Lending rate cut season begins
BS REPORTER
Mumbai, 18 September
A day after the Reserve Bank of India (RBI) reduced the cash reserve
ratio by 25 basis points, State Bank of India (SBI), the country's
largest lender, cut its minimum lending rate, or base rate, by the
same margin to 9.75 per cent. The new rate, effective September 20,
will benefit all its customers whose loans are linked to the base
rate.
"The bank will take a hit of about ~1,200 crore (annualised) from the
base rate cut," said Chaudhuri. However, it would not impact margins
as the move was expected to boost loan growth and result in higher
interest income, he added. The chairman said the bank would not cut
deposit rates for the time being.
Other lenders are expected to follow suit shortly. K R Kamath,
chairman and managing director of Punjab National Bank, said the
lender would look at how the cost of funds was panning out. "Following
the reduction in CRR, there is a downward bias in the interest rate
scenario," said Kamath. PNB is not in favour of cutting deposit rates
immediately. Bank of Baroda Chairman and Managing Director M D Mallya
said it would review rates in a week.
United Bank of India Chairman Bhaskar Sen said, "Deposit accretion has
been quite robust while credit is yet to pick up." He added the banks
assetliability committee would meet in a couple of days to review the
base rate.
Andhra Bank might review its base rate within a fortnight, said
Executive Director K K Misra. Corporation Bank Chairman and Managing
Director Ajai Kumar said, "We will factor in the cost of funds and our
asset-liability committee will meet in the next few days." This is the
first reduction in SBI's base rate since the system was introduced in
July 2010. Since August 2012, SBI has been cutting the spreads over
the base rate, thereby offering lower rates to new customers in select
segments. SBI has already cut its deposit rates by 50-100 basis points
in early September.
Chairman Pratip Chaudhuri said the bank passed on the benefit of the
CRR cut to its customers. The CRR reduction will release ~2,500 crore
for SBI. Chaudhuri had said the amount could be deployed to generate
~200 crore of interest income, assuming an eight per cent rate of
return.
However, the reduction will not be applicable to borrowers whose loans
are linked to the Benchmark Prime Lending Rate (BPLR). Chaudhuri said
the bank was yet to take a call on BPLR, which was 14.75 per cent.
SBI cuts base rate by 25 bps, others to follow BASE RATES
Where each bankstands
Bank Base rate (%)
State BankIndia 9.75
ICICI Bank 9.75
Punjab National Bank 10.50
HDFCBank 9.80
BankofBaroda 10.50
Axis Bank 10.00
Union BankofIndia 10.50
Canara Bank 10.50
Source: Banks
DEBATE
Should Sebi regulate executive pay?
It is tempting for the government and regulators to try to curb
executive pay; it is surely politically attractive to do so in these
days of austerity. The idea of curbing runaway compensation is not
new. In fact, our current law has extensive regulations relating to
pay, such as deliberations by an independent committee of the board,
authorisation by shareholders, various disclosures, maximum percentage
caps on commissions for profit-making companies and absolute caps for
loss-making ones, government approvals for various acts, minimum
period of vesting for employee stock option, to name a few.
No further control on executive pay is warranted for four reasons.
First, Indian firms are not orphaned by their owners. In other words,
there is typically a large dominant shareholder known as a promoter
who controls the company. Now, this promoter has a financial incentive
to keep costs low, and, thus, pay as little as he can to a
professional CEO, as little as would get him a high quality CEO.
Compare that to the western CEO, who has no one over his head to
supervise remuneration. In fact, most western countries do not even
require a binding shareholder vote on pay. The agency problem becomes
clear as the CEO usually picks his own directors and, thus, members of
the remuneration committee, which is a child of the board. Given that
for a vast bulk of Indian companies this agency problem does not
arise, means we are solving a problem that doesn't yet exist in the
country. Most top promoters give themselves well below 0.5 per cent of
net profits as salaries, compared to the law that permits them to take
away as much as five per cent of profits.
Second, Indian companies including financial companies are not
massively leveraged like their western peers. No wonder, the various
crises have not required any governmental bailouts of financial
institutions. Thus, the western argument that financial institutions
through their CEO take large bets, which, till the bet pays off,
results in huge profits for themselves and their top management. When
those bets fail, the government must bail out the firm, that is,
privatising profits and socialising losses. Given this problem,
several western countries have mandated claw-back provisions that take
away compensation if there are future losses in a company. Given
Indian regulations limits on leveraging, this is not a problem and,
again, solving it is, therefore, pointless micro-management.
Third, Indian top honchos' pay packages are nowhere near as outsized
as the western ones. The top US CEO makes over `7,000 crore in a
single year (source: Forbes). The top Indian CEO, and there are very
few in that bracket (only three), takes home `70 crore by contrast
(source: SiliconIndia).
