Home

April 2018

Perspectives: The Month Through India’s Eyes

Media coverage in India In April, focused on a combination of economic and political affairs.  On-going difficulties being faced by the government as it looks to, privatize India’s state-owned airline, Air India, and allegations of complicity between the CEO of India’s second largest private sector bank, ICICI, and a large business group received extensive coverage.  On the political front, columnists also weighed in on a motion moved by a coalition of Opposition parties to impeach the Chief Justice of India.

The Government of India’s Challenges in Privatising Air India

Earlier this month, the Indian government launched a process to privatise Air India in an attempt to turnaround the financial and operational performance of the state-owned airline.  Shortly after the launch of this process, however, it was reported that a number of potential buyers had withdrawn their interest, citing some of the bid conditions laid out by the government.  Various media publications weighed in on this news, offering their views on the process so far, and what was required to successfully turn around the airline.

Live Mint, while criticising the government’s current privatisation process for Air India, argued that it would be cheaper to start a new airline than to buy and turnaround Air India. “Less than a fortnight into the government’s ambitious program to privatise Air India, two of the most promising suitors have already indicated they are going to pass… The decision by the two airlines is significant since it is a cue for other potential buyers… it is a serious portent of the business prospects for the privatisation plan… Without [Indigo], its chances of emerging from this exercise with hopes of a revival are very slim… National airline carriers, with rare honourable exceptions like Singapore Airlines, have been like an albatross around most countries’ necks.  Keep them running, like India has done for long or like Malaysia, Poland and Italy did, and it becomes a case of pouring good money after bad. Privatise them and the pain envelops the buyer as well. Check the red ink on the balance sheet of Etihad Airways after it bought into ailing Alitalia and Air Berlin. The history of national carriers being privatised is chequered at best with few examples of successful transition from state to public ownership… It is an option that is no longer available to the Indian government. But the alternative, finding a viable buyer for the rickety old national airline, may prove equally challenging… IndiGo’s example shows that it is far cheaper to start a new airline and grow it successfully than to take on an ailing dinosaur like Air India and nurse it back to health.”

A  contrary view was offered by the Financial Express.  A column in the newspaper made the case for the current privatization process, explaining that it could work if the successful bidder for the airline was a group with deep financial pockets. “If we study the prior experience of disinvestment of airlines the world over, we find an interesting pattern. Large airlines, taken over by strong contenders, have not only survived, but became consistently profitable over the years… On the other hand, airlines that were small and did not have a viable network failed even after privatisation or disinvestment… Therefore, if the precedent is any indication, there is a good possibility that with a large number of aircraft and a good network, Air India disinvestment could be a safe exercise if taken over by a financially strong group. Air India is a running organisation, with among the best technical people anywhere in the world, experienced pilots and a large domestic and international network. Air India suffered because of the legacy of bad decisions made by its owner—the government… Air India could not overcome such bad business decisions by the owner, and the owner paid the price by contributing crores of rupees of taxpayers’ money to sustain the carrier and keep it viable. Hopefully, the new owner would be smart enough not to repeat the same mistakes… The current government has two tasks at hand. One, to disinvest Air India to the best suitor. Two, to recover the ill-gotten wealth from the people involved in milking the airline. The first task is urgent. But the second one should not wait longer. This is the last chance for the Maharaja.”

Bloomberg Quint also advocated that the government continue with its proposed privatisation of Air India, but argued that certain changes were required in the manner in which the process is being run, and what is being asked of prospective buyers. “The headwinds on this deal are increasing on a near-daily basis. Many of the 18,000 employees have quite predictably begun protesting the privatisation. Reports say the airline’s 11 (yes 11) unions have begun to stir and are now even using social media to air their opposition… The government thus needs a Plan B. Which means looking at the organisation as a substantially downsized concern and not a going concern. That is the only way a serious suitor will return to the table… Equally, it needs a chief financial officer rather than a chief executive officer to take charge at this point. Because no amount of strategy or direction can save the airline from the quagmire it has sunk into… In another era, Aviation Minister Ghulam Nabi Azad read the riot act to striking Air India employees when unionism in the airline had hit one its many peaks. The current aviation minister needs to do the same. And explain that this is a no-go now. A more generous voluntary retirement scheme might be called for, but the airline needs to set a target of cutting manpower faster… It’s time Air India’s recalcitrant unions and staffers were educated of the national drain their organisation has become.”

