Towards Better Corporate Communication

Communication fails because of a lack of clarity on part of the leader. Communication fails because of lack of proper channels and modes of communication. Communication fails because of politics and power play in the work place. Failure of communication is dysfunctional and dysfunction is the enemy of efficiency, growth and profits.

Many factors contribute toward failure of communication in an organization. Are these failures unavoidable, or is it possible to overcome these failures and communicate effectively?

The first step towards effective communication is to standardize the formal mode of communication. This includes standardizing the official operating language, the channel and mode of communication , and the accessibility of information. The employees must be trained to hone their interpersonal skills. In a cosmopolitan organization, cross-cultural training should be given to minimize interpretation / perceptive errors.

Even when all these measures are put into practice, it is inevitable that misunderstandings will occur in large organizations. This is mainly because of the language and cultural factors, and the difference in perception between the parties involved. For example, something that one person considers a light hearted joke could be taken offensively by another because of various factors including his moods and prejudices.

The only way to avoid such failures of communication will be at a personal level. The employees have to be careful while voicing opinions and take care not to say anything that might hurt their colleagues. But when one comes across a communication that they are disagreeable with – they should think rationally and decide whether the message was really understood how it was meant to be understood. The prerogative of course, remains with the organization to ensure this.

A little initiative towards better communication can go a long way in maximizing growth and profits.

What is Taxation Management all about?

I had the wonderful opportunity to study Taxation Management under Prof. Ram Kesh Gupta. I learnt the following from him:

1. Tax compliance is good for a firm from all perspectives. It is ethically right and it keeps the organization out of litigation which means it can focus on maximizing profits.

2. Tax evasion is not only illegal but also detrimental to business in the long run.

3. The objective of the firm is to make profits – not evade tax.

4. Paying taxes is ethical and is a way to pay back the system/country/government for the infrastructure made available for the business to function (physical infrastructure, conducive business environment etc.)

5. Tax avoidance unlike tax evasion is not illegal and should be used for the benefit of the firm.

6. Tax planning is a necessary scenario for all firms these days because of intense competition.

7. Tax planning and management will not only help you survive but may also prove to be a competitive advantage.

The following are important points about filing returns:

1. Always file your income tax returns on time to avoid penalty and also scrutiny.

2. Once the returns are filed beyond the due date – penalty can be as high as 300% (in India) and it will go for compulsory scrutiny. This can be avoided by filing returns on time.

3. Unabsorbed depreciation can be carried forward for 8 years.

4. Unabsorbed business losses can be carried forward indefinitely.

5. If returns are not filed on time any unabsorbed depreciation or losses cannot be carried forward again to the next year.

These points are about litigation:

1. If the IT officer is disallowing any expense and there is a dispute, go for litigation and get an opinion from the higher authority.

2. The higher authorities are:

• Commissioner of Income Tax (Appeals)
• Income Tax Appellate Tribunal (ITAT)
• High Court (HC)
• Supreme Court (SC)

3. Never pay a bribe, because your case can be pulled up at any time again in the future.

4. In case of doubt in interpretation, go for litigation as it will settle the case once for all. If the judgement is not in your favour appeal to the higher authority.

5. Paying a bribe is like getting stuck in a whirlpool. It might be very difficult to get out of the cycle.

The bottom line is:

Never evade tax, always file your return on time and make use of all legal provisions available to lessen your tax burden.

Excise Duty Cut impacts Budget Deficit and Credit Rating

The recent central excise duty cut by the United Progressive Alliance (UPA) government in India is raising eyebrows from all sectors. The excise duty has been cut to 8 % down from 10 % and this comes after the general excise duty cut of 4 % which is in effect till 31st March, 2009. This cut in excise duty comes at a time when the Government of India has announced a fiscal deficit of 6 % which is more than double the expected 2.5 %. This move is supposed to boost demand and shield the economy from the global financial crisis. This move has received a mixed response from various quarters.

