Bus do minute

The past few days have seen Nestle getting intense negative publicity across media on the presence of high levels of MSG and lead in the ubiquitous Maggi Noodles.

Quite a few state governments across the country have placed a temporary ban on Maggi noodles. Metro, Big Bazaar, Wal-Mart and others have pulled Maggi Noodles off their shelves. 

In the midst of all this the Kerala Food Safety Department has announced that Maggi packets contain lead within the permissible limits. I wonder what the upshot would be if other state governments also report similar test results. Would this issue die a quiet death or would it get politicized like most issues in India are wont to do?

Either way here is a perfect recipe for a corporate pot boiler.

However, surprisingly, it is not the ban on Maggi or the attendant health related issues that interest me currently. Serious as these issues are, I have been fascinated by only one aspect of this issue – Celebrity Endorsement.  

A district court in Muzzafarpur directed the police to file an FIR against Amitabh Bachchan, Madhuri Dixit and Preity Zinta for endorsing Maggi. The thought seems to be that celebrities ought to be more responsible about the brands they endorse. This is so probably because we, those who revere these celebrities, blindly buy products just because they are endorsed by one celebrity or the other.  

Honestly, if we Indians are buying some products only because of celebrity endorsement then we are a nation of absolute dimwits. If such is the situation, India has a much bigger problem than MSG in noodles.

Sure a celebrity endorsing a brand gets my attention and helps the company break through the clutter. An SRK sitting prettily in a bath tub attracts my attention. Ads by celebrities sometimes amuse me and at other times they bring about a sense of WTH. However, at no point do I make a beeline to the nearest store to buy the product that is being endorsed. I am fairly certain that this would be the case with most of us.  

Give this context I find it rather offensive when experts insinuate that we make choices of which packaged food product we eat because a celebrity endorsed it. Kids might be swayed by such advertisement but surely not adults. Surely as adults we know we should feed ourselves and our kids what is good for us while keeping in mind what we like to have.

If we do not know all this then we deserve this little crisis. I am sorry, but it is Buyer Beware  – every single time. Unless of course the company has falsified claims, in which case government agencies should come into play.

There is also this brouhaha in some quarters about the need for a celebrity to be socially responsible. What utter nonsense is that? As far as I am concerned there is only one parameter to judge them on – legality. Is the company that hired them allowed to manufacture, distribute, advertise and sell its products? If it is then there should be no issue with celebrities advertising that product. They are just professionals who are working for the company that has hired their services. That is about all.

With specific reference to Maggi, why are we not talking of social responsibilities of the other actors in the ads? The logic here seems to be more in the nature of, hey you are famous and you are endorsing a brand and therefore you ought to have a social conscience.

I think this is outright hypocrisy.

Do we expect professionals in any field to stop working for an organization if it has been found guilty of malpractices? No, we don’t. Then why hound the celebs?

I believe celebrity endorsers are merely professionals who have been contracted to do a particular job. They are not doing this to ‘save the world, they are merely doing these ads to earn money. There is absolutely no “social responsibility” angle to it and we must not try to pin this nonsense on the celebs. When one buys a product endorsed by film stars one should do one’s own damn due diligence and buy and use the product only if one is satisfied. Our experts should just leave it at that. 

Gone in 16 seconds

Aah! how the mighty have fallen. Rajat Gupta, the poster boy of the Indian media, the corporate world and also the rarified world of the Indian MBA has been charged with insider trading in the US.

The bare bones of the case are that Guptaji misused his position as a member of the Goldman Sachs and P&G Board of Directors. As a Director on the Boards of these two companies Guptaji was in the know of certain confidential information that was, obviously, not in the public domain at that moment. He was under obligation to maintain the confidentiality of the information provided to him and not give that information to others for securities trading.

The accusation is that Guptaji passed on the information that he received due to his position on these Boards to his dear friend and business partner Raj Rajaratnam who then proceeded to transact in these securities and profit from the same.

An incident quoted in the chargesheet filed by the District Court in New York is how Guptaji participated in a special meeting of the Goldman Sachs Board on 23rd September, 2008. This he attended via telephone. This meeting was called to approve the 5 billion dollar investment by Berkshire Hathway in Goldman Sachs. Given the financial state of affairs at that time, Lehmann Brothers had just filed for bankruptcy, this was indeed big news. The public announcement of this deal came after the 4 pm close of the NYSE on 23rd September.

