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Monday,
February 4, 2002, Chandigarh, India  
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The dark side of capitalism
Inflation dips
Budget to provide direction
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Rebate on house loan
Learn to grab opportunities
Form action group for safety issues
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The dark side of capitalism London Enron provides a fitting epitaph to the bubble decade of the 1990s. It is also a quintessential fable for our time, pointing up with black-and-white clarity the Faustian battle now being waged for the corporate heart and soul. As Enron shows, it’s a battle that the devil can still win — and even now is busy turning into a damage — limitation exercise, with soothing suggestions about tighter auditing and better non-executive directors. This is like saying you can stop people joining al-Qaeda with better passport controls. The truth is that Enron was way past technical control, being the living embodiment of the fundamentalist management beliefs that took hold in the 1990s, with results that are now nightmarishly plain. Let’s have a look at Enron’s anti-management doctrine point by point: 1). Politics must bend to the market. Aided by the internet, a near-religious belief grew up in the 1990s that technology and capital could bypass earthbound governments and nation states, turning the globe into one giant marketplace. To speed the conversion, at least for energy, Enron backed its fanatical zeal for deregulation with a reported $ 5.9 billion in political contributions since 1990 - and not just in the US, as we know. Significantly, political commentators (such as our own Nick Cohen and Greg Palast) were sounding the alarm on these excesses while the business gurus were still feting its apparently dazzling metamorphosis from boring energy company to weightless giant of the new economy. 2). The only measure of success is Total Shareholder Return (TSR). More than any dotcom, Enron was the ultimate bubble company. It has been well put that instead of its soaraway share price being the result of solid commercial success, success was a smoke-and-mirrors affair based on the soaraway share price. So long as the share price kept climbing, no one looked too closely at what ‘success’ represented. Now, some doubt whether the shrivelling company will be left with any net worth at all. 3). What you manage is the numbers. This is the logical consequence of using TSR as the measure of success — and Enron did it with ruthless enthusiasm. To participate in the capital markets’ feeding frenzy, it largely abandoned the old-fashioned idea of profit (and share performance) as a byproduct of delivering superior value to customers, in favour of instant profit from numbers — that is, from trading, in energy, in broadband internet capacity, in anything. As the story shows, if you’re determined (or ‘aggressive’) enough, managing by numbers is supremely easy. Even Enron’s size (it was at one point ‘the seventh-largest corporation in the US’) was a numerical illusion, built on an accounting convention that allowed it to book the full amount of energy trades as sales, not just its own margin. Just as fictional were its earnings, a combination of financial manipulation (‘innovative transaction structures’, as the prospectus for one of its off-balance-sheet partnerships boasted) and booking future earnings as current profit — practices which, though not in themselves illegal, drove coach, horses and an entire baggage train through accountancy and audit claims to objectivity. 4). Interests of shareholders, employees and managers can be aligned with stock options. This was another of Enron’s most fervently practised beliefs. As the unwinding saga proves, there’s nothing so dangerously unaligned as senior executives armed with their insiders’ knowledge of a company’s real position and a stack of options about to mature. While long-serving Enron employees lost not only livelihoods but future pensions in the debacle, chairman Kenneth Lay’s Enron share-dealing profits totalled $ 145 million, on top of an already handsome salary and bonus. As Alastair Ross-Goobey remarked ruefully in a recent interview: ‘Never underestimate the power of human greed’ — even, or especially, in those already absurdly rich. 5). Good corporate citizenship is a voluntary add-on. Enron was a lavish corporate donor, with a policy of giving 1 per cent of earnings to charitable and civic causes ranging from opera and ballet to medical and community centres. Lay was also generous in support of local good causes. At first sight this seems surprising, but it was a kind of retrospective profit-laundering. The use of ‘corporate social responsibility’ as a fig-leaf — quite separate from its business purpose - is of a piece with its overall strategy. At the Houston company, these unholy principles locked together to create a monster, a monster that bears the same relation to capitalism as the Taliban do to mainstream Islam. The initial reaction has been to blame external agencies such as auditors and credit-rating analysts, or internal risk analysis, or even the computer algorithms used by Enron’s traders. In the USA, the chairman of the Securities and Exchange Commission (SEC) has solemnly unveiled plans to set up an independent governing body to review the big accountancy firms that regularly audit public corporations - in effect auditing the