Fourth, it is unlikely that the promoter would extract a huge salary
as his gains mainly would come from capital appreciation and dividend
payouts. Besides, a lower tax incidence on capital appreciation (often
zero) and dividends (typically 15 per cent payable by the company and
tax free in the hands of the shareholder) would ensure that the
promoter does not award himself alarge salary. In addition, the
benefit of a disproportionately outsized salary is likely to depress
share prices in the secondary markets so the promoter loses far more
in terms of capital appreciation than he gains in terms of a larger
salary cheque.
High executive compensation in a market is an outcome caused by
limited supply and high and rising demand for top talent. Attractive
as it may sound, the government and regulators should restrain an urge
to cap executive pay either in all companies or specifically in
financial companies. Problems that exist in the West do not exist in
India and are unlikely to find a place in India so long as the
promoter-shareholder continues to oversee professional CEO and top
managers. Increasingly aggressive shareholder scrutiny, especially
from institutional investors and proxy advisory firms, has created
substantial pressure on executive pay practices. The law should only
take action in cases in which a promoter or CEO is seeking to loot the
company with strict enforcement action rather than impose absolute
restraints on pay packages by way of pointless micro-management.
The writer is also visiting faculty at IIM-A
Micro-management of this sort is pointless in the Indian context but
present forms of pay approvals are ineffective Afresh debate has been
sparked following a statement by the Securities and Exchange Board of
India (Sebi) on the need to take a relook at the executive pay. Sebi
has not suggested any cap or formula but has only proposed that such
compensation should be entrusted to the "remuneration committee". This
is in contrast to the present practice in which remuneration in most
companies is decided by promoters.
In recent times, though shareholders have lost a lot of money, there
has not been a corresponding reduction in executive remuneration. Top
executives often get an increase in pay regardless of the company's
poor performance, when shareholders would have been happy to see a
cut. At such times, the league tables of CEO salaries appear
incongruous. Moreover, flaunting big mansions, villas, yachts,
aircraft et al does not go down well with minority shareholders.
For a proper debate, however, we need to first differentiate between a
promoter-CEO and an outsider-CEO.
Promoter-CEOs constitute the majority since most Indian firms are
owned and run by families like personal fiefdoms. The present forms of
pay approvals are ineffective. While general meetings are a farce,
board approval is a mere formality since most independent directors
play ball with promoters. There are now innumerable cases of
promoter-CEOs drawing tens of crores in pay. This is aclear enrichment
of self at the expense of minority shareholders. There is merit in the
argument that their pay be moderated. Promoter-CEOs, in any case, have
other sources of remuneration — such as large dividends and greater
valuation of their shareholding.
Given our levels of governance, however, any kind of cap would not
work since promoterCEOs would easily find other ways to enrich
themselves. How can a regulator verify if purchases of equipment or
raw materials have been not over-invoiced? Or that sales have not been
underinvoiced? Or that money has not been siphoned out through
subsidiaries, especially foreign subsidiaries? How do you stop sons,
daughters, wives and sisters from being paid huge sums? Or ensure that
almost all personal expenses (weddings, travel, shopping, even
household) are not charged to the company? On the other hand, limiting
the maximum compensation for non-promoter top management would mean
too much government interference, which is uncalled for in the growing
competitive environment.
As far as outsider-CEOs are concerned, it is true that for companies
of certain sizes and in certain sectors, talent is scarce and high pay
may be imperative. The safeguard here is that outlandish pay is
unlikely to be the norm since it would not enrich the promoter.
Hence, there is a case for executive remuneration to be closely linked
to long-term business performance and sustainability, not short-term
goals. Interestingly, there is already an increasing demand that
salaries should be divorced from revenues, a relationship that often
leads to malpractices for shortterm bumper gains.
Sebi has suggested that remuneration committees should be headed by
independent directors. This will work, provided we are able to get
truly independent directors and, more importantly, there is a
requirement for these directors to submit a report to shareholders
providing detailed rationale for executive compensation.
The most recent King Code on Corporate Governance deals with
remuneration policies and recommends, among other things, that a
company's remuneration policy should be tabled to shareholders for a
non-binding advisory vote at the annual meeting. In the UK, there is
pending legislation to give shareholders a binding annual vote on
companies' remuneration policies.
The ministry of corporate affairs is also considering the UK
prescription, which makes it mandatory for companies to disclose
whether the top management was able to meet its targets. Companies
also need to publish a comparison between company performance and
chief executive pay and data showing the difference between executive
pay and staff pay. The UK policy is based on the US Dodd-Frank Act.
The time has also come for proxy advisory services to play a more
active role in the form of more research, media stories and
recommendations to institutional investors to vote against unfair
proposals.