Now for the juicy part of the charges, 16 seconds after Guptaji disconnected his call from the Board meeting (at about 3.54 pm) his assistant connected him to Raj bhaiyya. And Raj bhaiyya purchased about 3,50,000 shares at about 3.58 pm. Now if this is not a ‘DO IT NOW’ method of living ones life I do not know what is. I mean this explains why he achieved so much success. If I was in his position I would have thought seriously about calling my friend and would have continued thinking about it. No action. Which explains why he is where he is and I am where I am…. Er… um… actually as of now that is super news, but then I digress.

There are other accusations listed in the Indictment that has been filed. There is another one about Goldman Sachs and the loss that it reported for the first time in its history as a public company. Raj bhaiyya received this information from Guptaji within 23 seconds of the meeting having ended. Information that helped him stave off losses by selling the stock that it had.

There was another incident where Guptaji as a member of the Board of Directors got information about P&G’s less than impressive organic sales growth. He was in Switzerland at that time, probably participating in the Davos circus, but found time to call Raj Bhaiyya who immediately sold short approximately 1,80,000 shares.

Now these as I have said are accusations that have been leveled against Gupatji. They have yet to be proven. Guptaji has denied these charges and is out on bail.

Is he guilty? Or is he not? I do not know. And it is always prudent to presume a man innocent until proven guilty.

I really am not concerned about whether he is guilty or he is not. I am interested in seeing how the Indian media and the corporate sector react to this news. I missed out on what they had to say yesterday. What with Diwali and all the sweets that needed to be dealt with.

I am interested in understanding how we treat his fall from grace. We rejoiced in his elevation claiming that it showed that Indians are taking over the world or some such crap. How are we going to deal with these accusations?

Are we going to hyper-ventilate and go over the top and call this action a racist one by the American judiciary against one of our own? Or are we going to go hammer and tongs at him and hurl insults at him for letting us down so badly? After all, some sections did live vicariously off his success. Or better still are we just going to pretend that this did not happen and get on with life. I mean we do have so many other crooks to think about that we may not have time for this guy who, let’s face it, is accused of activities that resulted in gains of about 4 cr in one transaction and some unspecified millions in the other two. I mean, what is 4 cr in relation to 1.76 lakh cr. No competition.

So, this is what I am interested in – the reaction of all and sundry to this issue, rather than the issue itself. Watch this space.

Ps: I wonder if we are going to transfer all our adulation to Preet Bharara who is the United States attorney for the Southern District of New York and responsible for the mess Guptaji is in.

Addendum: This is what Guptaji had to say in his Graduation Day address to the students of the Indian School of Business (ISB) on April 8, 2006

".... The third lesson I learnt was an interesting one, which is not always obvious. You will work with lots of other people. Try to make them successful. Don’t try to make yourself successful necessarily. Obviously you should work hard, but in life you have to work through others. No matter how brilliant, no matter how good you are, you can through your own merits, only succeed so much. But if you make other people successful, help them do their best, they in turn, will help you succeed and with the power of everybody helping you succeed, you will succeed beyond your dreams....."..... Looks like he took his advice rather seriously. I mean he really did try to help Raj Bhaiyya. A lot. And I am sure these charges are beyond Guptaji's dreams too...

Welcome to the real world kids

I thought I would share with all of you a letter that I wrote to my favourite nephew, Mr. Sacked Jet Employee Who Has Now Been Rehired a.k.a. Sajet, and his friends.

Dear Sajet,

I know that this is as good a time to write to you as any and I thought why delay doing something that has to be done. After all, all of you have been re-hired after an emotion packed tear jerker played out on national TV.

However guys, while others have looked at this issue with a fair degree of concern I have only felt a degree of faint amusement. Amusement not at your plight for 48 hours but at the fact that you guys felt the good times would always roll.

Hey welcome to the real world kiddos. That is not how the world operates and contrary to what you think, it does not even owe you a livelihood. Forget a posh one.

In the recent past it was almost de rigueur for all you fresh graduates, MBAs, engineers to jump from one ship to another. Almost as if the companies were going out of fashion. You belong to a generation that has not seen any pain on the professional front. All you knew was that you were earning salaries at the start of your careers, that your parents might have been earning after 25/30 yrs of service. And you saw no point in exercising restraint. Either in conspicuous consumption or in splurging on credit. Or in any activity in the social sphere. It was almost as if it was your birth right. You have bought yourselves bikes, cars, holidays and houses in up-market areas. Good for you. But did you for a moment think about the commitment that you were making to the financial institutions you were borrowing from? For time frames ranging from 2 years to 25 years? Or did you think that these commitments were also like the relationships you guys are allegedly getting into – a month or so and then move in with someone else?