auditors. This is understandable. But the danger in this approach is all too clear. Accounts are opinion, not fact (a confusion that Enron exploited to the full). As such, what makes them work is not more figures — their bulkiness is already as much an obstacle as an aid to understanding — but a willingness to abide by the spirit of the exercise. Likewise, executive management will always have an information advantage over non-execs and auditors, whatever the corporate-governance safeguards. Formulas and formal compliance may catch some mistakes and fiddles but they are not up to dealing with an Enron. They may even make matters worse. As Peter Martin pointed out in the London-based Financial Times newspaper, business is about judgment and risk. Imagining that those judgments can be reduced to, and uncertainty eliminated by, quantitive analysis ‘may expose us to still greater dangers, by placing too much faith in analysis that will always be vulnerable to wishful thinking or outright manipulation’. This is to attack the wrong problem. What’s wrong with Enron is its entire conception of what a company is. Let’s be brutal. The only good thing about Enron is that it is such a clear illustration of the dark side of management: as instrument of enslavement and destruction, rather than the empowering ‘liberal art’ described by Peter Drucker. Enron doesn’t deserve to survive, but even more importantly nor do the principles it was based on. The answer is clear: just say no. |
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Inflation dips
New Delhi, February 3 The consumer price index for industrial workers fell by three points to 469 in December 2001 from the previous month. But the point-to-point inflation based on CPI-IW rose to 5.16 per cent in December, 2001.
PTI
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The article by Nitin Saxena on income tax matters
(January 28) gave wrong information about standard deduction on salary. For the financial year 2001-02 the standard deduction is as under: Income upto Rs 1.50 lakh 1/3rd of salary or maximum Rs 30,000 Income between Rs 1.50 lakh and 3 lakh Rs 25,000 Income exceeding Rs 3 lakh Rs 20,000 Income exceeding Rs 5 lakh Nil |
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Budget to provide direction Public sector stocks were the prominent gainers in a range bound market last week. The sensex gained 1.62 points during the week to close at 3333.92 on Friday. The current divestment initiative provided the necessary impetus for a surge in PSU stocks. A brief rise later in the week provided some solace to the IT shares following the US Federal Reserve hint that the US economy was stabilising. The major gainers during the week were IBP (up by 16.5 per cent). Container Corporation (up by 16 per cent)Bharat Petroleum Corporation (up by 12.5 per cent) and BHEL (up by 7.7 per cent). In the IT sector, Satyam Computers gained 2.5 per cent and HCL Tech 9 per cent. IBP The government on Thursday invited financial bids for the divestment of its 33.6 per cent stake in IBP, which according to market rumors has got a strong response from seven bidders, including two Reliance group giants, Reliance Industries and Reliance Petroleum, oil PSUs BPCL, HPCL and IOC, besides two foreign companies Kuwait Petroleum and Shell. IBP shares soared to a fresh all time high Rs 614.60 on the market talk that the seven bidders in the fray for the 33.6 per cent government’s stake were ready to take the stake at a substantial premium to the market price up to as high as Rs 1,200 per share. Reliance Petroleum Reliance Petroleum declared its third quarter results last week. The company posted a 1.47 per cent fall in its net profit to Rs 402 crore compared to Rs 408 crore in the corresponding period of last year. The net sales also declined by 10.72 per cent to Rs 8,231 crore. Though the results remained more or less in line with expectations, RPL’s stock gained 3 per cent in the week to Rs 28.75 on rumors that it is one of the strongest bidders for IBP and that Reliance group’s acquisition of IBP (the government’s 33.6 per cent stake) will prove very advantageous for RPL. Dr Reddy’s Labs & Ranbaxy Dr Reddy’s Laboratories and Ranbaxy Laboratories announced their third quarter and fourth quarter (ended December 2001) results, which were in line with the expectations. Though Dr Reddy lost 3 per cent during the week, Ranbaxy remained range bound. Dr Reddy posted a 406 per cent jump in net profit to Rs 161.53 crore from Rs 31.93 crore in the corresponding period last year. The net sales for the quarter rose 98.3 per cent to Rs 403.04 crore from Rs 203.26 crore in the corresponding quarter of 2000. With its focus on bringing biology with chemistry, DRL is suited based to emerge as a strong research-based company from a chemical process based company. Ranbaxy posted a 4.14 per cent rise in net profit to Rs 50.3 crore compared to Rs 48.3 crore in the corresponding period of the previous year. Sales rose by 19 per cent to Rs 569 crore from Rs 478.5 crore in the corresponding quarter of 2000. With an improvement in the performance of its subsidiaries and more abbreviated new drug applications getting approved Ranbaxy’s subsidiaries are expected to become the backbone of the company. Success in research and development will place the company in a far better position than its domestic competition to face post-General Agreement on Tariff and Trade era. Investors may buy these two stocks on declines for long-term gains. Coming fortnight Technically the market seems to have resumed the downward journey. A close below the 3226 level will confirm this. The fall, if confirmed, is likely to be of almost 400 points from the top of 3300. This means up to almost 2900. Ideally 2940 seems to be the target as it forms the 61.8 per cent retraction of the rally between October and December 2001. A lot, however, will depend on the fear and hope the market will place on the forthcoming Budget, which will provide a medium-term direction to the market. |