At the end of the day, a better-equipped remuneration committee, more
disclosures to shareholders and pressure by shareholder activists can
rein in this growing ill.
SANDEEP PAREKH
Founder of Finsec Law Advisors
"It is unlikelythat the promoterwould extract a huge salaryas his
gains mainlywould come from capital appreciation and dividend payouts.
Besides, alowertaxincidence on capital appreciation and dividends are
deterrents"
PRITHVI HALDEA
Chairman & Managing Director Prime Database
"While general meetings are afarce, board approval is a mere
formalitysince most independent directors play ball with promoters.
There are nowinnumerable cases of promoter-CEOs drawing tens of crores
in pay"
< >
Govt to keep reform pot boiling amid political heat
BS REPORTER
New Delhi, 18 September
The reform measures announced by the government in recent days may be
just the beginning. The government has lined up several big-bang moves
to push critical policy measures and fast-track project clearances to
perk investment.
Steps on which the finance ministry has already started work include
new banking licences, dissolution of SUUTI (Specialised Undertaking of
UTI), expeditious clearance of 90 projects with an investment of ~2
lakh crore and advancement of the bank capitalisation plan. This
financial year's Budget allocation for bank capitalisation is ~14,588
crore.
Senior ministry officials, including economic affairs secretary Arvind
Mayaram and financial services secretary D K Mittal, are holding
extensive consultations with various stakeholders to expedite major
policy decisions. The idea is to convince investors about India's
long-term prospects, according to officials in the know.
The ministry has firmed up plans to exceed the disinvestment target of
~30,000 crore fixed for 2012-13 and decided to ensure enforcement of
the mandatory public shareholding norms on both public and private
sector companies. The Securities and Exchange Board of India (Sebi)
has been pressing for the meeting of next year's deadline set for
companies to meet the aforesaid norms. But, with the finance ministry
coming on board, the companies waiting for an extension will have to
move fast.
In the case of SUUTI, the Cabinet has already approved a proposal to
wind it down and shift its assets to a new asset management company.
The ministry is exploring if the company can be used to hold
government stakes in state-run entities. The department of
disinvestment has initiated the process for stake sales through the
offer-for-sale route in MMTC, NMDC, Nalco and NLC and is considering
divestment in these companies in tranches, rather than in one go, to
ensure good valuations.
Boosting investor sentiment is one of the government's objectives
right now and P Chidambaram today gave enough indication of that in
his first public meeting after he took over as finance minister on
August 1. Sharing the dais with Sebi Chairman U K Sinha at a National
Stock Exchange event on SME exchanges, the minister said given the
huge number of medium, small and micro enterprises in the country, at
least a few thousand of those should be listed on the country's SME
exchanges. The statement was seen as an attempt to energise the
markets.
OPINION, P11
EDIT: Win-win disinvestment
In the works: new banking licences, SUUTI dissolution, quick clearance
of projects
Finance Minister P Chidambaram ( left )with Sebi Chairman U K Sinha at
the launch of the NSE's operations on its dedicated SME platform
'Emerge' in New Delhi on Tuesday PHOTO: PTI
Advancement of bank capitalisation plan mooted SUUTI dissolution to
give leg-up to stake sale Public shareholding norms to be enforced on
companies 90 projects worth ~2 lakh crore identified for a big push
FAST-FORWARD AFTER LONG PAUSE
New banking licences on the cards
Source Business line
Make SME trading platforms a success: FM
Thejo Engineering ends flat on debut at the NSE
New Delhi, Sept. 18:
The Finance Minister, P. Chidambaram, on Tuesday, launched 'EMERGE', a
dedicated NSE platform for emerging corporates.
EMERGE is expected to help thousands of small and medium enterprises
(SMEs) to raise capital from institutional investors and high networth
individuals.
The first company that opened its IPO on EMERGE, Chennai-based Thejo
Engineering, got listed on the platform with the ceremonial ring at
the event. The stock closed at Rs 403 against the issue price of Rs
402.
Making his first appearance at a public function in the capital after
taking charge as Finance Minister Chidambaram asked the stock
exchanges to make "extra effort" to bring SMEs into the market and
help them raise capital.
On Earlier efforts
Extra efforts should also be made by merchant bankers and other
players to make a success of the platform, he said.
He noted that the earlier attempts to launch a dedicated SME platform
had yielded little results. Even for this attempt ('EMERGE') it had
taken four years before the first company — Thejo Engineering — was
listed, Chidambaram said.
"It's not easy to bring SMEs to exchange-traded platforms. But it is
important for us to send a message that we want SMEs to grow out of
their small and medium size," he said, adding that one way to grow is
to raise capital.