It was a nightmare for the HR departments to keep the attrition levels down. Why? Simply because if you were in any way irked by the service conditions in the organisation or if someone down the road gave you a 10% hike you would take that and to hell with the process and the team and the organisation that you were leaving behind. The gods were there for all you kids who felt that the world was created according to your dictates. All this is very well till it lasts but then the gods spat on you or at least are beginning to.

And what have you, the first lot done? Gone whining to the local political leadership and the media. Why is that? Did you go to the local leadership or did the Company go to such leaders when you kept jumping from one job to the other? You did that because you considered it your privilege. Boss now the shoe is on the other foot.

Now I don’t think you can jump so blithely from one job to the other. Primarily because I don’t think there is another job waiting for you. Not in the BPO sector, not for the engineering grads, not for the IIMs guys who until recently were under the impression that it was only losers who did their summers here in India. (ok this one might be a bit of an exaggeration from my side) Now you are screwed because you believed the myth that everyone of the idiot commentators on TV were feeding you. That is, this level of prosperity will continue for ever and ever, amen.

Well I have news for you. It will not. Wake up and smell the coffee.

And when you do get the shove as some of you will definitely get as this recession gets uglier, take it on the chin like grown ups and get your act together. You might have got back your jobs for now, based on god knows what behind-the-scene wheeling and dealing. But take it from me, your well-wisher, that good times do not roll for ever. See, you guys enjoyed yourself when the going was good. Now it is not. Toughen up and don’t go crying to the media and/or politicians. If you did not want this uncertainty then you should not have taken up this profession. You should have gone into …. maybe govt. jobs. Or the academia or some such stable profession where you would have got safety of tenure. No, you did not do that because you wanted to have the fun ride provided by the private sector.

Nothing wrong in that. Only thing is that if you wanted the upside of higher salaries, better perks, hotter chicks/dudes etc. then you should be ready for the downside too. As they say if you can’t take the heat get out of the kitchen.

Have fun beta. And don’t forget to update your resume. Just in case.

Yours lovingly,
Concerned Uncle

Yechury and the Tatas

I can understand the frustration of the Marxists with the loss of the Tata Nano project to Gujarat but surely even such acute disappointment does not warrant the asinine statement that Mr. Sitaram Yechury supposedly made on the telly yesterday.

For those who are not in the know Yechury said, “You cannot go into an area and say I will build my house only if everyone gives the assurance that it will not be burgled.”

Article continues after the message:

-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-www.indyeahinc.com is your one-stop info hub for all things related to Biz, Finance, Marketing, Management theory, Advertising and much more. Read, Comment, Submit your favourites articles or links to your own Blog. Come join the community at www.indyeahinc.com

-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-

Seriously Yechury garu, is that what the Tatas were saying? Or were they saying that we will build a house only if we are sure that there is no goon in the area attempting to intimidate us, only if we are sure our family members won’t get beaten up, only if we are sure that our house won’t be gheraoed, only if we are sure that all movement will be allowed from the main road to our house and a general environment of ‘these guys are not welcome in the neighbourhood’ changed?

Very clearly the Tatas were not saying what Yechury is suggesting and therefore to blame the Tatas by twisting the reasons does not behove a senior and respected politician like him.

Like I have written before, the entire issue of land acquisition needs to be looked at in greater depth but I definitely feel that it is the responsibility of the government concerned to manage the politics of it. And here the Marxists failed miserably. It cannot be anyone’s case that the company that has acquired land should be left to fend for itself in the event of any political agitation. And a political agitation that was launched against an action the West Bengal government was involved in. If the agitation was against some actions by the Tatas or if there was an agitation because of misgivings regarding the cost to the environment then very clearly it is the company itself that has to sort out that mess. But land acquisition – now that is entirely the state government’s responsibility.

Therefore, Yechury garu, I suggest you speak to Comrades Bhattacharya and Sen and check with them as to why they were not able to contain the agitation and not attack the Tatas pointlessly.

From Singur to Sanand & from a Bad M to a Good M

The Nano has found a new home – Gujarat. According to an announcement made earlier today the Tatas will set up the plant in an 1100 acre plot at Sanand, close to Ahmedabad. The planned capacity of the plant is 5 lakh cars a year, up from the Singur plant's proposed capacity of 3 lakh cars. Finally Tata can get going on his pet project.