Allegations of Complicity Between ICICI Bank’s CEO And the Videocon Group

Earlier this month, reports emerged over a possible conflict of interest involving the CEO of ICICI Bank, Chanda Kocchar, the Videocon Group, and NuPower Renwables, a company owned by Mrs. Kocchar’s husband.  While the allegations are unproven, and the Board of Directors of ICICI Bank has defended Mrs. Kocchar, the incident generated significant media coverage, with media houses weighing in on the quality of ICICI Bank’s internal investigations, and the broader operating environment in India’s banking sector that allowed for similar conflicts of interest taking place undetected.

An editorial in Live Mint criticized ICICI Bank’s Board of Directors, stating that its investigations into the matter lacked objectivity and depth. “Kochhar showed a lack of judgment in not recusing herself from the committee that cleared the loan [to Videocon] … In these circumstances, for the stewards of ICICI to hunker down and express “full faith and confidence” in the CEO, as they did… is remarkable. It also may be premature because, as Fitch Ratings says, there’s a “potential risk of financial penalties, as well as legal action,” if the government’s investigation comes up with findings against the bank. ICICI directors can’t possibly have enough information to determine whether Dhoot gave a quid pro quo to the CEO’s husband. Dhoot and Deepak Kochhar have denied any wrongdoing, but for the board to dismiss the possibility based on a simple review of the bank’s decision-making process may have been ill-advised… As the agents of shareholders—of a bank listed in both India and New York— [the board of ICICI] have a fiduciary responsibility.  Chairman Mahendra Kumar Sharma… should at least initiate a debate on the merits of retaining a CEO who has under performed peers by share-price returns since the start of her reign in May 2009.  The buildup of bad loans during her tenure is sufficient cause to try out a new leader… the ICICI board will find it increasingly tough to justify keeping [Kochhar] in the job. As for potential conflicts of interest, the time for the board to order an external inquiry was when the current allegations surfaced in a whistle-blower complaint in 2016. Now, with the Central Bureau of Investigation starting a preliminary probe, that chance is lost.”

An opinion in the Asian Age resonated a similar sentiment and further questioned the efficacy of the ICICI’s board in maintaining internal controls. …the role of independent and government nominees on the boards of companies needs to be probed thoroughly. How are they performing as directors, are they complicit with management, do they raise pertinent questions in board meetings? Who was the government nominee on the board of the ICICI when the credit committee, which included CEO Chanda Kochhar, approved the disbursal of the Rs. 3,250 crore loan to Videocon? Did he red-flag it? Cronyism is a way of life in India… Independent directors play an active role in various committees set up by company to ensure good governance. They are expected to be independent from the management and act as the trustees of shareholders. This implies that they are obligated to be fully aware of and question the conduct of organisations on relevant issues… Independent directors are nominated by the management and are thus at the mercy of the promoters. So, the independence of the directors is more a myth than a reality… The Kochhars have been under the lens since 2016 regarding the… loans and alleged quid pro quo in the form of foreign funding… in NuPower Renewables, the company owned by Chanda Kochhar’s husband Deepak Kochhar… These revelations [have] led to allegations of impropriety, nepotism, integrity and conflict of interest.”

Finally, Firstpost, a leading Indian news website took this opportunity to comment on the broader banking landscape in India and the lack of regulatory checks against such conflict of interest deals. “Indeed, there was no wrongdoing if one goes through The Banking Regulation Act, 1949. Section 20 thereof, while prohibiting loans to directors, maintains a studied and curious silence on loans to their relatives. In sharp contrast, Section 185 of The Companies Act, 2013, and its predecessor of 1956 vintage, comprehensively prohibit loans to directors and their charmed circle including relatives. But truth be told, the transaction was governed by The Banking Regulation Act and not by the Companies Act. In fact, Section 20 of the Banking Regulation Act explicitly overrides the Companies Act. And Section 20 indeed absolves Chanda Kocchar of any wrongdoing. This is curious.  It should have been the other way around if at all because banks are in the business of giving loans more than non-banking companies to which the Companies Act applies… Clinging to technicalities and loopholes in law is the hallmark of those who evade the law, including income tax evaders. But people had very high expectations of Chanda Kocchar, who, together with the other women of her time — Indira Nooyi of Pepsi and Shikha Sharma of Axis Bank — were hailed for daring to break the glass ceiling in a male-dominated world.  The ICICI loan row may be small in comparison to scams committed by Nirav Modi with regard to the Punjab National Bank (PNB) fraud and Vijay Mallya of Kingfisher infamy, but it has shocked the nation’s conscience more because it has pushed across an impression that an insider, a person at the helm, facilitated the loot, howsoever small in size. A case of the fence eating the crop.”