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Rebate on house loan Q: I raised housing loan of Rs 5,00,000 from my bank for the construction of the house on 24.06.98 thereafter I raised a loan of Rs 65,000 under NHB Scheme in 2000 for the completion of the ground floor. Now in October 2001 I have raised loan of Rs 2,50,000 being additional housing loan for the construction of first floor. I want to know how much rebate in income tax I will get on account of housing loan. Kindly reply me in detail and oblige. — R.K. Sharma, Panchkula Ans: The total tax deduction permissible to you in respect of interest on loan for residential house will be Rs 30,000 in respect of the loan taken prior to 1st April, 1999, together with this the interest paid by you or payable by you on the fresh loan for the house property will be allowed as a deduction. Thus, the total deduction in respect of interest on loan for residential house property will be limited to Rs 1,50,000 p.a. TDS Q: I am president of charitable trust want some clarification about tax deduction at source. We don’t have regular anesthetist on roll in our charitable hospital. Our doctors (Surgeons, Ortho-surgeons, Gynaecologists, Eye & ENT Surgeons) call anesthetist of their choice while operating patients in this charitable hospital and pay them fixed amount (Rs 600-800 per patient) directly after charging from patients or their relatives without any entry in our cashbooks and without any receipt from anesthetist to patients or their relatives. On an average 200-250 operations are performed every month. In this way approximately 1,50,000 are paid to anesthetists without any tax deduction at source. Please clarify whether we have any roll in case or not or any responsibility lies with us. — Ram Bilas Sharma,
Gurgaon Ans: The payment of Rs 1,50,000 paid by your charitable organisation to anesthetists without tax deduction at source is wrong. The anesthetists may not be an employee of the charitable trust but still income-tax will be required to be deducted at source. In respect of the payments made to him as per section 194 J of the Income-tax Act, 1961, the tax is to be deducted @ 5 per cent together with surcharge @ 2 per cent of income-tax as the total professional fee payable is in excess of Rs 20,000 p.a. |
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Learn to grab opportunities Ludhiana How did I start my career? After completing my graduation in 1969, I worked for some time as a marketing executive for some small units in Dhanbad and Bhopal. But my father, who was then working as an accountant with a firm here, suggested to set-up our own ancillary unit. So with his financial help of Rs 12,000 and a loan of Rs 85,000 from the Central Bank of India, I decided to set up a small electroplating unit in 1975, for doing job work for bicycle manufacturers at the focal point. I entered into a partnership with my friend, later turned relative, Mr Bikram Bambi, to cover the financial risk and to get the required technical know-how, as he had technical knowledge of electroplating. Initial phase I did not face any major problem as the bicycle market was growing at a tremendous rate at that time. The state government was also providing financial and technical assistance to the entrepreneurs to expand their units. I started making electroplated spare parts for the large units. Turning point My real break through came in 1980, when I helped the Atlas group solve an electroplating problem in their newly built-up plant at Sonepat, which could not be solved by the local engineers. As part of the award, we got a big order from the group to supply various cycle parts. That was the turning point in my career, and I never looked back afterwards. The banks started following us to provide loans due to our good track record and sustained progress path, but we waited for the right opportunity before diversifying in other areas. The success of Mr O.P. Munjhal in two-wheeler market also inspired me to try my hand in this area. On the basis of our track record and willingness to provide auto parts at the cheapest rate with best quality, I got an order from the Kinetic Autos in 1982-83, to supply spare parts for their Luna model and later by TVS mopeds. It gave us a big push in the market. Key to success Our decision to hire foreign and domestic consultants paid rich dividends. They helped us cut the costs and improve the quality. Our company is among those, who have started extracting nickel and chromium from the chemical wastes, which have resulted in financial gains besides environment protection. By 1995, I decided to explore export market as the Central Government was formulating policies to encourage exports. The Campbell International, an independent export oriented unit was set up, which is currently exporting auto parts worth Rs 8 crore. It helped us get a contract from the Bajaj Autos to supply various parts of the motorcycles, such as chassis, electroplated frames and other parts. Tips for young entrepreneurs Get good vocational education and practical experience before starting your own unit. Remember the jungle rule — Survival of fittest. In the era of tough competition, only the best would survive. As compared to independent manufacturing units, there is more scope for the ancillary units and in the service sector. (As told to Manoj Kumar-