I believe that the entire Nano saga raises a couple of issues.

The first one is very clearly that of land acquisition for industrial production. I believe that the entire process of acquiring land should be dealt with in a much more transparent and humane manner. I do not want to go into the specifics of the agitation at Singur but on a broader scale, when people are being asked to give up their land for industrialisation, the social and cultural costs need to be evaluated along with the economic costs. I suspect we are not doing that at the moment.
Article continues after the message:
-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-www.indyeahinc.com is your one-stop info hub for all things related to Biz, Finance, Marketing, Management theory, Advertising and much more. Read, Comment, Submit your favourites articles or links to your own Blog. Come join the community at www.indyeahinc.com
-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-
The second is whether Modi is now beginning to cast off the opprobrium of 2002. The Sangh Parivar and large sections of Gujarat always saw him as a dynamic and result oriented CM. But after this coup of his will the corporate sector and India at large also buy into the Modi story? Or as Tata put it, “the Good M” theory?

The issue with Modi was always his acceptability among people outside Gujarat. But with this very clear demonstration of seriousness of intent in working for the development of the state and the speed with which he made the government machinery move Modi, I suspect, will begin to acquire a halo even outside the state. The “From a Bad M to a Good M” comment of Ratan Tata could well be the tipping point as far as Modi’s career on the national stage is concerned. After all it does signal a high level of acceptability for the man from one of the most respected names in corporate India.

Are stock markets returns for real?

Authored by Sameer Nair

This is the story of two childhood friends Anju and Manju. Anju was a quant. wizard while Manju was the English literature/History kind of girl. Anju slogged her way to a premier engineering college and then realized that she was more interested in finance. She cracked the CAT and in two years she landed a job in a bank.

Meanwhile Manju had five years of pure fun at Xaviers before starting work at an Ad agency. They met at the school alumni meet in 2001. Manju thought it fit to ask Anju for some tips on investments. Manju had invested all 4 lakhs of her savings in a bank FD at 7 %. Anju was flabbergasted. She wanted to be of help to Manju. “You see given that inflation is at 4 % you are in effect only getting a Real rate of return of 3 %”.

Manju didn’t understand a word but felt too ashamed to ask the meaning of that statement. Anju went on to explain how she had invested a similar sum in the stock market. She expected it be the surest method to beat inflation. In a few years she expected to grow her investments enough to move from her tiny one-bedroom apartment to a larger flat in the same locality. Manju had a more modest goal of upgrading from her Maruti 800 to an Esteem in a few years. At six lakhs she felt it was beyond her.

Cut to 2006. One more reunion. Anju’s stocks had performed brilliantly. She earned a “CAGR” of 24% she told Manju. As usual Manju didn’t understand a word. “So you must have moved into that large flat right” Asked Manju.

“Alas, real estate rates have gone through the roof, that flat is still unaffordable” Anju Said.

Slowly Manju started understanding what “real” returns meant. Car prices had crashed. An affordable bank loan coupled with Bank FD had allowed her buy a Honda City. In real terms she had performed better than Anju who could yet not buy her dream house.

Anju went home feeling jealous. Everything had gone well for her. Seemingly. Yet Manju the financial dud had done much better for herself. Over the next few days she thought of only this and nothing else. To the point where it got unbearable. She decided that she had to go back and speak to her B-School Prof. to figure out what went wrong.

Anju called up Professor Tsunami-nathan to find out more about the “Real Returns” conundrum.

Professor Tsunami-nathan intoned, “While inflation of consumer items like foodgrains, clothes and other items of everyday use has been moderate, capital assets like real estate equity and gold have risen in value substantially.”

“Under such circumstances, is it not silly to hold on to the Real Returns = Nominal Rates minus Consumer price Inflation formula? Especially when consumer price inflation rate does not reflect the huge increase in capital asset price.” asked Anju.

“Its as silly as the statistician who drowned in a river whose average depth was only 4 feet. He believed that being 6 feet tall, he would have no problem crossing the river, till he reached the point where the river was actually 12 feet deep” replied tsunami, with a grin that did not hide his contempt for Anju

“The inflation rate is merely an average. The average, as you are aware can conceal huge variances in the rise in prices of individual components” Tsunami went on.

