Whiplash

I want to fly the Dreamliner. Imagine that the latest fracas in the
long running ill fated shotgun wedding soap opera of Air India and
Indian Airlines is that erstwhile Indian Airlines pilots want to fly
the Dreamliner. Bah, so what is the big deal if they want to fly the
jet? Why aren’t they being allowed to fly it? How can that be the
sticking point to hold all of us to ransom? Air India pilots don’t
want them to fly the planeas it impairs their career progression. Like
petulant children, they are squabbling over a new toy. Mera hai, nahin
mera hai (Mine, it is mine). Simply told, the no brainer merger was
between two airlines which flew different types of aircraft – Boeing
by Air India and Airbus by Indian as it was called just before the
merger. Incidentally Indian Airlines went ahead and conducted a
massive rebranding exercise, rechristened as it was from Indian
Airlines to Indian with everything from livery to uniforms and plane
tail logos only months before the 2007 merger .

Before you could say Praful Patel, the merger was initiated and that
is the genesis of the downslide. Actually it is more like a fall from
a cliff for the merged entity. Saddled with debt, courtesy two massive
yet disparate aircraft renewal programmes, the airline has never been
able to achieve what was meant. Which was fleet rationalization,
integration, synergy, savings. The report card says F. How can an
airline which earns 26 crore daily and spends Rs 62 crore fly? It is
losing money hand over fist. And fuel cost at Rs 14 crore daily is not
the only reason for the red swathe across the books.

Mismanagement across the board is a more honest appraisal of the
situation. The Chicago Tribune reported the other day that Boeing
South Carolina is preparing to deliver the first Dreamliner to Air
India in June. As part of the merger process, it is believed that Air
India pilots had agreed to allow cross training. The minister Ajit
Singh is faced with a piquant crisis, the pilots refuse to talk to
him, even as they show scant respect to the Delhi H.C order.

A merger made in hell. Resulting in incessant pain for flyers.

Whiplash

I want to bite the bullet, but I can’t. Not because it doesn’t taste
good, but because it is distasteful. Heh, what does that mean? Bullet,
why does one want to consume it like a pill? Simply because, India now
has increasingly no other course, but to undertake third, fourth
generation reforms instantaneously. Paani saar se upar ho gaya hai
(water level has crossed my head and I am drowning) is the most common
refrain in industry, markets and even sections of the bureaucracy.
We need to get a move on, this delusion that we are a market no one
can ignore cannot carry on. As someone said being on auto pilot is
good for it means that that the pilot has realized that he is safe so,
he has switched from manual to auto mode.

But the drift in government is now bordering on the ludicrous. On
Thursday, we saw manifestation of this sad phenomenon yet again. The
Cabinet and the worthies who frequent such meetings decided to
mothball the insurance FDI plan to hike it to 49 %. Once bitten twice
shy perhaps after the FDI in MBRT (multi brand retail trade) fiasco
which was first ratified by the Cabinet in the last week of November
even as parliament was in session and led to widespread consternation
and then being kept in suspended animation.

Ditto this time with insurance. A weak Govt unconvinced of its own
actions will always see ogres lurking in the shadows. Avoiding an
action replay, it decided to keep the bill in abeyance. It is clear
that this Govt has no appetite whatsoever for anything forget reform.
For years now global insurance majors and their Indian partners have
been pleading for a hike in FDI from 26 to 49 per cent. The right wing
BJP which should have logically supported this move is also caught in
a quandary. One of its top leaders – Yashwant Sinha – heads the
standing committee on finance. Its verdict is that by jacking up the
FDI, you will expose India to the vulnerabilities of the global
market. Fair enough, if you remember the 2008 meltdown when insurance
companies using high fangled derivative instruments went belly up.

But all this still doesn’t change the fact that India is capital
starved and has better best practices to deal with fraud than most
nations. The case if for capital and regulation which comes inbuilt.
The case is for biting the bullet even if it is unpalatable. Question
is who will do it? Not this lot for sure.