The most positive response to this move has been from the auto, steel and the cement industry which experts say will definitely pick up demand as the companies will pass on the excise duty cut benefit to the customers. In an interview Mr Sheshagiri Rao, Director-Finance, Jindal Steel has said that the 2% cut along with the previous 4% cut will together form a significant reduction in the excise duty. He said that all excise duty cut benefits are passed on to the customer and thus would boost demand. Responding to a question about how passing on the benefits of the excise duty in full to the customer, he said that the excise duty is collected from the customer and passed on to the government and thus would not affect the financials of the company in any manner. He added that it is likely to be a demand booster and volumes will go up. He also said that Indian domestic demand is much higher than the overall global demand.

The stock market has also reflected this positivity for boost in demand with cement, steel and auto stocks gaining much in the last few days. Mr Ravi Pishody, VC CV, Tata Motors said that the consumer sentiment is being positively affected by the excise duty cut. This scenario has also been reflected in the cement industry as large scale buyers stand to gain much from all the rate cuts.

The scenario is not all sunshine though as Standard and Poor’s (S & P) has changed its credit rating outlook to negative a week after the latest excise duty cut was announced. It has called the country’s increasing budget deficit unsustainable. S&P’s credit analyst Mr Takahira Ogawa said that the outlook revision reflects their view that India’s fiscal position has deteriorated to a level that is unsustainable in the middle-term. But the “BBB-” long-term and “A-3″ short-term sovereign credit ratings on India has remained unchanged. S & P is not the only agency that has such views about the budget deficit which it says will only widen with implementation of more stimulus packages. Several other rating agencies including Moody’s have expressed their concern about the recent cut in excise duty. The Indian Council for Research on International Economic Relations (ICRER) also has its reservations about the present excise duty cut by the UPA government.

Most industrialists though, have not been much worried about the change in the credit rating outlook on India by S & P. The whole scenario is best reflected in the words of Ms Shanti Ekambaram, Group Head – Wholesale Banking, Kotak Mahindra Capital -  “… frankly there is not a great amount of credit that is being accessed from international markets… because global countries and banks are facing their own crises whether it is US, Europe, UK or to a certain extent Japan… domestic credit will continue to chart its own path irrespective of what the international agencies might say… but the underlined concern of the fiscal deficit and its likely impact as we unfold into the next 12 to 24 months cannot be ignored.”

Investment Banking Scenario in India

Investment Banks mainly act as a liaison or intermediary between the companies which have a requirement for funds and the individuals and institutions which have funds to be invested. Investment Banks in India were earlier referred to as Merchant Banks since their activity was largely confined to merchant banking services. The early merchant banking scenario was dominated by foreign banks. The first merchant bank that was set up in India was Grindlays Bank in 1967 and this was followed by Citibank in 1970. These banks offered advisory services apart from raising funds through equity and loans. It was mandatory to be licensed under the Reserve Bank of India (RBI) to provide these services.

The Banking Commission Report of 1972 recommended the need for merchant banking services in India by public sector banks. It also asserted the need for a separate structure for merchant banks as opposed to the structure of commercial banks and financial institutions. Merchant banks were meant to manage investments and provide advisory services. This led to many banks such as the Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Syndicate Bank and many others starting with SBI in 1972 setting up merchant banking divisions. ICICI was the first financial institution to set up a merchant banking division in 1973. The merchant banking division of many public sector banks were made subsidiaries in the 1980s. Later in 1992 the financial institutions IFCI and IDBI also set up merchant banking divisions.

The Securities and Exchange Board of India (SEBI) was started in 1988 and the free pricing of primary market equity issues was introduced in 1992. The economic liberalisation in India after 1992 has led to an increase in economic activity including an increase in the flow of foreign funds into the country. All of a sudden, India became a preferred destination for global investors and a large number of investments banks opened shop in India to cater to this increased demand for financial services. This led to an increase in the issue management activity and this was the dominant activity for the investment banks in the following decade. There were a lot of fluctuations in the market which led to phases of hectic activity followed by downturn of business.

SEBI started to regulate the merchant banking activity in 1992 and all merchant bankers had to be registered under SEBI. The total number of merchant bankers registered under SEBI in the mid-1990s was almost one thousand. But by the end of March 2003, the number had fallen to 124. This was attributed to the economic slowdown and market downturn of late 1990s to early 2000s. This was followed once again by increased activity in the stock market leading to the boom in late 2007.