TNS) |
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Form action group for safety issues There were three highly distressing reports in the newspapers last week - reports that once again highlighted our callous disregard for safety in products and services. The first report pertained to serious eye injuries caused to 13 school children while they were buying gas balloons in Bhubaneswar. According to initial reports, 11 out of the 13 children who received injuries may lose their vision. Soon after the Republic Day celebrations, the children went to buy balloons from a vendor standing nearby, when the gas cylinder meant to fill the balloons burst, causing severe thermo-chemical burns. According to the reports, cylinder had run out of gas and the vendor was trying to refill it when the accident occurred. Apparently there was a similar accident about three years ago at a school playground in Jajpur district in which one student had been killed and three others had received severe injuries. Obviously no lessons were learnt from that accident. The second disturbing report came from the Institute of Driver Training and Research, New Delhi, which re-evaluated 12,300 professional drivers and found 14 per cent failing in the test. In fact 85 per cent of the drivers could barely pass the re-evaluation tests and only 1 per cent was found to be satisfactory. And most of these drivers drove commercial and public transport vehicles. And according to the institute, if the test rules had been as stringent as international standards, not even 5 per cent of these drivers would have cleared the tests. No wonder our roads are so unsafe!. The report also highlighted the fact that 23 per cent of the drivers of privately owned buses and 28 per cent of the Delhi Transport Corporation had failed to pass the fitness test this year. And this percentage of failure was much higher than last year. And in the wake of this news came the accident involving a school bus in South Delhi. A 14-year old school boy died and 16 others, including six children, were injured when a school bus with 13 children on board collided head on with a DTC bus. Bad roads, poor lighting and careless driving can be a highly potent combination. And the accident only proved this point. Following the tragic death of 28 children in Delhi in 1997 when an overcrowded and speeding school bus had plunged into the Yamuna, the Supreme Court had issued detailed guidelines on the safety norms required for all school buses, including installation of speed governors to prevent their over-speeding. Obviously the guidelines are not being stringently enforced. The accident brought out another important factor — the state of the road on which the accident occurred. It was obvious that the road which had been dug up by the Jal Board and was under repair for more than a year was unsafe. Yet, no effort had been done to render the road safe and prevent accidents. I quote these reports to highlight the need for a three-pronged strategy for action on the part of consumers: First and foremost, consumers in every locality, every city and town should form small “action groups” that would look at issues of safety. Roads are built today and tomorrow they are full of potholes. And during monsoon and also under poor lighting, uneven road surfaces and potholes can cause serious accidents, particularly to those travelling on two wheelers and bicycles. There are also any number of cases where children have fallen into open manholes and died, while adults have received grievous injuries by falling into trenches dug up for laying cables or pipes and left uncovered by civic authorities. Unless residents associations and consumer groups focus attention on these issues and demand accountability from the administration, the service providers and the manufacturers , accidents such as these will continue to occur with regularity. The next step is to focus on school bus safety. Here, parents have to become far more assertive and force schools to pay more heed to safety. One way is for a parent to travel in the school bus every day and fill a report card on the performance of the driver, the conductor and the vehicle. On the basis of such monitoring every month, parents can review the quality of service, particularly with reference to safety standards and demand replacement of bad drivers wherever necessary and offer small incentives for good ones. In short, parents should keep up the pressure on drivers, transporters as well as school authorities to pay more attention to safety The third step is to demand independent consumer safety commissions at the national and the state levels to oversee safety in public places, public services and consumer products; a commission that will keep track of accidents, their causes and the remedial measures required and ensure that the necessary steps are taken to prevent their recurrence. It is only such continuous and persistent action that can ensure the safety of every consumer, every citizen in the country. |
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