Whiplash

During his darkest days in prison Andimuthu Raja never ever allowed
himself to be cowed down. The term in Tihar didn’t break his spirit,
at least not outwardly. Maybe the long hours spent in solitude in the
night may have given him time to introspect, but his external demeanor
was always positive. It appeared as if he had a Teflon coating. In
court, it was the usual Raja dressed in white in summer and black in
winter. His body language one of an aggressor, his tone one of
confidence personified. By keeping himself busy playing badminton
inside the jail premises, and reading up on his trial, he was always
preparing for battle as it were. A trained lawyer himself, when push
came to shove, he even pushed senior criminal lawyer Sushil Kumar
aside and started arguing his own case before Judge O P Saini in the
CBI trial court.

Raja even today believes that he did the right thing, he reckons that
key members of the Govt were on board viz. all the decisions and that
it was done to break the telecom cartel that existed and as a
consequence bring down tariffs. What one cannot condone is that Raja
aided and abetted by R K Chandolia conjured a scam out of thin air,
after all he sold air waves to a handful of operators, many of whom
weren’t even in the telecom space. In fact a couple of them were from
the realty space. It is Raja’s supreme confidence that belies his
present status. A sea of red and black, supporters swarming outside
the Patiala Court Complex and later in the evening Tihar Jail was a
power statement from Raja. It was as if the Raja of Tihar was emerging
from his palace.

The DMK never consigned Raja to the rubbish heap, his proximity to
Kanimozhi probably responsible for that. Raja was the principal
architect of the January 10,2008 spectrum scam, his brazenness while
doing that is now well established. Over the last 15 months and even
before he went to jail, he displayed the same devil may care attitude.
People forget that Sanchar Bhawan was raided by the CBI while Raja
was a sitting minister. People forget that CBI filed an FIR against
unknown persons while Raja was a minister. Despite all those travails,
Raja was unruffled, Captain Cucumber. It is only when the Supreme
Court came down like a ton of bricks after the damning CAG report that
all hell broke loose.

Now Raja is back, a sneer on his face, eh poda (hey you, move in
Tamil) on his lips as he returns to make a political statement. That
is politics – up one day, down another and back, call it the yo yo
syndrome.

Whiplash

So, Shahrukh Khan gets it wrong again. At least that is what the
Mumbai Cricket Association says. SRK himself is furious on the
wrongful portrayl of the much blown out of proportion incident by the
MCA officials. He reckons that his daughter Suhana and other children
were being manhandled by the officials. The Knight Riders in fine
fettle this year in the IPL pulled the chestnuts out of the fire
virtually by suffocating Mumbai to a 32 run defeat and I guess there
must have been much bonhomie amongst KKR supporters who would have
wanted to celebrate by getting on to the playing field.

That SRK is hot headed is a given, but at the same time, he is careful
of doing the ‘wrong’ thing in public. He is conscious of his public
persona and knows that he figures towards the top of the popularity
index. At KKR games, people often want to see SRK and not the match,
such is his personable appeal. Over the day I have heard many
uncharitable remarks – he is under pressure because Aamir and Salman
have bested him at the box office, SRK is a boor, he is constantly
behaving badly, why is he doing this to himself et al. Shahrukh Khan
is a star, his actions and comments are constantly watched. Whether it
is his spat with best buddy Salman Khan or thrashing Shirish Kunder or
now the very ugly altercation at the Wankhede stadium, the hot headed
Khan has lately not been on his best behavior.

His psyche was obviously been brutalized with the harrowing interface
with American immigration officials which led to him making – My Name
is Khan. His films, much hyped, have not been commercially as
successful as the other two Khans, his peers – Aamir and Salman
bhaijaan. The dramatic Rs 100 crore net of tax big number at the B.O
was something that eluded the Khan. But with an extremely stylish take
on Don, SRK breached the box office. Suddenly one hears that SRK is
doing five films, one sees him at all his games and mercifully his
team is actually doing well this season and has a shot at the trophy.
SRK has changed over time, one can sense that. A seven hour long
interrogation by the Enforcement Directorate in Mumbai obviously not
helping him mentally. My most recent interaction with him was at the
F1 circuit. In a melee, he was gracious enough to break free from the
fetters of his bodyguards and onlookers to touch base with my kids. He
even blessed my son.

