80 (0.26%) ADANIENT 221.60 0.50 (0.23%) JINDALSTEL 298.80 3.75 (1.27%)

While the recent CAG reports have thrown the spotlight back on crony capitalism, India is no alien to business-politics nexus. Jagan Mohan Reddy created a multi-million dollar empire in no time, thanks to undue favors from his then Chief Minister father late Rajasekhara Reddy.

The Bellary brothers including billionaire and mining magnate G. Janardhana Reddy ran their illegal iron ore mining business with impunity, thanks to BJP’s patronage. Their political clout ran across party lines and they were also linked to both Jagan Reddy and his father.

Even BCCI’s billion-dollar baby, the Indian Premier League, which included businessman, politicians and film stars, has been implicated for financial irregularities that run into crores.

The controversial S-Band spectrum deal between ISRO’s commercial arm Antrix and private firm Devas Multimedia was scrapped after it emerged that undue favors were given to the private company. The loss from the scandal was pegged at more than Rs 2 lakh crore.

The issue of black money, currently the toast of the nation, gathered steam after Pune stud farm owner Hasan Ali Khan was nabbed in a massive money laundering scam and accused of amassing wealth of over $8bn in Swiss banks. While many influential politicians have been linked to the scrap dealer turned billionaire, none have so far been substantiated.

Seasoned watchers explain that the perfect example of crony capitalism was played out in one of the country’s largest companies. Till Murli Deora was at the helm of the oil ministry, Reliance Industries, run by Mukesh Ambani had a free run as Deora was seen close to the Ambanis. Ever since he was shunted out and Jaipal Reddy took over, the fortunes of RIL turned worse and the company’s run-in with regulators over KG-D6 gas basin has intensified. RELIANCE 815.80 29.35 (3.73%)

Coming back to scams, who can forget Ramalinga Raju and his Satyam Computers SATYAMCOMP 110.25 0.35 (0.32%). Raju was seen as close to both former CMs of Andhra Pradesh Y S Rajasekhara Reddy and N Chandrababu Naidu. While both ministers rode on the back of Satyam Computers and Raju to showcase the city as an IT den, once the Rs 14,000 crore scam exploded, none wanted to associate themselves with the fallen hero.

Even as the tainted government battles to save its skin, the fallout of such scams has been widespread. Parliament functioning has been stalled due to political gridlock, macro environment for investment has worsened, policy reforms are in deep freeze, risk aversion has increased, decision-making at the government’s administrative machinery has completely slowed down and business sentiment has taken a beating. Is it any surprise that the country’s GDP growth is languishing at a decade low of 5.5% in Q1?

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KG D6: Time to end the off-field drama

Posted on August 8, 2012 by Thyagarajan

From being a prized asset to a pain in the neck for Reliance Industries (RIL) RELIANCE 815.80 29.35 (3.73%), the government, investors and other stakeholders, KG-D6, the country’s biggest gas discovery, has been mired in several off-field controversies than on-field exploits. Production was expected to touch 80 mmscmd by April this year as per the original development plan after all the 31 wells are drilled and brought to production. However, in the last few months, output has dipped to below 30 mmscmd, sparking a ugly row between the government and operator of the eastern offshore block, Mukesh Ambani-owned RIL. This will be the lowest level since RIL began production from KG-D6 block in April 2009.

While a drop in pressure in the wells and increased water and sand ingress pulled down per-well gas output, the flagging Krishna-Godavari (KG)-D6 fields has been subjected to several other distractions like sharp downward revision in provable reserves by partner Niko Resources, tussle between RIL and the government after the centre refused to clear the operator’s investment proposals of over $1.5 billion and delays in regulatory approvals forcing the company to defer investments.

Under the production sharing contract, the government allows companies to recover their cost from revenues and then share profits with the government.

Last November, RIL sent an arbitration notice to the government over recovering its investments in the KG basin after the oil ministry disallowed the cost recovery saying RIL failed to meet drilling commitments, accusing it of violating the production sharing contract.

Some voices in the street also believe that RIL is deliberately allowing production to drift downwards as it is unhappy with the gas price of $4.2/ mmbtu that stays till 2014.

The ugly battle has created a climate of uncertainty and loss of confidence among global oil & gas majors, forcing them to stay away from India’s hydrocarbon sector.

Instead of adopting a confrontationist stance, the oil ministry and the company need to bridge the gap and work in tandem for the sake of the country’s energy security. Sagging output from KG-D6 has forced companies to import gas at almost double or triple rates. While KG-D6 gas is available at $4.2/mmbtu plus taxes and marketing margin, imported gas varies anywhere from $8.5/ mmbtu to $14/mmbtu.

While the government must get rid of its bureaucratic hurdles and cut down on red tape, RIL must ensure greater transparency in terms of the problems facing the basin, the costs undertaken, etc. Both the sides have taken steps in this direction. While the oil ministry has conditionally approved RIL’s KG budget for the last three years, the Mukesh Ambani-controlled company has agreed to provide the Comptroller and Auditor General of India (CAG) access to records of the KG D6 block. This paves the way for the company to obtain green signal for its integrated field development plan (IFDP), which is crucial to revive the declining KG-D6 production.

The conditional approval will not only facilitate investments but also lead to an amicable resolution of the pending arbitration between RIL and Oil Ministry over reduction in KG – D6 cost-recovery.

For RIL, its fortunes and growth outlook are linked to quick recovery in gas production from KG-D6 basin. Last fiscal (FY12) saw the company’s share price slump by 28.6% against a 10.5% fall in the Sensex during the same period, reflecting investors’ unease over the standoff. If RIL is to regain its aura as the darling of D-Street, it needs to step up the gas and ramp up declining production.

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