He never had patience for the student who applied formulae without understanding the underlying assumptions. As corollary, he did not really enjoy discussions with his students, supposedly the intellectual cream of India

“To believe that booming stock markets have made investors as wealthy as these pink papers make us believe is absurd. A person’s wealth increases when he can buy more with what his investments generate for him. In fact the next time the stock market falls by 20%, you may actually become wealthier,” he said.

And Anju being the quick learner was quite clear. “If that flat that I want falls in value by 50% and my stock investments only by 20%, I may in fact be able to buy it.”

She went home and prayed that her dream house becomes affordable. Unlike earlier, when she prayed that her stock investments rise in value. She did not care for the nominal value of her shares any more, she was only interested in what they helped her purchase.

Investment Advice or Gobbledygook

Over the years the one point that I have heard finance ministers across party lines make is “Investing in equity markets is a risky proposition. Investors who do not have the requisite expertise are advised to leave it to the experts. If you want to participate in the India growth story you would be much better off using mutual funds to do so….”

Fair enough. Coming from ministers with such impeccable educational backgrounds I thought it sensible to take their advice. I promptly signed up for this newsletter that sent me research reports on the prospects of different companies.

I must say the reports were very impressive. Industry analysis. Comparative analysis of various players in the industry. Ratio analysis. The reports had it all. And what’s more, they also gave me a clear idea as to what I should do in the form of a “Buy” or “Sell” advice.

I few weeks later I was completely confused. At the end of a rather comprehensive analysis of a software company “A” they put a “Hold” advice on the stock. I read further to figure out what this exactly meant

“By this recommendation of HOLD, what we mean is that existing shareholders would be better off holding onto the stock with a long-term perspective. However, if an investor would like to BUY this stock, then the upside from the current levels is about 14% CAGR. Investors could take the investment decision based on this premise.”
“Hang On”, I tell myself. “What are they really saying?”

Are they telling me that my decision to own the stock tomorrow depends on whether I own it today or not. That was definitely contrary to what my B-School management accounting professor told me. Remember, sunk costs and all that.

In essence what they were telling me is that if I already own company “A”, I should be happy with an annualised return of 14 %. However if I don’t own it, I can buy into a company “B”, (which they recommended last week) and expect an annualised return of 25%!!!

And this is in a tax regime where the costs of shifting from Stock A to Stock B are negligible for a long- term investor.

I decide to research this further. I search through their archives and come across a report on Company “A” published more than a year back. I notice that they had recommended a buy on the company in that report.

An interesting consequence of all this is that an investor owns a stock because they suggested that he buys it, and now that he owns it they suggest he continues holding it. Despite the fact that in their opinion he would make higher returns going forward if he instead owns stock B.!!! A person who subscribed to the newsletter last week would outperform a subscriber who took their advice on company A last year.

And all this is when they are RIGHT with the predictions on stock performance. God save us in the rare event that they go wrong.

Authored by Sameer Nair

The Mutual Fund merry go round

Which MF scheme should you invest in?

a) A Fund launched five years ago at Rs. 10 that has a NAV of Rs. 50 or
b) A New offering from the same fund at an entry price of Rs.10

To make your decision more “informed” assume that the new scheme will have the same investment pattern as the existing one, albeit packaged under a new name keeping with the latest flavour of the stock market.

In fact a “rational” investor should be totally indifferent between the two. The current NAV of the scheme is totally irrelevant!! If two funds have the same investment portfolio their performance will be no different.

Going by the enthusiastic responses to New Fund Offers (NFO) of various funds it seems that a large number of people believe otherwise. In fact a quick glance of the portfolios of some well known funds will tell you that they have multiple funds launched at different times, that have largely invested in the same set of companies.

Many mutual fund analysts have noted that despite the large funds garnered by New Fund Offerings the total amount invested in mutual funds has not increased significantly.

Clearly a number of investors are actually selling their investments in the fund quoting at a Rs 50 NAV to invest in the new fund offering at Rs. 10 because they believe the new fund is cheaper and therefore has more upside potential!!!

Who benefits?

The fund - because it is allowed to recover the marketing expenses from a new offering to the extent of 6% of the initial moneys garnered. To make matters worse this money is recovered over a five- year period effectively benefiting those who exit early and penalize those who stay with the fund.

Mutual Fund Distributors (in many cases banks) who make huge commissions by selling mutual funds.

The savvy large investor who “shares” the commission with his Agent

Who loses?

