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Lesson for India from Tesla

Akhilesh Bhargava

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Tesla

It was on 7th August, 2018, that Elon Musk, the maverick founder of Tesla Motors tweeted, that he was considering taking Tesla private, by buying back its shares from the public at USD 420 per share, and that he had secured the funding for it. It was an impulsive tweet, with no basis whatsoever. It created a chaos in the American stock markets. Trading in the shares of Tesla was suspended and its share price fell, amidst chaos and confusion in the stock markets. It hurt shareholder interest and warranted strict action from the regulator.

SEC, the American regulator of securities/stock markets swiftly got into action. It sued him for securities fraud and corporate misgovernance and decided that he was not fit to lead a company. His other misbehaviour, which included smoking marijuana, wielding a sword on a webcast and attacking a British rescue diver at Thailand, by calling him a paedophile must have added to the SEC’s ire. It thus came down heavily on him as well as Tesla.

In a quick settlement between SEC, Tesla and Elon Musk, the company and its temperamental founder agreed to pay a fine of $20mn each, Musk agreed to step down as the Chairman of Tesla within 45 days and agreed that he cannot be appointed as its chairman for three years thereafter. The SEC let him continue as CEO, subject to appointment of an outsider as its chairman, the appointment of two independent directors to keep a check on him and the set up of a Board committee to set up controls over his unpredictable communications, that severely hurt shareholder interest. This amicable settlement avoided a lengthy legal battle which would have ensued, had SEC thrown out Musk as the CEO of Tesla and was in the best interests of the company. His running of the company as it CEO was critical for the company since he oversees every detail of Tesla’s design and technology and has driven the company to great heights. He, however, got a much-needed slap on the wrist and will now function under Board control.

The Indian regulators need to learn from the Tesla story where due to the immediate action of the SEC, the shareholder interests/wealth was protected and a maverick founder/CEO of the company was restrained and shackled under controls. The hands of the Board of Directors were strengthened and shareholder interests were shielded from his unpredictable behaviour. In India the likes of Chanda Kochhar, Shikha Sharma and Rana Kapoor were found to be indulging in far more serious malpractices viz. window dressing of accounts, which have immensely hurt shareholder interest, but SEBI has been a mute spectator, with no action taken against any of them. SEBI needs to protect shareholder interest, as its prime duty and mandate and must restrain the company directors/promoters from indulging in any acts that harm shareholder interest, as SEC did in the case of Tesla and Elon Musk.

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Demonetisation saved collapse of Indian economy: S Gurumurthy

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Gurumurthy

New Delhi | Ahead of next week’s crucial board meeting of RBI, the central bank’s independent director and RSS ideologue S Gurumurthy Thursday made a case for calibration of its massive Rs 9.6 lakh crore reserves, saying no central bank in the world maintains such high levels of surplus.

Gurumurthy, who was appointed to the board of RBI a few months back, said the capital adequacy ratio prescribed in India is 1 per cent higher than the global Basel norms. He also pitched for easing lending norms for small and medium enterprises, which account for 50 per cent of the country’s GDP.

In his first public comments since the spat between the RBI and the Finance Ministry over a range of issues came out in the open, Gurumurthy said the stand-off “is not a happy thing at all”. The RBI’s board meeting is scheduled to take place on Monday where the issues raised by the government, including easing of PCA norms, cutting size of reserves and enhancing credit to MSMEs, are likely to come up for discussion.

Praising the shock demonetisation of old Rs 500 and Rs 1,000 notes in November 2016, he said the Indian economy would have collapsed under the weight of high denomination currency notes which had risen to Rs 4.8 lakh crore in just 18 months and was being funnelled to real estate and gold.

On the issue of capital framework for RBI, he said two different studies have put the adequate size of reserve that the central bank must maintain to guard against default risk at 12 per cent and 18.76 per cent. However, the RBI currently has reserve of 27-28 per cent, which may have further gone up due to the recent depreciation in the value of rupee.

“The appreciation in the value of the dollar is the reserve of the Reserve Bank. You bought dollar at 42-45, and it is now 70. Just like when you buy some shares and the share values go up, and you take the appreciation as your reserve, this is the reserve.

“You cannot say, come on it has appreciated so much, give me that money. I don’t think the government is asking for that. As my understanding goes, the government is only asking for a formulation of a policy as to how much reserve the central bank must have. Most central banks don’t have reserves of this kind at all, only RBI has these kinds of reserves,” he said. Gurumurthy was delivering a lecture on ‘State of the Economy: India and the World’ at the Vivekananda International Foundation (VIF) here.

