Satyagraha For Freedom From Corruption

Gandhi ji, in his book “History of Satyagraha in South Africa” narrates the coinage of the term Satyagraha and the journey of the movement. It is an amazing story of sacrifice, determination, and moral courage. Hence, I wondered whether we can use the concept to fight corruption in this century.

The irony is that Gandhi ji started the Satygraha movement in South Africa because Europeans passed unfavourable laws for Indians. They were scared of Indian traders and professionals taking a huge slice of the business, hence passed laws to restrict their liberty to live and trade freely. Greed was at the crux of it since there were plenty of natural resources in South Africa for Europeans, Blacks, and Indians. Now India is being destroyed by the greed of its leaders and public.

Gandhi ji’s story stands in stark contrast to the Anna Hazare led fight against corruption. Hazare’s was packaged as Gandhian inspired struggle but as results showed it was far from it. Hazare took the stance of my way and high way on the Lokpal Bill, whereas Gandhi ji believed in negotiation. Moreover, Hazare’s was a publicity driven exercise of a few fasts and he quickly distanced himself from it when he faced failure. Another aspect was that though thousands turned up in support at the initial stage, no one made use of that energy constructively and directed people to do something more than shout slogans on the streets. Hence, the euphoria disappeared after a short while, as the educated middle class needed an action plan to maintain their commitment.

It brings back to our understanding of Satyagraha. We generally confuse it with “passive resistance” and it was the same situation when Gandhi ji developed the concept a century back. Below are few points from the book:

1)      Satyagraha

Gandhi ji considered Satyagraha as a soul-force. The Satyagrahies never used physical force even when they had the capability for it. In Gandhi ji’s word – “Satyagraha is soul-force pure and simple, and whenever and to whatever extent there is room for the use of arms or physical force or brute force, there and to that extent is there so much less possibility for soul-force. These are purely antagonistic forces in my view, and I had full realization of this antagonism even at the time of the advent of Satyagraha

2)     Passive resistance

The term “passive resistance” originated in Europe as a weapon of the weak. It was generally used when other options of fighting were not available. It was a method used by people without voting rights, or lacking public support. The people were not averse to using arms for attaining their goals. But they did not go for it because they didn’t think they would succeed with it. Hence, passive resistance was more of a strategic manoeuvre than commitment to non-violence.

3)    Difference between the two

Gandhi ji described the fundamental difference in the concepts in the following paragraphs -

 “The power of suggestion is such that a man at last becomes what he believes himself to be. If we continue to believe ourselves and let others believe that we are weak and therefore offer passive resistance, our resistance will never make us strong, and at the earliest opportunity we will give up passive resistance as a weapon of the weak.

 On the other hand if we are satyagrahis and offer satyagraha believing ourselves to be strong, two clear consequences result from it. Fostering the idea of strength, we grow stronger and stronger every day. With the increase in our strength, our satyagraha too becomes more effective and we would never be casting about for an opportunity to give it up.

 Again, there is no scope for love in passive resistance; on the other hand, not only has hatred no place in satyagraha, but it is a positive breach of its ruling principle. While in passive resistance there is a scope for the use of  arms when a suitable occasion arrives, in satyagraha physical force is forbidden even in the most favourable circumstances. Passive resistance is often looked upon as a preparation for the use of force while satyagraha can never be utilized as such. Passive resistance may be offered side by side with the use of arms. Satyagraha and brute force, being each a negation of the other, can never go together.

 Satyagraha may be offered to one’s nearest and dearest; passive resistance can never be offered to them unless of course they have ceased to be dear and become an object of hatred to us.

 In passive resistance there is always present an idea of harassing the other party and there is a simultaneous readiness to undergo any hardships entailed upon us by such activity; while in satyagraha there is not the remotest idea of injuring the opponent. Satyagraha postulates the conquest of the adversary by suffering in one’s own person.”

 4)    Freedom From Corruption

Considering the above definition of Satyagraha and the differences highlighted by Gandhi ji, I haven’t seen very many noteworthy cases of mass movement of Satyagraha. Hazare’s movement just entailed short-term sacrifice and not a long-term struggle. When the public disappeared so did he.

The Satyagrahies courted prison and lived a simple life to fight for their cause. Hence, the question is that do we lack commitment and determination for long-term struggle to root out wrong habits. Is it possible and realistic to expect people to make these sacrifices in the present age of instant gratification. Can we expect Indian public to take a vow not to take or give bribes and kickbacks? Will it be expecting too much from the citizens to sacrifice a few luxuries. Will the public stay committed to the cause or leave it when it gets bored, to participate in the next novel thing.

We need to seriously think of eradicating corruption on this Independence Day. India has come a long way in one century but the corruption is eroding its sheen and destroying the country from within. We must not forget the sacrifices a whole generation of Indians made to ensure that the next generations live with freedom. Let us pledge to keep our souls free of greed.

Wishing all Indians a Very Happy Independence Day.

References:

History of Satyagraha in South Africa by M.K. Gandhi 

Missing Men of Honor

royal disgrace

The Story of Disgrace

A wave of shame and disgrace washed over Indian Premier League’s (IPL) Rajasthan Royals team. Three players of the team – S Sreesanth, Ajit Chandila and Ankeet Chavan – were identified as part of the spot fixing racket. Eleven bookies were involved. Investigators have found some evidence connecting it to underworld don Dawood Ibrahim.