The poor retail “long term” investor who has not only incurred transaction costs for nothing, but has also effectively subsidized the Mutual Fund’s marketing expenses.

To put it bluntly this is nothing but a scam. Exploiting human irrationality and lack of appreciation of basic financial concepts amongst the masses to enrich themselves cannot be called anything else.

Authored by Sameer Nair

India V/s China: The Google Test

Over the past few years there has been a lot of discussion on the India v/s China story. I was following the same on and off in my own desultory fashion and trying to figure out which country was more economically important to MNCs. No particular reason, just idle thoughts of an idle mind. Unfortunately I found it rather confusing.

Why? Well, look at the usual suspects discussed, FDI and Infrastructure.

Some claim that the FDI figures that China releases is highly puffed up and that India on the other hand under reports its FDI as it does not take into account the reinvestment of capital and overseas corporate borrowings as is the normal practice. Therefore the FDI gap is much closer than one feels. Then again there are those who compare India's FDI inflows very unfavourably with the Chinese FDI based on actual numbers.

The state of infrastructure in both the countries obviously has to crop up. And people always always start with the airports. The squalor of Mumbai pitted against the spanking new Pudong airport at Shanghai. While China is indeed far ahead in terms of physical infrastructure, of late MNCs have begun to talk in glowing terms of India's "soft" infrastructure i.e. a free press, an independent judiciary and our democratic institutions - such as they are!!!

So as I said in the beginning it has been a slightly confusing time for me. Which do MNCs prefer? India or China?

Now I know.

China China China and China once again.

Why so?

Well look at the reaction of dear old Google – the world leader in search and a very important player in the Internet arena – to the "requests" of Chinese authorities to censor their search results. It has voluntarily decided to censor search results on topics such as " Independence for Taiwan" and the "Tiananmen Square massacre" among other things.

And as justification for this despicable conduct Google has come out with a totally self serving crap which read as, "While removing search results is inconsistent with Google's mission, providing no information... is more inconsistent with our mission." Ooo la la.

Now look at the reaction of Google to concerns of the Indian Government over Google Maps, "Google takes governmental concerns about Google Earth and Google Maps very seriously. Google welcomes dialogue with governments, and we will be happy to talk to Indian authorities about any concerns they may have."

That is it. Nothing beyond this bromide dished out by the company spokesperson. I wonder if they would have been so blase if it was the Chinese Government that wanted some change.

This difference in reaction says it all does it not?

China wins hands down.

(Ir)Rationality and Corporate Madness

The only course that I managed to get an A grade in my illustrious career at B-School was Cost and Management accounting.

And here I am in the danger of losing my annual performance incentive. My sin? I have been vehemently arguing in favour of putting into practice something I learnt in Cost and Management accounting.

Serves me right for deviating from my general philosophy of not taking academics too seriously. I sometimes wonder if performance at work and grades at an MBA are negatively correlated. But more of that later.

In my years spent in the corporate world (and in life in general) one of the concepts I have found most appealing and yet the one concept that I find most difficult to put into practice is the notion of sunk costs.

Very broadly, while evaluating the pros and cons or more mathematically the costs and benefits of a decision I should only consider future costs and benefits. Costs that have already been incurred and benefits already reaped should not enter the equation at all. It will unnecessarily cloud my decisions.

Intuitively the most rational of us make this mistake. I make this mistake often, but am puzzled that on a few occasions that I don’t; my bosses in fact mock me.

Some common examples are

1) Let’s say there are two stocks that I own,
a) I own 1 Share in Company A, Purchase price = 50, Current Market Price = 75
b) I Own 1 share in Company B, Purchase price = 100,Current Market Price = 75

If I need 75 urgently and I want to sell only one of these then which one should I sell?

Similarly

1) Total Revenues from Project A = $ 10 Million, Costs = $ 8 Million, Should I fight a battle with my customer to make an additional 1 million in revenues in the process incurring a cost of 3/4 a million?
2) Total Revenues from the same Project A = $ 8 million, costs = $ 10 million, should I fight a battle to make an additional 1 million in revenues incurring a cost of 3/4 a million?


The key to making the correct decision, I was told by my professor back in B-School, is to ensure that we only take into account future costs and benefits. One million in additional revenue vs. three fourth of a million in costs.

Put simply our decision to go ahead and contest the case or not should not be clouded by the costs already incurred.