The stock market bubble burst in January 2008 and the market has steadily climbed down and remained in a slump ever since. The total number of investment bankers registered with SEBI as on 22^nd February, 2009 was 110. The investment banks which offer the entire gamut of services in India are SBI, IDBI, ICICI, Kotak Mahindra and Citibank. Non Banking Financial Corporations (NBFCs) such as Rabo India Finance Ltd & Ambit Meghraj also provide investment banking services. Some firms such as Ernst & Young, KPMG, Price Water House Coopers and Lazard Capital offer only pure advisory services.

A recent study titled “Merchant Banking under SEBI guidelines – A study of Regulators in Developing Capital Markets” has assigned ranks to the top merchant banks in India. The study was the contribution of Sarker De and Sushil Kanna. The ranking is shown in the table below:

The Indian Investment Banking industry has seen a steady growth in its business from 2003 onwards. This was mainly because of the pro-active measures the government had taken to increase market activity after the 9/11 terror attack over the United States of America in 2001. The regulations were relaxed a little and this reflected in increasing merchant banking activity. This is evidenced in the number of private equity deals, which have been increasing at a constant pace as seen in the chart below:

There has been a huge increase in the strategic investment activity over the years leading to 2008. This is seen in the chart below:

There has also been a massive increase in the Mergers and Acquisitions (M & A) activity over the years leading to 2008. We can also see the correlation between the stock market index (BSE Sensex) and the value of the deals in this chart. This is seen here:

As we see from the above charts, the investment banking activity was going full swing up to the first half of fiscal year 2008. But presently, the investment banks are facing a difficult situation as the stock market has lost by over 50 % since January last year. The number of companies opting to raise funds through equity is nil as on date (24^th February, 2009). Also the demand for other services of investment banks has also come down drastically. The economy is on the way to recovery as some experts have been pointing out recently. This optimism some say will be reflected in the stock markets as soon as the recovery begins. The situation for the investment bankers will also gradually improve along with the economy.

Recent History of Share Buyback in India

‘Share buyback’ refers to the process of a company buying back its own shares from its shareholders. This process is also referred to as ‘stock repurchase’ or ‘share repurchase’. This is done to reduce the number of shares in the market for a variety of reasons including:

a. To increase value of the shares still available in the market

b. To reduce/eliminate threat of a hostile takeover

Many companies -particularly MNCs- in India have gone through the process of buybacks during depressed stock market conditions. By using the option of buybacks the promoters of these companies increase their controlling stake in the company. The buybacks also benefit the investor by offering them a much needed ‘exit’ option when the stock markets are not performing well.

Stock repurchases are regulated by the ‘Buyback Act’ in India. The Government of India (GOI) introduced the buyback ordinance on 31^st October, 1998. It has subsequently become the Buyback Act. The main objectives of the buyback ordinance of 1998 were to:

a. Revive the capital markets

b. Protect companies from hostile takeover bids

The buyback of shares was governed by the Securities Exchange Board of India’s (SEBI) ‘Buy Back of Securities Regulation,’ 1998 and ‘Substantial Acquisition of Shares and Takeover Regulations,’ 1997. There were many conditions included in the ordinance to prevent the companies from misusing the ordinance. The ordinance allowed companies to buy back shares to the extent of 25 percent of their total paid up capital in a one financial year. The buyback was allowed to be financed only through the company’s free reserves, securities premium account or proceeds of an earlier issue made specifically for the purpose of buying back shares. Companies which had defaulted on repayment of deposits, redemption of debentures and repayment to financial institutions were prevented from buying back its shares. The companies were also not permitted to buy back its shares through negotiated deals.