As per police disclosure Chavan was paid Rs.60 lakhs by the bookies, Sreesanth and Chandila got Rs.40 lakhs each. By the number of matches they have played they would have earned a few crores each. The bookies lured the players by throwing parties and providing female escorts.

It is shocking that players with such international repute and excellent career opportunities would take a criminal route to earn money. One wonders what they were thinking. Were they joyously throwing up their hands in the air and dancing with happiness. Did they think that for a few millions they would be breaking the hearts, trust and expectations of billions of people, starting with their family?

It is reported that Rahul Dravid, the captain of the team suspected something. He made Sreesanth sit a couple of matches and the team managers asked him to leave the team. How painful it must have been for Dravid, a man reputed for gentlemanly conduct.

This isn’t the first time followers hearts have been broken by their idols. It started with the political leaders. Now the cancer has spread through all facets of life. Indian politicians – Gandhi, Nehru, and Azad – were known for their impeccable behavior  Congress leaders fought for Indian independence. They spent years behind bars to fight for a cause. Now Indian politicians spend time behind bars for corruption and fraud. Instead of feeling shame or humiliation, they get back into public life with renewed vigor to mislead people and make money.  Over 30% of Indian politicians have a criminal track record.

The new breed, who have joined the infamous bandwagon are senior managers of Indian corporates. After Satyam and 2G telecom scam, their names appear frequently for being interrogated by CBI and spending time in jails.

Valuing Honor in Our Lives

So where has honor disappeared? Previously, the mark of distinction for a man was when people referred to him as – “he is an honorable man”.  Having a dishonorable reputation was disastrous socially and professionally. Now, honorable men among leaders can be counted on figure tips.

As a world civilization, we need honor back in our bloodstream. Without it, humanity will reach new levels of depravity. We require men and women to work dedicatedly to get it back for the sake of next generation, though it is a challenging task.

The cynics will say it is a pipe dream and point out various flaws. The idealists look at the times gone by and wish the same could somehow come back. The practical breed has learnt to work like an automaton to earn a living and look at nothing else.

So where do we get our heroes who will change the world for us?  The heroes have to pay a price. Lincoln, Gandhi and King – were all assassinated because they dared to bring about change. From the first step to the end of their journey they made personal sacrifices. They repeatedly saw failures, their hearts sank with despair and somehow they gathered their strength to walk on thorns again.

In the present world, who would wish to trade the high life, luxuries and comforts for a life full of dynamite?

But unless we do so, we are bestowing the next generation a dangerous life.

So our choice is between our generation and the next. Do we want to look that far ahead?

Closing Thoughts  

When we talk about change, our hackles rise. Even when it is obvious that we should change, we don’t want to. That is a human failing which 100% of us have. Our best excuse is that we can’t change the world, who would listen to us, how can all the people change? But if we study change, we just need 10% of the people to believe in our cause. That is, we need to influence just 1 in 10 people in our life. That doesn’t sound very difficult; all of us are capable of doing it. So why not give it a shot, and bring honor back in our lives. I leave you with words of Dorothy L. Sayers from Gaudy Night:

“If it ever occurs to people to value the honor of the mind equally with the honor of the body, we shall get a social revolution of a quite unparalleled sort.”

References:

IPL match fixing 

Two Lessons from Purti Group Investigations

Nitin Gadkari, the BJP President, is under the scanner in respect to his Purti group. The allegations are that multiple layers of companies were created with numerous ghost investors. Some of the companies exist only on paper and the directors are all employees of Mr Gadkari. The Income Tax department and the Registrar of Companies have commenced investigations after the stories appeared in the media. I have a couple of questions about the whole thing.

1.     Unqualified Directors

Until fourteen months back, Mr Gadkari was the chairman of Purti Power and Sugar Limited (PPSL). Presently Mr Sudhir Wamanrao Diwe, Mr Gadkari’s personal assistant is the managing director. Moreover, as per media reports “four directors of Purti’s investment companies  - Kawdu Zade, Manohar Panse, Nishant Agnihotri and Sagar Vikaskotwaliwale – are either close associates or employees of Gadkari. While Zade is the accountant of Gadkari’s household, Peens is his driver.” Additionally, the four were directors in 16 corporate companies holding major shares in PPSL before 2010.

A fundamental question out here is why the director’s profession is a big deal. As per company law, any one can obtain a Director Identification Number (DIN) and be a director of the company. The DIN application requests for the residential address of the person. No details regarding professional qualifications or background are required.

The joke doing the rounds is that every driver now wants to be Nitin Gadkari’s driver. Seriously speaking, the onus of responsibility of appointing well-qualified directors rests with the promoters. It is their choice. In most cases, directors are friends and acquaintances of Chairman or CEO. Hence, the question is should the Corporate Laws be modified to ensure the quality of directors appointed?

2.     Fictitious Addresses of Companies

The second issue is that a number of group companies of PPSL are not operating from the addresses given to the Registrar of Companies. IT department visited the addresses in Mumbai including Damji Shamji Trade Centre at Vidyavihar (West), Dube Chawl at Andheri Kurla Road, two locations at Fort and Gupta Compound at Thane.