I can bet my bottom dollar that all the bosses in the 10 companies I worked for will be more inclined to say “No” in case 1 and “Yes” in case 2

They would have certainly flunked Cost and Management accounting. But does it really matter? They decide my annual performance incentive, rationality be damned.

Authored by Sameer Nair

Don’t Tax my Salary, Mr. FM

Its that time of the year again!!! A whole host of industry associations, tax-experts, finance managers and their aunts have crawled out of the woodwork once again with their wish lists for the finance minister.

Cut excise duties on cars – It would be a great employment generator.
Cut Tax Rates, Tax Collections will rise? Laffer, the famous economist dude said so.
Do not raise taxes on essential commodities; we are already overburdened with an increase in Oil prices.
Blah blah blaaah and some more blah.

I am a simple man with a very simple wish.

Out with taxes on Salary.

Do I hear “Yeah right, might as well ask Aishwarya Rai out”?

Well I think it is not as crazy an idea as it sounds at first. This could actually be a Win-Win situation. Unlike my date with Aishwarya, I might add. :-)

What if we replace Income tax on salaries with a “Salary Distribution Tax”?

The way it would work would be by shifting the burden of paying the tax entirely on to the Employer in the form of a tax on the wage payout. Say a 10% Tax on the total wage bill of the employer.

The idea is to make the whole process simpler for the employee while ensuring the exchequer does not lose out.

For the employee the immediate benefit is WYSIYG. His take home salary converges to the salary mentioned in the employment letter. (Of course the salary mentioned in the employment letter would now be more realistic, read a bit less than before.) No need to run to the CA to file tax returns. No medical bills to be “arranged” for, no rent receipts to be forged, no Form 16s to be obtained. The tax authorities do not have to deal with the mountains of returns that they do every year.

Moreover the employee feels deliriously happy under the mistaken belief that there is no tax to be paid at all.

Can the tax authorities do it? Sure they can. After all they have done the same with dividends, when all that the government did was to shift the burden on to the company in the form of a dividend distribution tax. The result of this distribution tax was lower dividend for the shareholders (to the extent of the tax). But who looks so deep?

With this one stroke of the bureaucratic pen the then BJP government convinced a large number of retail investors that dividends distributed by companies are tax-free. Retail investors “felt good” that they no longer had to pay a tax on dividends.

Why not make the salaried employees “feel good” in the same manner, this budget?

Authored by Sameer Nair

The Sodexho Story

I am motivated to write this piece in response to a comment on the post “Lunch Coupons, Warren Buffett & the Pot of Gold”. The gist of the comment was Lunch Coupons are merely a tax saving device so how does it matter if I “lend” some money to Sodexho at 0%.

Sure. But why not allow the same money as a tax-free allowance.

A company wants to provide food to its employees and instead of getting into the messy business of having a full-fledged cafeteria simply pays the employee an allowance.
-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-
www.indyeahinc.com is your one-stop info hub for all things related to Biz, Finance, Marketing, Management theory, Advertising and much more. Read, Comment, Submit your favourites articles or links to your own Blog. Come join the community at www.indyeahinc.com
-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-
In comes the taxman to complicate matters. He insists that the company should ensure that the money is indeed spent on food. What does the company do? It approaches Sodexho to buy vouchers that can be redeemed only against food. It is a completely different matter that my resourceful kiranawala has put up a poster saying that he will accept Sodexho Lunch Coupons for non-food items as well, but will charge 3% extra for that privilege!!!!!

My point is that these food vouchers have no raison d'être.

The government allows Rs. 800 a month as conveyance allowance without asking the company to issue travel vouchers. Then why make the distinction for food?

As long as the person spends Rs.1500 on food sometime during the course of the month it does not matter what he uses to pay in any specific transaction. So long as the tax authorities are certain that a person spends Rs.1500 a month on food items why have these silly passes.

By insisting on Food Vouchers the govt. has inadvertently allowed a multinational to issue “Currency”. Also any company accepting deposits from the public at large is regulated by the RBI. Wonder if Sodexho’s books are open to such scrutiny.

Authored by Sameer Nair

Lunch Coupons, Warren Buffett & the Pot of Gold

All of us working in the so called “New Economy Companies” are quite familiar with Lunch Coupons that companies like Sodexho issue. Our employers’ issue these coupons as part of our “CTC” (that interesting invention of HR which makes us believe, erroneously, that we are earning more than what our parents did) and we go home without a second thought about them.

But have we ever wondered how all this works for Sodexho and others of its ilk?