Opposition Parties’ Impeachment Motion Against the Chief Justice of India

Earlier this month, a coalition of India’s opposition political parties introduced a motion to impeach the country’s Chief Justice on the grounds of administrative and judicial irregularity.  While the motion was unsuccessful, the propriety of the motion and its broader implications on India’s judicial system were debated by various publications.

An column in Live Mint cautioned that the move could set a dangerous precedent and possibly erode the authority of India’s highest court. “The biggest problem with this entire chain of events is that now each judgement will be open to innuendo. Each verdict will be parsed for excavating the political bias of judges delivering them… While dismissing the petition, the court made scathing remarks against the petitioners’ “veiled attempt to launch a frontal attack on the independence of the judiciary and to dilute the credibility of judicial institutions”. Another problem with the move of the opposition parties is the kind of precedent it sets. Once each judgement is open to being interpreted politically, the political parties feeling out of favour may move a notice for the removal of the judges involved. Paradoxically, this will favour the ruling party. Since it can muster the numbers more easily in Parliament to remove judges, the latter might feel more obligated to keep the ruling party in good humour. The third problem is that the CJI’s removal does not solve any of the two systemic problems—the allocation of cases and appointment of judges. The two are related. If the allocation of cases to “junior” judges cannot be trusted, doesn’t it raise questions about the process of appointing judges in the first place? The allocation of cases is an administrative issue and should have been resolved internally by the court. The very fact that it has not been resolved internally has opened the door for outsiders to intervene… The move will most likely fail but it would have weakened public trust in a very important institution—the judiciary… The Congress should realize that once in opposition, the BJP too can play the game of discrediting institutions in order to undermine the ruling party. Indian democracy will be a lot better if it avoids that route.

Scroll, an Indian digital publication offered an opposing point of view, defending the impeachment motion, citing the need for greater accountability in India’s judiciary. “The impeachment motion moved against Chief Justice of India Dipak Misra on April 20, by Opposition political parties led by the Congress, is now being described as political. But proponents of this bogey fail to realise that the world over, powers to impeach members of the judiciary have been vested with Parliament, and the motives of a particular move cannot be divorced from politics… Whenever there is an unholy nexus between the higher judiciary and the ruling dispensation, any move to remove the black sheep will always be branded as political. Considering the several safeguards provided by the Constitution (as interpreted by the Supreme Court), these accusations do not stand to reason… Ultimately, it is evident that the provision to impeach a judge of the higher judiciary in India is not working, and one must revive the passage of the bill relating to judges’ accountability.”

Finally, Hindustan Times, while agreeing with the rationale for the impeachment motion, argued that the politicisation of the move could deal a lasting blow to judicial independence. “There is much about the Supreme Court that requires reform. Equally, there is much about the actions of the incumbent Chief Justice of India that may be disquieting. Particularly, the allegation by the four senior justices in their press conference in January about questionable bench selections by the CJI, his continuance on a bench to hear a matter relating to medical college admissions where his involvement, rightly or wrongly, had been insinuated, and his studied silence on these issues, are grave provocations that might impel a concerned Parliament to act to restore the dignity of the court. Such action might have taken many forms — a law to curb the powers of the court and the method of case allocation by the CJI, might have been an option. But when seven opposition parties unite to bring an impeachment motion against the CJI in the aftermath of the judgement dismissing the plea for a judicial probe into the death of judge Loya, who was presiding over a case in which the BJP party president was an accused, the conclusion is inescapable — the court is now a plaything of politicians for electoral gains… When the dust has settled, the actual charges against the CJI will pale into insignificance in comparison with the principle of judicial independence that was incontrovertibly compromised. Restoring the credibility of Parliament to assure the country that reform of the court is possible, without making it a pawn in a political minefield will be arduous, matched only by the measures needed to set right the missteps of the CJI that has brought the court to the brink. For both these ends, playing fast and loose with the Supreme Court for political gains must stop. One would have hoped that having lived through the Emergency, our politicians might have known.

 

©2018 Greater Pacific Capital