Reeling out statistics, he said that there were 3.11 crore enterprises
which qualify as SMEs They contribute 45 per cent of industrial output
and eight per cent to GDP.
"We should take encouragement that there are entrepreneurs who are
willing to come to the market to grow. We should have at least a few
thousand companies listed in this platform," he said.
Besides the NSE's EMERGE, the other dedicated SME platform is with the
BSE where seven entities are already listed.
srivats.kr@thehindu.co.in
CSR: A pragmatic approach
Mohit Kishore
, The larger role of the corporation in society is a topic that has
often produced extreme views. One common view is that corporations,
particularly large ones, take away far more from the society than they
give back, and hence corporate social responsibility (CSR) is
important.
This is certainly true in the case of companies whose operations cause
significant and direct environmental impact, displacement of people or
loss of livelihoods and these entities must be held strictly
accountable to contribute back to the local communities and
environment.
Looking at implementation
However, this argument turns weak when measured against many of the
newer knowledge/service-based industries that have emerged in the
post-industrial era, and which have begun to dominate the economic
landscape, particularly in service-sector focussed economies like
India. Such industries have a limited harmful footprint on the
environment or society.
In the Indian context, media reports suggest that the government
intends to mandate that a fixed percentage of a company's profits must
be set aside to be ploughed into CSR projects. There is no doubt that
the performance of corporations must be measured with a greater
yardstick than mere profits.
However, in this article I argue that a more pragmatic view must be
taken of the entire notion that corporations must contribute to
society through CSR initiatives in the traditional sense, and that
even if a fixed percentage of profits were to be allocated by each
firm towards CSR, it must be implemented in a manner that builds on
the strengths that professionally-run companies already have, as
opposed to tokenism.
Recognising the unique contributions
There is a need to recognise that corporations already make a unique
contribution to society and the economy, and this cannot be replicated
by other institutions or individuals such as governments, NGOs,
universities and others. First, they help create and deliver essential
products and services to customers in an efficient manner, while also
constantly innovating to improve customer experience. Second,
businesses create employment on a large scale, which in turn serves
households of employees and helps in the creation of household
capital.
Successful businesses also create wealth for their shareholders, which
in the case of publicly-traded companies could also benefit thousands
of shareholders. Finally, companies do pay taxes on their profits,
which in turn help the Government fund its projects. All of the above
are usually achieved efficiently in the case of well-managed and
ethical companies. In in the case of unethical firms some of the above
may be compromised, but that is more of a corporate governance issue
that needs good regulations.
This is not to suggest that merely being well-run, and ethical
absolves the need for any further social contribution on the part of
corporations, but only that the larger picture of the social
contribution must be taken into account while framing policies.
CSR: A national venture capital fund
Assuming that the route of mandatory CSR contributions is taken, there
must be some mechanisms to ensure that this CSR is 'smart' and not
just tokenism. One way to do this is to use these contributions to
create many more ethical enterprises, and unleash the entrepreneurial
energy of the country.
For instance, this could be done for the creation of a national
venture capital fund, into which all companies pay their share of CSR
funds. All contributing companies could become investors in this fund,
and stand to reap the benefits from any successful investments made by
it. The Government, too, could match the contribution from
participating companies and stand to gain in the process.
Additionally, participating firms can be asked to provide advisory,
mentorship and infrastructure support to investee enterprises where
possible (and where there is no conflict of interest).
This national venture capital fund can open its doors to a wide
spectrum of entrepreneurs, who would otherwise struggle to get funding
— such as fresh college graduates, rural enterprises, socially-focused
for-profit projects and others.
Helping freshers
The idea is to leverage the vast amount of experience that the
country's industry has and transmit it to small enterprises, both in
the form of capital as well as expertise.
To make such a thing work, it may be important to structure the
implementing agency based on a public-private partnership model, so
that the efficiency and intellectual capital of the private sector may
be better tapped. Equally important would be mechanisms to ensure that
only meritorious entrepreneurs receive funding.
None of this is intended to suggest that the traditional CSR model,
based on philanthropy, needs to be discarded. This, too, has its own
place, and must certainly be voluntarily adopted by companies in
whatever manner they deem fit. As for the mandatory portion of CSR
that is currently under consideration, the above model may be a better
way to go about it so that funds are not wasted to just meet the
norms.
In summary, a pragmatic redefinition of CSR could include two
dimensions — first, the traditional model of contributing to
philanthropic causes, and second, nurturing and supporting the
creation of future entrepreneurs who can in turn build the next
generation of enterprises.
mohit.kishore@gmail.com
(The author is a corporate strategy professional in the financial
services sector.)
--
.
-
CS A RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
Company Secretary, Chennai
email csarengarajan@gmail.com
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