During the late 1990s and the early 2000s, the MNCs in India were keen to buy back shares increase their equity stake. The buyback also usually indicated that the management of the company felt that their stock was undervalued in the market. The buyback thus resulted in an increase in the market price of the stock providing the investors a higher price for their investment in the company. The buyback also offered a much needed exit option to the investors during depressed market conditions. The fund managers were of the opinion that buybacks were one of the most favourable developments in the Indian market scenario. The MNCs also saw the buyback option as an opportunity to convert their Indian ventures into wholly owned subsidiaries. This also allowed them to delist the shares from the stock markets and allowed them to escape monitoring of accounts from public eyes and gave them greater control over the venture.

The guidelines placed strict norms on the companies intending to buy back the shares. The company had to appoint a merchant banker and make a public announcement at least one week before the commencement of buyback. A copy of this public announcement was supposed to be filed with SEBI at least two days before the announcement. The public announcement had to contain clearly the names of the stock brokers and the stock markets through which the company intended to buyback the stocks. The directors of the company had to take full responsibility for the factuality and truthfulness of the information.

The company was also supposed to file a copy of the special resolution passed at its general meeting at the stock exchange within seven days of it being passed. This memorandum included the buyback price and the amount of shared proposed to be tendered and the details of their transactions and holding in the previous six months. The resolution also had to be made public within two days of being passed and an escrow account had to be opened and the needed amount deposited before the purchase. The buyback also had to be completed within twelve months from the day of passing the special resolution.

The buyback ordinance of 1998 did not lead to increased buyback activity by the MNCs. The lack of interest in the buyback option was mainly attributed to the stringent restrictive regulations of the SEBI. The government was forced to make amendments to the buyback ordinance to revive the stock markets after the September 11, 2001 terrorist attacks in the USA.

The government relaxed the buyback norms by making amendments to the buyback ordinance in October 2001. The changes allowed a company to make open offers to purchase up to 10% of its equity without making a public announcement. The amendments also reduced the time limit of issuing fresh shares after the buyback from 24 months to 6 months.

The buyback of shares can be done in two ways. They are:

1. Open Offer Purchase
2. Tender Offer

When a company buys back its shares directly from the stock market through brokers it constitutes ‘Open Offer Purchase.’ This operation can be used to buy back shares when the number of shares being bought is relatively smaller. To buy back shares through this process the company has to fix a maximum price for an open market offer, the number of shares it intends to purchase and also a closing date for the purchase. The price can also be arrived at through the book building process.

When the number of shares to be bought back is huge then the company can go for a ‘Tender Offer.’ The price of the buyback offer has to be fixed before hand and usually at a premium to encourage shareholders to surrender their shares. The company buys back pro-rata if the offer is over subscribed and the time is extended if the tender is under subscribed.

Apart from the above two methods, the company can resort to targeted buyback methods to repurchase shares from a select group of shareholder(s). This tactic can be useful in preventing hostile takeovers.

Some analysts are of the opinion that the buyback option can be and has been misused by MNCs. The MNCs have exercised this option to increase their equity stake allowing them to delist from the stock markets. Delisting helps the company avoid public scrutiny and avoid the Indian regulatory environment. Further, the option is available to convert the company into wholly owned subsidiaries allowing them to repatriate profits. This also gives them complete control over the company.

There are however, complaints from a section of investors who have held shares in such companies that they were not given a choice in the matter and forced to sell. Their main grievance was that the MNCs when buying back shares for the first time offered a premium for the shares. During the second offer, the MNCs have offered much lower prices and the investors have been forced to sell fearing delisting of the shares. Any company with less than 10 % of its shares in the hands of the public is allowed to delist its shares from the stock market. This however, causes the remaining shares in the hands of the public to become illiquid. Also, if the amount of shares in the hands of the public is very less, the trade volumes go down thus bringing down the demand and value of the shares.

There is an ongoing debate about how the SEBI and the GOI of India can look after the interests of the small investors. A lot more regulations can be added, yes, but there are always loopholes and ways to get around them. The SEBI should thus also invest in investor education and awareness since it the investor who has to be responsible for his investments. The investor should diversify his risk and invest in companies with good practices and moral integrity. This is true not only in buyback situations but at all times.

References:

i. SEBI Buy Back of Securities Regulation, 1998

ii. SEBI Takeover Code, 1997