After that, he has had another run in with US immigration officials.
These things can play and prey on your mind. SRK has to rise above
this. He is a star, a star larger than the celluloid he graces. The
greatest romantic hero of this time.

Whiplash

Oblivious, impervious or simply delusionary. Wonder which tack is
right for the self congratulatory mode that one found UPA’s
constituents in on Tuesday night. Secure and comfortable in their nest
that they have the math in their favour, they continued to delude
themselves by heaping lavish praises on themselves. From UPA
chairperson to the PM to Pawan Bansal, the attitude was one of
complete disdain. By bringing Mulayam Singh Yadav and Laloo Prasad
Yadav on board the dias, they were sending out a terse message to the
opposition, perhaps even cocking a snook. It was virtually like
putting out a neon sign in our faces – catch me if you can, we are in
power and we will remain in power till May 2014. This attitude was in
your face on Tuesday night and I reckon that this Government and its
principal, the Congress sleep soundly at night knowing fully well that
no one can rock the boat.

So, everyone be damned, the people can go take a hike. Dang, the
mountains are a good place to go to at this juncture given the sultry
heat in the capital, but one needs to have a pocketful of cash, and
not a hole in your pocket to actualize that dream. Prices in the real
economy are rising constantly, the spike in Consumer Price Index
(urban) 11.10 per cent for April is something that has all of us under
the cosh. A mismanaged economy which has practically gone into free
fall, a rupee which is being hammered out of share – ab tak chappan –
as I sit down and write this and a general policy freeze which now has
investors acutely worried. Throw in retrograde and regressive measures
like GAAR (general anti avoidance rules) and retrospective taxation
and you have a Molotov cocktail. Lob that at the middle class with
petro product price hike and you have a combustible experience.

Meanwhile RBI Governor D Subba Rao and his board are holding a board
meeting in the cool climes of Mussorie, hopefully concerned about the
mayhem in the forex markets. There appears to be a run on the rupee.
Exaggeration, oh, I think not, foreign investors don’t like policy
uncertainty or paralysis. I bet my bottom dollar that they are
teaching the Govt a lesson by pulling out capital. Bah, we have done
very well, we can do better though, we don’t care – so say those who
guide our day to day destiny. Sorry, the squeeze is such that I may
have to cancel my summer holiday plans. While Sonia, Manmohan, Bansal
& Co enjoy their celebratory dinner.

JAGAN – THE NEW CENTRIFUGE

It is emerging rapidly that Jagan Mohan Reddy will be the next
centrifuge of any coalition that takes power at the centre. While the
Congress dithers on Telengana, suspends its own MPs and essentially
makes a hash of things, the Andhra pot continues to boil. Why will
Jagan be the new centrifuge , one may ask? Won’t the BJP as the
principal opposition party be the big brother in any new formation? Of
course it will be, but the math across the poll map of the country
provides insights into what maybe the final outcome in 2014. Yes, 2014
is a long way off, so why am I getting off the blocks so early.
Simple, a mini referendum is set to take place in the same Andhra
Pradesh on June 12 when 18 assembly segments and 1 Lok Sabha seat go
to the polls.

There is every possibility that Jagan, all fire and brimstone against
the Congress so far will side with the BJP in the next round. And once
he does that, then he becomes a very powerful player in whatever form
and shape the new combine takes. Nitish Kumar, Navin Patnaik,
Jayalalitha, who knows Mamta Banerjee and the wild card in the pack –
Jagan Mohan Reddy all aligning with the BJP will see a major
regrouping of forces. So, I am not getting ahead of the curve, but
looking at an emergent scenario. An emergent scenario which doesn’t
portend well for the ruling dispensation either in the state or the
Centre. Interestingly, AP state assembly elections took place in 2009,
so the state goes to the polls again in 2014, along with the general
hustings. In 2009, Y S Rajasekhara Reddy returned to power with 156
seats, a much reduced mandate from the stunning win in 2004 when he
garnered 185 out of the 294 assembly seats.