Further, as per Times of India – “four shareholding companies — Seven-Eleven Sales and Marketing Pvt Ltd, Ashwami Sales and Marketing Pvt, Nivita Trades Pvt Ltd and Rigma Fintrade Pvt Ltd — were shown as operating from the Vidyavihar office. Interestingly, at least three of these offices had earlier shown a room at Dube Chawl at the Andheri Kurla Road as their address. TOI’s investigation had found that the offices never existed in the chawl.

TOI had earlier reported that some two dozen companies had unverifiable addresses.”

As per the Companies Law while getting incorporated promoters have to give the correspondence address till its registered office is established. Secondly, the law states:

“(1) A company shall, on and from the fifteenth day of its incorporation and at all times thereafter, have a registered office capable of receiving and acknowledging all communications and notices as may be addressed to it.

(2) The company shall furnish to the Registrar verification of its registered office within a period of thirty days of its incorporation in such manner as may be prescribed.”

Since the companies were incorporated a decade back, the basic question is where the communication was sent from the Registrar of Companies. Secondly, at the time of registration and future years why the Registrar of Companies missed out that a multi-crore business is being run from a chawl . Is that not sufficient to raise alarm bells? How did the auditors of the company approve the corporate governance standard and where did they audit the books?

This would not be a one off case. There would be numerous cases where the registered address is fictitious despite that fact that Company Law prescribes serious penalties for furnishing incorrect information at the time of incorporation. Hence, the question is why are the review and investigation procedures at Registrar of Companies not improved to reduce wrongdoing?

Closing thoughts

The case has highlighted the prevailing malpractices in the corporate world. As the investigations are going on more dirt will be uncovered. However, the government instead of making a Congress – BJP power struggle, should introduce legal processes and procedures to curb these misconducts. The government should modify the new companies bill to address these loopholes. Lastly, the auditors liability for signing off on corporate governance standard of the company should be clearly mentioned when the basic tenants are not met.

References:

I-T heat on companies linked to Nitin Gadkari

Coal Gate Scam – Should Auditors Comment on Policy Decisions?

The Coal Gate Scam report has squarely put the loss of Rs. 1.86 lakh crores (USD 35. 097 billion) at the Prime Ministers door. Comptroller and Auditor General (CAG) report states that Prime Minister Manmohan Singh agreed to introduce competitive bidding for allocation of coal blocks way back in October 2004. However, his office indulged in delay tactics of approving the revised policy. This resulted in allocation of coal blocks according to the old policy introduced in 1993. Failure to use competitive bidding resulted in a loss of Rs. 1.86 lakh crores (USD 35.097 billion).

This raises interesting questions from the corporate sector perspective. Should auditors see the validity and applicability of policies? Alternatively, should they restrict their role to the compliance of existing policies?  What happens when a policy or standard operating procedure of an organization is redundant however is still being followed? If competitors are using better processes, technology and policies than the organization, what role should auditors play in it?

1.     Delaying Policies Becomes a Political Game

According to the CAG report, the Screening Committee allocated blocks and the process lacked transparency. Allegations are that private companies with political links benefited at the expense of others. However, competitive bidding policy could have been introduced with an amendment from the administrative desk. Prime Minister’s role becomes critical as he was also fulfilling the responsibilities of Minister of Coal. CAG says he made it into a bigger issue that the policy should be changed for all minerals and not just coal; hence the process for making such large-scale policy change was different. This allowed the coal ministry to follow the 1993 process.

This happens in the corporate sector too. For instance, an employee or a small group suggest a change to an existing control process that will take just one man-month effort. Some others with vested interests do not wish for the change to occur. However, they can’t reject the suggestion for strengthening controls without looking bad. Hence, to stall the project, they add a few more suggestions which make the project larger into 24 man-months effort. Now the change can only happen once the huge budget is approved. Since, the project is not priority; it stays on the bottom of the budget approval list. Hence, status quo remains and subsequently someone exploits the control weakness to conduct a fraud.

In such a situation, as an internal auditor would you highlight the initial attempt to strengthen controls and put responsibility on the other group for delaying the change? Do we as internal auditors go back in such depth to find out what projects or policies were kept pending approval and they had such a huge negative impact?

2.     Auditor’s Role in Policy Review

The Supreme Court has upheld CAGs power to comment on policies. Justices R M Lodha and A R Dave bench said “Do not confuse the constitutional office of CAG with that of an auditor of a company or corporation.” This response was in respect to a petitioner’s contention that CAG should restrict itself to auditing expenditure and not comment on the government’s rational of policy decisions. The bench had further added – “CAG is not the traditional Munimji to prepare only balance sheets. It is constitutionally mandated to examine the efficiency, effectiveness and economy of the decisions of the government in using resources. If the CAG will not do this, then who will?

This viewpoint raises some interesting points for internal auditors in the corporate world. Should auditors be commenting on strategic or policy decisions of the company?

For instance, the company decides to use print media for advertising open job positions. However, it is much cheaper to use job portals and social media. These significantly reduce the cost of recruitment. Should an auditor restrict himself to checking that all expenditure is authentic or question the hiring policy?

Another aspect is the strategy decisions. Let us say, Company A decided not to enter into the emerging markets, whereas Company B operating in the same industry entered the emerging markets and increased the profitability tremendously. Should an auditor audit strategic decisions, and not just say that it is management responsibility. Where is the line of demarcation drawn in respect of corporate internal audit?