Stating that the stand-off between the RBI and government “is not a happy thing at all”, he indicated that differences could be a result of considering only the American system as the perfect ecosystem. “But I think an alternative is necessary and exists also. That is part of an overall correction of the Indian mind,” he said.

On easing of Prompt Corrective Action (PCA) framework, he said there has been certain revisions of norms recently. “If capital adequacy is the only ground, then much of this problem won’t be there. But there is capital adequacy-plus grounds on which this issue is there. That is the matter of dispute between the government and RBI,” he said.

The PCA framework kicks in when banks breach any of the three key regulatory trigger points — namely capital to risk weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA).

Of the 21 state-owned banks, 11 are under the PCA framework. These are Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra. With regard to Basel III norms on capital adequacy, he said the BIS prescribes these for only internationally active banks.

“But banks which are not internationally active, need not conform to what (they) say. The universal banks need not conform to what (they) say. We don’t have any commercial banks. We have only universal banks because our banks do term lending. But still the same Basel norms are imposed,” he said.

In India, for both internationally active and domestic banks it is 9 per cent, he said. “We are doing more than what Basel wants and so the banks have less money to lend. These are all the things on which there is no discourse in India,” he noted. There are only four internationally active banks in India, he said, adding all others are domestic lenders. “They need not have 8 per cent capital. They are forced into having 9 per cent capital. Because some people think the IMF feels happy if we have 9 per cent capital,” he said.

Making a case for restricting imports, Gurumurthy said the government has been following an utterly wrong policy of having capital goods import exceeding oil imports. “We need to go in for heavy import restrictions. We have got to cut down the current account deficit and trade deficit in the next one year. Otherwise we will continue to accentuate this problem. On this, all the institutions need to work together,” he said.

Backing demand for enhancing lending to MSMEs, he said this sector has been hit by both demonetization and GST and has been starved of credit. “If government says (this sector) should be funded, the media says the government is working against the independence of the RBI. A sector which is driving the lifeline of India, which constitutes 70 per cent of exports of India, 90 per cent of employment and 50 per cent of GDP of India that is starved of money, these are the issues,” he said.

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Rupee rises 10 paise against US dollar to 71.87

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Rupee

Mumbai | The rupee firmed 10 paise to 71.87 against the US dollar Friday on increased selling of the US currency by exporters and banks.

Besides, weakness in the greenback against some currencies overseas, increased foreign fund inflows and a higher opening of domestic equities supported the rupee, traders said. Foreign funds bought shares worth a net of Rs 2,043.06 crore Thursday, as per provisional data. At the interbank forex market, the rupee opened higher at 71.94, and advanced 10 paise to 71.87 against the US dollar.

The rupee had vaulted 34 paise to close at a two-month high of 71.97 against the US dollar Thursday on robust foreign fund inflows amid low crude oil prices. Meanwhile, the benchmark BSE Sensex rose 96.29 points, or 0.28 percent, to 35,356.83 in early session Friday.

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Sensex jumps over 150 points on funds inflow, global cues

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Sensex

Mumbai | Domestic equities opened on a firm note Friday as the benchmark BSE Sensex surged over 150 points on the back of continued foreign fund inflow and appreciating rupee.

Positive leads from the US markets on optimism that the US and China may resolve their trade dispute, and a mixed trend at other Asian bourses too influenced sentiments here. The 30-share index spurted 159.17 points, or 0.45 percent, to 35,419.71 points with sectoral indices, led by healthcare, auto, FMCG, capital goods and banking, rising up to 1.03 percent. The barometer had gained 118.55 points Thursday. The NSE Nifty was trading 41 points, or 0.39 percent, higher at 10,657.70.

Prominent gainers include Sun Pharma, Axis Bank, Asian Paint, RIL, M&M, Hero MotoCorp, TCS, HDFC Bank, Maruti Suzuki, PowerGrid, ICICI Bank, Tata Motors, Bajaj Auto, NTPC and Bharti Airtel, gaining up to 1.37 percent. On the other hand, continuing its fall, Yes Bank was the biggest loser, dropping up to 6 percent. ONGC, Infosys, Tata Steel, Vedanta and Adani Ports too fell up to 3 percent.

Meanwhile, the rupee was trading higher by 10 paise at 71.87 against the American currency in early deals Friday. There was continued buying by foreign funds for the second straight day Thursday.

Foreign institutional investors (FIIs) accumulated shares worth a net of Rs 2,043.06 crore, while domestic institutional investors (DIIs) sold shares worth Rs 165.31 crore Thursday, provisional data showed. Elsewhere in Asia, Shanghai Composite Index rose 0.71 percent, Korea’s Kospi up 0.20 percent, while Japan’s Nikkei fell 0.52 percent. The Dow Jones Industrial Average in the US ended 0.83 percent higher Thursday.

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