Let’s make the extreme assumption that all the money that we receive in the form of vouchers is spent within 3 days of our receiving it from the employers. One can easily assume that the employers themselves had kept in their custody for three days at the very least. The retailer in turn presents it to Sodexho a day after the receipt for redemption. The money has thus earned zero interest for 1 week.
Typically Sodexho issues coupons against funds received while they pay the retailers only thirty days after receiving the coupons. Effectively Sodexho has paid 0% Interest for one month. And Next Month the cycle starts again!!

Essentially at all times Sodexho has one month’s equivalent of lunch reimbursement on which it pays no interest. Out of an estimated 1 million employees in the IT and ITES space if we assume that 10% are issued coupons worth Rs. 2000 a month then at the very minimum the industry is lending Sodexho Rs. 20 cr. at 0%. Not a bad deal at all. What say?

-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-
www.indyeahinc.com is your one-stop info hub for all things related to Biz, Finance, Marketing, Management theory, Advertising and much more. Read, Comment, Submit your favourites articles or links to your own Blog. Come join the community at www.indyeahinc.com
-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-x-

And the moment we change our assumption from “immediate use” to an average of “15 days to use” the effective money lent changes to Rs. 30 cr. at 0%.

An elementary knowledge of finance tells us that if one borrows at say 6% and lends at 8% one makes money. If we borrow relatively large amount of money at 6% and lend it at 8% we make large amounts of money.

Simple enough is it not? Banks across the world work on this basic principle.

The flip side is if for some reason we borrow at 6 % and are able to eventually lend only at say 5% we end up losing a lot of money. Financial experts call this the Power of Leverage. Leverage magnifies both profits and losses many times over.

Here we have a Sodexho that “borrows” money from us at 0% and we do not even think of how the process is benefiting them. If I were to ask you guys to lend me money at 0% interest you would think I am completely crazy. Why would any individual in his senses want to park money with me for no returns? But for a Sodexho you are game, aren’t you?

One rule of making pots of money that Financial Experts on channels like CNBC forget to tell us is that one must try to borrow money for as long as possible preferably at 0% interest. And after a few years one is likely to be stinking rich.

Much like a famous gentleman who goes by the sobriquet, “The Oracle of Omaha”.

Warren Buffett at the beginning of his career controlled a company called Blue Chip Stamps that had an estimated 100 million dollars of money on account of vouchers issued. Some of the companies that he acquired in the early years were through these moneys.

While it is always difficult to estimate, surely a lot of the spectacular returns that he made were because of the zero cost funds he had at his disposal.

Most of us know that he is considered to be amongst the greatest investors around. No one would argue that he was not.

However very few would know that he was also amongst the best in identifying and using low cost capital, a point that is equally important but is seldom discussed with the seriousness that it deserves.

Maybe this is so because if aam junta like us sees that all that he achieved was possible only because he was shrewd enough to see and acquire a cheap source of funds he will look less like an Oracle that he is proclaimed to be. Probably this is why “Magicians never tell”.

A glance at the operations of the Oracle and Sodexho shows remarkable similarities and is obviously the road to riches. Now if only I could get onto this gravy train.

Authored by Sameer Nair

IIM Bangalore and its Memorandum of Association

Quite a few newspapers and Television channels reported, in angry voices, that the autonomy of IIMs’ was under siege again. How can MM Joshi oops Arjun Singh not allow it to set up a campus abroad? Former Singapore PM Goh Chok Tong jumped into this debate and said it was "India’s loss". Mr N.R. Narayana Murthy, ever ready with a quote, spewed venom at the government decision while receiving an honorary degree in Kochi. Tsk tsk. The poor IIMs, held hostage by a madcap government.

But hey! Just a second. It turns out that the Memorandum of Association of IIM Bangalore does not allow it to establish a brick and mortar campus overseas. Oooh! I wonder why nobody is talking much about this humungous slip-up by IIM Bangalore. Surely something as elementary as this should have been taken care of even before thinking of venturing abroad. And if this is the same thoroughness with which IIM B will do things then may be they should not be allowed overseas after all. ;-) Juuusst kidding guys. But seriously, if someone working in a corporate entity goofed up like this he/she would have definitely got a black eye.

I guess in all this it helped that the reason given was so asinine. The IIMs are expected to handle all demand in India before venturing out. Sure! So it does it mean that all aspirants should get a seat?

Let’s wait and watch how things develop on this front. Should be interesting viewing.