Institute of Internal Auditors new standard applicable from 2013 ‘Achievement of the organization’s strategic objectives’ states that – “The internal audit activity must evaluate risk exposures relating to the organization’s governance, operations, and information systems regarding the achievement of the organization’s strategic objectives”.  Hence, should we conclude that evaluating strategic decisions comes under internal audit purview?

3.     Auditor’s Role in Calculating Presumptive Loss

The CAG audit reports on 2G licenses and Coal Block allocations have raised a storm due to the calculation of presumptive loss figures. The government’s contention is that CAG should not be calculating the opportunity loss, as policy decisions are taken to benefit the public.

CAG however, contended that – “We had never commented on government policies, neither did we ever say that auction was the only route or that all natural resources should be auctioned. In both 2G spectrum licences and coal block allocations, we had only commented on the ‘effectiveness or non-implementation’ of policies. The presumptive loss or windfall gain figures are only to highlight the serious issues of an act of commission during implementation of government policies.”

In the corporate world, internal auditors make an observation and restrict their recommendations to suggest improvements. In rare cases, a cost-benefit analysis is done on the impact of the control weakness. We generally fail to draw management attention to the seriousness of the issue, as they are no numbers given. Should corporate internal auditors change their approach to audit work to give a cost-benefit analysis for their observations? Will that garner more attention from the management and initiate action?

Closing Thoughts

These are questions worth debating about and there are no easy answers. The business world internal auditors can learn quite a few lessons from the government auditors. They are doing a good job of raising contentious issues. Below is a poll to assess your views.

References:

  1. CAG not a ‘munimji’ of govt’s balance sheet: SC
  2. CoalGate: CAG does not let Manmohan, PMO off the hook
  3.  Performance Audit of Allocation of Coal Blocks and Augmentation of Coal Production (Ministry of Coal)

Why Auditors Fail To Detect Frauds?

When media reports a new fraud, the first few thoughts of public are – “What were the auditors doing? How did they miss it? Were they involved?” The auditors get labelled as morons, conspirators or criminals. Generally most people jump to the conclusion that auditors had malafide intentions and became accomplices to get more business. While this may be true in some cases, auditors need the benefit of doubt. They sometimes genuinely miss the cases despite their best effort to diligently perform their duties. This post is an attempt to explain why auditors miss the frauds.

I want to share a joke with you before I explain. Two drunkards were walking on a railway track. The first said to other – “I am really tired, I hope the steps will end soon.” The second replied – ‘Yeah. I wish they had put the handrails at a better height, my back is killing me.”

1. Auditors responsibility to detect frauds

We can laugh at this, but if I say most of us don’t see clearly, there will a lot of angry reactions. So I am not saying anything, and am requesting you to watch this video.

Now did you see the moon walking bear?

Auditors have the same problem. They have to to give a true and fair opinion on the financial statements. They are not required to focus on detecting frauds. Hence, the audit programs are not designed to conduct tests to  detect fraud symptoms and probability. Therefore, with no specific coverage auditors fail at detecting frauds. Extract from Section 143 of New Companies Bill is given below:

The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made thereunder or under any order made under sub-section (11) and to the best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company’s affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed.”

2. Auditors punishment on failure

The second question frequently debated is – “Should auditors be punished if they fail to detect frauds?” Section 147, clause 4 of New Companies Bill states auditor’s liabilities in respect to fraud in the following words:

Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners of the audit firm and of the firm jointly and severally and such partner or partners of the audit firm shall also be punishable in the manner as provided in section 447.”

This clause puts auditors on shaky ground. It is difficult to prove innocence once a fraud is detected. How can an auditor state – “I did my work properly, saw these documents, looked at the same audit evidence but didn’t find anything wrong with it.” Most will jump to the conclusion that the auditor knowingly ignored all the evidence. So here is another video. Watch it, and then you will see how this situation can occur.

According to various experiments, 75% of the people failed to observe the person swap in the experiment.

Think of this from an audit evidence perspective. An auditor is checking 100 vouchers with supports. One voucher among the 100 is fraudulent. What is the probability of the auditor noticing it? One can safely assume that it will be less than 25%.

Is it surprising that auditors fail to detect frauds after seeing these experiments. Though they are trained, they are human. The same psychology works with them too.

Closing thoughts

The success rate of detecting frauds will be higher when the auditors – external and internal – have specific responsibility to detect frauds. Without the specific responsibility, regulators can continue to complain and investors will share their anguish, however all will be futile. The laws need to be devised to hold someone responsibly for detecting frauds. What is your opinion?

A modified version of this article was published in the Middle East Accountant Magazine.

Has Shame Disappeared From Indian Society?

Nowadays, one doesn’t hear “I am feeling so ashamed of….” . No, that is not exactly true. I have heard people feeling ashamed of not having the latest car, gadgets, botox treatment or size zero figure. But rarely about their behavior. Two political incidents last week made me think about why people have stopped feeling a sense of shame and how do ethics get impacted due to it.

1. Tamilnadu : A. Raja was released on bail from Tihar jail in May 2012 after fifteen months of imprisonment. He was implicated in the 2G telecom scam along with Kanimozhi. On his exit from prison, his supporters congratulated him as if he was a hero and there were huge celebrations. Then last week, the DMK family members – Stalin, Kanimozhi, Maran courted arrest as part of protest against Jayalalithaa’s government, stating that she was practicing vindictive politics.  Even after making headlines for corruption for over a year, among the DMK party key leaders there is no sense of shame, guilt or remorse.

2. Karnataka : Today, Mr. Jagadish Shettar is being appointed as Karnataka Chief Minister and he is replacing Mr. DV Sadananda Gowda. Mr. Gowda in his eleven months tenure made no headlines for the wrong reasons. The reason for his fall is former Chief Minister BSY Reddy. Mr. Reddy was implicated in illegal mining scandal and has a number of corruption charges against him. However, he still retains clout in Karnataka politics, and BJP party leaders to satisfy him replaced Mr. Gowda. Mr. Reddy doesn’t show any hangups that he is forcing changes in the government to retain his power and continues to arm twist BJP.

In both the cases, one thing was clear. Even after imprisonment, these political leaders did not feel a sense of shame. As the cases are still going on, one cannot say they are guilty. However, aren’t human beings supposed to feel ashamed on being implicated in such scandals? Have they lost their sense of ethics to such an extent, that they feel comfortable mocking the judiciary? Hence, I attempted to delve deeper into the psychology of shame and its impact on ethics.

I found a fascinating post titled “Shame as an Ethics Issue” on GoodTherapy.org. Here is an excerpt:

Shame is defined as a deeply disturbing or painful feeling of guilt, incompetence, indecency, or blame-worthiness. Now considered a primary though under-acknowledged emotion, shame creates self-loathing and/or imploding or exploding rage. Shame is experienced as a global attack on the core Self that sentences the person to life with an irreparable flaw or inadequacy. No wonder we do our utmost to keep actions or experiences that engender shame a secret from others, and often ourselves.”

That is the crux of it. As long as we do not feel ashamed of our actions and behavior, we feel good about ourselves. To feel powerful, a person needs to feel invincible, shame threatens that concept by making a person feel powerless, vulnerable and fearful. Without a sense of shame, a person does not accept that they have done any wrong.  Therefore, the mental barrier created as self-defense, stops a person from taking accountability of their actions.   Hence, this makes self-correction and ethical behavior impossible.

Brene Brown, a world renowned researcher on shame, says shame causes a fear of disconnection and unworthiness. However, people have misconstrued having a sense of love and belonging. To connect and have self-worth, one has to be be open and vulnerable, live life honestly. But people mistakenly consider vulnerability and weaknesses as synonyms. On the other hand, vulnerability is about courage to be able to live whole-heartedly. Besides vulnerability forcing us to deal with shame, it allows us to live with joy. Worst news is, that if a person numbs oneself to shame, they numb themselves to happiness, because to numb one emotion, one has to become numb to everything. Watch her video below, it is absolutely mind-blowing.

Closing thoughts

It is horrifying to see a country’s social values deteriorate so rapidly in a span of few years.  India has Mahatma Gandhi as father of nation, and present day leaders are becoming prone to illegal and corrupt acts. Leaders need to be chosen for their ethics, values, character and courage. Incorrect choices will lead the society awry. Rather than celebrate unethical behavior with pomp and show, it is better for one’s own happiness and well-being to acknowledge the broken behavior and take corrective measures. Hiding behind walls to project invincibility and perfection harms one own self.

References:

  1. Raja gets bail, walks out of Tihar jail- The Hindu
  2. DMK leaders Stalin, Kanimozhi, Dayanidhi Maran court arrest protesting against Jayalalithaa’s govt
  3. Karnataka: BJP MLAs to elect Shettar as new CM
  4. Shame as an Ethics Issue – Part I

LIBOR Scandal – What Went Wrong?

This week Barclays Plc made banking history for the wrong reasons. The unheard occurred – the chairman, chief executive officer and chief operating officer – all resigned within one week. While chairman of Barclays, Marcus Agius took the blame saying “the buck stops with me“, initially Bob Diamond said the incident was “inappropriate“. An understatement or lack of adequate vocabulary for describing a manipulation with such huge impact on the financial markets? LIBOR is used as a benchmark for prices of approximately $ 350 trillion of financial products. British and US authorities fined Barclays $453 million!

In the parliamentary hearing yesterday, Mr. Diamond did modify his viewpoint and said “behavior is inexcusable“. In the hearing, Mr. Diamond implicated Bank of England and the Financial Regulatory Authority. With a dozen more banks under investigation, this story of rigging interest rates  isn’t going to blow over. It is just going to get murkier with time.

Watch this video to get an inside view on the procedures for calculation of LIBOR and the lack of monitoring by the regulators. Some speakers have given volatile views, but these are definitely worth listening in case of such a serious breach of business ethics.

In the last couple of months, titans of banking industry are facing the public ire. First Jamie Dimon was called in for questioning by US senate, yesterday Bob Diamond was questioned by UK parliament. The winds are blowing in a different direction; public is outraged by lackadaisical attitude of bankers towards ethical practices. Since the financial crises, many have written about the need to change culture within the banking organizations. However, from the frequent scandalous news stories, it doesn’t look that the wizards of the industry are understanding the social strategic inflection point.

With senior bankers’ ambition to join billionaires club, even the best minds have developed blind spots. The ambition is for more and more money; they have forgotten that more is not always better. We need banking CEOs to have the ethical mindset of Dalai Lama to bring about a positive change in the industry. Is it possible, what do you say?

References:

Barclays CEO Bob Diamond Resigns After Rates Scandal – Business Standard

SEBI Revises Consent Process

While Rajat Gupta, ex-board member of Goldman Sachs is facing the trial by fire on insider trading charges in US, Stock Exchange Board of India (SEBI) has tightened the screws on the consent process for stock market manipulations and offences.

SEBI last week revised the earlier rules passed in March 2007. Some of the critical features of the revised consent process are:

1. Face the Music

Certain defaults including insider trading, front running, failure to make an open offer, redress investor grievances and respond to the summons issued by SEBI are excluded from the consent process. The defaults falling in the category of fraudulent and unfair trade practices, which in the opinion of SEBI are very serious and/or have caused substantial losses to the investors, shall also not be consented.”

The details are below:-

SEBI shall not settle the defaults listed below:
i. Insider trading i.e. violation of Regulation 3 and 4 of the SEBI (Prohibition of Insider Trading)Regulations, 1992;

ii. Serious fraudulent and unfair trade practices which, in the opinion of the Board, cause substantial losses to investors and/or affects their rights, especially retail investors and small shareholders or have or may have market wide impact, except those defaults where the entity makes good the losses due to the investors;

iii. Failure to make the open offer (except where the entity agrees to make the open offer or if in the opinion of the Board, the open offer is not beneficial to the shareholders and / or the case is referred for adjudication);

iv. Front-running; for the purpose of this circular, front running means usage of non public information to directly or indirectly, buy or sell securities or enter into options or futures contracts, in advance of a substantial order, on an impending transaction, in the same or related securities or futures or options
contracts, in anticipation that when the information becomes public; the price of such securities or contracts may change;

v. Defaults relating to manipulation of net asset value or other mutual funds defaults where the actions of the asset management company (AMC)/ mutual fund (MF)/sponsor, result in substantial losses to the unit holders, except cases where the entity has made good the losses of the unit holders to the satisfaction of the Board;

vi. Failure to redress investor grievances(except cases where the issue involved is only of delayed redressal);

vii. Failure to make such disclosures under the ICDR and Debt Securities Regulations, which in the opinion of the Board, materially affect the right of the investors Non-compliance of summons issued by SEBI;

ix. Non compliance of an order passed by the Adjudicating Officer (AO), Designated Member (DM) or Whole Time Member (WTM);

x. Any other default by an applicant who continues to be non-compliant with any order passed by the (AO) or (DM) or (WTM).”

This means that where SEBI considers breach of law or listing guidelines, the companies, investment managers, brokers etc. won’t be able to pay a fine and get away with it. Previously, on such charges, SEBI allowed them to pay the fine while not admitting guilt and sometimes by voluntarily agreeing to debar from the  from stock markets. Now without being allowed to go through the consent process, the organizations and persons alleged to have committed the above-mentioned acts will have to go through a legal process for criminal offences except in some exceptional cases. SEBI has allowed itself some room for maneuverability for some cases. In regular cases, now an organization can go through the consent process only for small technical breaches.

2. One Time Lucky

No consent application shall be considered, if any violation is committed within a period of two years from the date of any consent order. However, if the applicant has already obtained more than two consent orders, no consent application shall be considered for a period of three years from the date of the last order.”

Hence, this clause allows leeway once only in a couple of years. If an organization has already gone through a consent process, it is not going to get away easily without some criminal charges the next time round. The practice of organizations to claim a mistake has been made every year whenever they get caught will have to stop.

Closing Thoughts

The rules are good. SEBI is finally gearing itself to govern and regulate the stock markets properly. This move in the long-run will build investor confidence and dissuade asset managers, brokers and organizations from indulging in malpractices. Reliance Industries has an ongoing case for insider trading, along with a couple of other banks for front running and stock market manipulations. Reliance has appealed to the Bombay Courts to be allowed to go through the consent order process available before as it’s case is  from 2007.

The method SEBI chooses to deal with the older cases, will decide the fate of many organizations. It appears the organizations are worried, and that for regulators is a good strategy. The last high profile case of consent was of Anil Ambani group in which the group paid a Rs 50 crore (USD 8.93 million ) fine. Hence, in all likelihood the organizations with pending cases will either have to pay high fees or face criminal charges.

References:

  1. Streamlining of Consent Process
  2. Modified Consent Process Circular
  3. Reliance Industries moves Bombay High Court on new consent order rules

An Update of Adidas India Euro 125 Million Fraud Story

In the last couple of weeks, some startling information was revealed by the media about the fraud. To recap, Adidas global management disclosed euro 125 million (Rs 870 crore, USD 157.68 million) fraud in India operations in the first quarter end report of 2012. Subsequently, Adidas India management filed a police complaint against the ex-CEO Subhinder Prem Singh and ex-COO Vishnu Bhagat. Now the battle lines are drawn and allegations are flying. Here are some surprising revelations of the case so far.

Adidas management is alleging “commercial irregularities” and mismanagement of Reebok operations for last five years. Reebok and Adidas India operations were merged under Mr. Singh last year. Mr. Singh portrayed it that the allegations are more about a power struggle between the two groups and Adidas India operations has similar number of unreported frauds, as mentioned in the earlier post.

Some financial numbers and other details that were reported by the media are:

1) Profitability of Adidas & Reebok India

An Economic Times article stated that Reebok India March 2010 reported Rs 786.1 crore (USD 142 million) total income with a loss of Rs 40 lakhs (USD 72,000) . On the other hand, Adidas India operations showed a profit of Rs 455.6 crore (USD 82.75 million) for the year ending March 2010, with a profit after tax of Rs 9.01 crore (Rs 1.63 million). Mr. Singh attributed the difference to two aspects. First, Reebok India had a share capital of Rs 23 crore (USD 4.16 million) in comparison to Adidas India’s share capital of Rs 99 crore (USD 17.94 million), hence has to pay interest on borrowed funds. Second, Reebok India paid a royalty of 5% on sales, that amounted to Rs 110 crore ( USD 19.93 million), whereas Adidas India isn’t required to pay royalty. Hence, Mr. Singh’s contention is that Reebok India  performed better than Adidas India.

This practice of charging royalty to one arm of the company and not the other in the same country, is somewhat controversial. It raises questions on the transfer pricing practices followed by the company.  The Income Tax department may view it as an intentional strategy to deflate profits to avoid taxation.

Subsequent to the story breaking, the Income Tax department has commenced an inquiry and issued notices to executives for probing financial wrong-doing in last four years to determine tax evasion.

2) Police Complaint

The FIR, which has been seen by Bloomberg UTV says that: 

- Irregularities include over-invoicing to the tune of Rs 147 crore (USD 26.64 million)
- Running a false franchisee referral programme, receipts from which were about Rs 114 crore (USD 20.66 million)
- Maintaining four secret warehouses where company goods were diverted, all of which have been sealed and goods confiscated
- Raising fake invoices of about Rs 98 crore (USD 17.76 million) to show higher sales and claim promotions, bonus and incentives
- And collusion with some customers to aid the two officers in the scam”

Behind the allegations, the details when pieced together give the following story.

According to the Economic Times story, Mr. Singh started gunning for the top job of the merged entity from 2008, knowing that merger was inevitable. He pursued expansion plans to show numbers and beat internal competition, at the expense of profitability.

The source of the problems appears to be the minimum guarantee strategy adopted for store franchises.  Reebok had 100 stores in 2003, and grew to 800 stores. As per the minimum guarantee program, the franchisee was given a specific sum, irrespective whether the company earned any money from the store. Small time business persons were invited by Reebok to open stores and these stores didn’t make any money. Hence, the costs ran high, with no revenues. Rumors are that some money was earned by Mr. Singh privately for opening these stores.

Another information shared by police is that Adidas management claim that Mr. Singh and Mr. Bhagat diverted stock to four secret warehouses near Delhi doesn’t hold much water as no stocks were found in the warehouses. Adidas India claims to have confiscated goods worth Rs 63 crores (USD 11.41 million) from these warehouses. According to the police, three of the four warehouses were empty, and the fourth the new management has taken the goods.

However, from the information available so far, it appears that sales figures may have been inflated, and closing stock deflated to show higher profitability and meet the growth targets. It is possible, that false sales invoices were created and the goods transferred to the warehouses. There are allegations from store owners also that there are discrepancies between statement of accounts. The debit and credit balances significantly differ. Hence, the sale invoices may have been made in the franchises name without an actual sale. If this is true, most of the internal controls were over ridden by management.

Another aspect reported was that German management at headquarters was aware of the complaints and various issues cropping up, however chose to ignore the same due the great performance being shown. They apparently didn’t take proper action on the auditors report also. Of course, there are likely to be questions raised as to quality of work done external and internal auditors.

With all the information available till date, the fraud figures don’t add up to Rs 870 crore (USD 157.68 million). The police investigators are stating that beside the complaint, no evidence has been provided by Adidas management till date. Reading the corporate boxing match, Registrar of Companies under Ministry of Corporate Affairs has commenced an investigation.

Closing Thoughts

With all the dirty linen being washed in public domain by Adidas group, it has attracted regulators attention. If the plan was to browbeat Mr. Singh, without adequate evidence the prosecution will fail. If in reality all the allegations can be proved, then Mr. Singh along with a number of senior executives are in hot soup. Till date it is the largest fraud case reported by a multinational company in India. Let us wait and watch to get some more juicy information.

References:

  1. How Adidas Slipped in India – Economic Times
  2. Reebok under tax lens, Adidas seizes goods from warehouses
  3. The Reebok Adidas scam – another corporate saga in courts

Indian Social Values – Root of Corruption

Page three newspapers are full of celebrities’ rave parties, fist fights, sex scandals, botox treatments, etceteras. The not so rich idealize these celebrities and mimic all, to be the in-crowd. With these social values, can Indian’s consider it cool to be good?

The west puts India on the pulpit for its values. From Beatles to Julia Roberts, western celebrities talk about Indian culture of prayers, the land of discovering one’s spirit and sense of being. When majority of the middle class Indians themselves are lost, the crown of leader of spiritual world appears  somewhat misplaced. Indians in the present world, from birth, get to understand that all human emotions come at a price. This may sound as a harsh statement, but is reality. Let us walk through the different phases of life of a middle class Indian to discover the spiritual compromises they make.

1. Indian Childhood

India post-independence from a land of leaders propagating good values  has turned into a land people indulging in  unscrupulous behavior in the name of social values. It starts with birth. From the 1960′s the desire to have a son grew among parents. Educated parents get female fetus aborted  since the son has more value in the marriage market. The sex ratio is 109.4 males to 100 females in 2011. According to reports nearly 50,000 female fetus are aborted every month.

The reason for abortions is financial. According to the Indian system, a girl’s father in arranged marriages pays dowry for getting a husband for his daughter. Secondly, in the conservative families daughters aren’t allowed to work. Hence, the cost of raising a daughter, educating her, is lost while a son earns back the money for parents from working and getting a dowry. Therefore, sons get a better treatment from parents from birth. From food, clothes, education and hobbies the girl is forced to sacrifice for the brother. Basically, from the day a child is conceived, Indian parents put a value on the child. There is a profit and loss motive in child upbringing.

With these values apparent in the household from childhood, is it surprising that Indians ethical values are confused? Can a child raised on the basis of returns s/he will bring to the parents on becoming an adult, consider emotions and principles above money? Are parents raising kids or cattle for sale?

2. Indian Youth

Indian parents tom-tom about their love for their children and their dedication to keep the children with them. They look down on their western counterparts, who let the kids leave home between the age of 16-20 years to live on their own. In India, 30 year old unmarried sons and daughters can also be found living with their parents. It arises from an attempt to control who the youngster marries, specially for sons, so that a big fat dowry can be earned.

In respect to daughters, it is a need to keep their image unsullied. A daughter having an affair is a no-no among conservative families. Good girls don’t have relationship with boys. While the boys can have relationships with girls, and any girl who has a sexual relationship with a boy is of loose moral character. It it surprising that with this culture, Indian youth does not have normal relationships with the opposite gender.

India is the 4th most unsafe place in the world. Eve teasing or sexual harassment is rampant and young Indian women endure comments from men even when walking to office at 9 a.m. According to a survey of developing nations, Indian men are the most sexually violent, with 24% having committed a sexual crime. Another survey states 65% men believe sometimes a women deserves to be beaten. With these results and mindset, can one ensure gender equality at work?

An Indian’s professional mentor/buddy in the first job is the person who teaches them to fudge the reimbursement bills of their salary. For instance, employees are entitled to medical reimbursements. The friendly mentor will share information of a medical store from where fraudulent medical bills can be obtained by giving a cut.

After being raised in this culture, can Indian youth have independent thinking, proper adult relationships and professional values? Most lip sync their parents’ desires for them, rather than discovering and understanding their own being. Abnormal behavior – living with one’s parents in adulthood, harassing opposite gender – is socially considered normal. Normal behavior of having adult relationships, independent living and maintaining professional ethics, may make the youth a social outcast. After being raised in this social climate, can Indian youth make India the next superpower?

3. Indian Marriage

The biggest trade in India, is of arranged marriages. Marriages aren’t made in heaven, they are negotiated for the best deal. The sons are put up for sale and the daughters’ fathers attempts to purchase the best available husband for her, according to their financial position.

If one sees it from an economic angle, the husband to provide for the wife lifelong, takes upfront payment from his wife’s father. Looking from another angle, the woman gets a man to have sex with her for life after being paid by her father. Prostitution is illegal in India, and prostitutes are looked down upon. But sale and purchase of husband and wife is a socially accepted norm.

In rural areas, the situation is worse. If a couple belonging to different castes falls in love, the male members of the girl’s family do honor killing, they kill the couple. It is a crime to fall in love, and humiliating for the parents. From all this one can conclude that Indian rational of honor, esteem and self-respect is quite contrary to human race.

Even divorce involves social stigma. In reality, 90% of urban husbands have had extra marital affairs. Most of the urban wives are educated but don’t leave their marriages even after being aware of the affair, as their standard of living will become lower. India has one of the lowest divorce rates with just one in a hundred marriages collapsing. There are just around 10,000 or so divorce cases filed each year. Despite the fact that there were 8391 dowry deaths in 2010 and 90,000 cases of torture and cruelty towards women by their husbands. This is when most women don’t report to police due to sense of social shame. Aren’t the numbers ironical. Abusing women is considered a social privilege of the Indian male. Moreover, educated women prefer to take abuse rather than stand on their own two feet and earn their living.

Closing Thoughts

Can Indian marriages teach valuing human emotions when they are nothing more than a financial transaction? After parent-child relationship, the second most precious relationship is of husband-wife. In India, both have monetary values attached to it. When critical relationships are not based on ethics, what is the probability of the society respecting professional ethics?

Indian ideas of honor, respect, ethics and principles are bunkum. A thief steals a women’s purse, he is a criminal. A  husband steals his wife’s dignity and her father’s retirement saving, he is respectable. It is a case of sacrificing rational thinking to camouflage social ills.

Last week, the government issued a “White paper on black money”. The paper describes ways and methods to curb corruption and reduce black money. However, with this social environment, the best efforts are likely to fail. Can an average Indian be considered as having a fully developed “Conscience”? Anywhere close to spiritual awakening? What do you think?

References:

  1. Disappearing Daughters: Women pregnant with Girls pressured into abortion
  2. Divorce Rate High Among Indian Techies
  3. Dowry murders in India result in few convictions
  4. Indian men most sexually violent, says survey of six developing nations
  5. International Center for Research on Women