The four states which return the maximum number of MPs to the Lok
Sabha are Uttar Pradesh, Bihar, Maharashtra and Andhra Pradesh. All
told they return 80 plus 50 plus 48 plus 42, making up a round figure
of 220 MPs. Both in the 2004 and 2009 general elections, Congress
used the rump provided by YSR in AP to come to power at the centre. In
2009, YSR brought in 33 MPs while in 2004, he returned 29 MPs. In
2009, the Congress bagged 206 seats, the highest number of MPs came
from AP, followed by UP 21, Rajasthan 20 and Maharashtra 17. Ditto in
2004 when the Congress came to power with 145 seats. Andhra and YSR
delivered in spades with 29, Maharashtra 13, Gujarat 12 and Tamil Nadu
10 were laggards in comparison. The point here is that Andhra Pradesh
has been the differentiator, in many ways the killer application that
has brought the Congress back to power and then help it retain power.

Unfortunately YSR’s untimely and at one level slightly mysterious
death muddied the waters for the Congress in AP. Habituated with
shooting itself in the foot, the Congress went and queered the pitch
for itself rapidly thereafter. When YSR’s son and heir Jagan Mohan was
projected as the claimant to the throne, the ‘high command’
neutralized him by electing a consensus candidate instead – K Rosaiah.
Since then the ruling party has hurtled from one crisis to another in
Andhra. A state that practically guaranteed success for the Congress
since the elevation of YSR as CM is now more or less a millstone
around its neck. Things have come to such a sorry pass that there are
no takers for the Congress candidature in Andhra for the by polls now.
Recent reports suggest that several Congress candidates have backed
out because public sentiment is so intense. Public sentiment is
intense not just for the creation of Telengana but increasingly for
the anointment of Jagan Reddy as the CM of the state. In this vacuum,
YSR Congress holds sway in Andhra politics now.

By keeping the issue of Telengana in suspended animation, the central
government has only created that many more complications for itself.
Soon after YSR’s death, Jagan declared his intent to take over the
mantle, but this was unacceptable to Delhi. In a public revolt against
K Rosaiah, Jagan made it clear that it was now or never. By November,
2010 Jagan walked out of the Congress. Impatience being his bugbear,
Jagan should have realized that a vulture is a patient bird. But the
impetuosity of youth and eagerness to grab power tripped him. Many
yatras later, including a fabled train journey to Delhi, he still
awaits what he believes is rightfully his. Politics at the end of the
day is about elections as Team Anna may have also realized to their
chargin. Electoral politics is also about playing the waiting game,
engaging with the hoi polloi and striking at the right time.

In May 2011, Jagan swept Kadapah, his family’s pocket borough by five
lakh votes, the other contestants lost their deposits. Significantly,
his mother Vijaylakshmi, equally cut up with the Congress, also won
the Pulivendula assembly seat by 85,000 votes. The banner of revolt
had been thrown flush in the face of the Congress in Delhi. As if all
this wasn’t enough, home minister P Chidambaram on the fateful night
of December 9, 2009 bunged in a big ugly monkey wrench in the mix by
announcing that the Indian government would start the process of
forming a separate Telangana state, pending the introduction and
passage of a separation resolution in the Andhra Pradesh assembly.
This resulted in protests across both Andhra and Rayalseema and MLAs
from these regions submitted their resignations in protest. Under
pressure, on December 23, the Government of India announced that no
action on Telangana will be taken until a consensus is reached by all
parties. Coastal Andhra and Rayalaseema region MLAs started
withdrawing their resignations while MLAs and ministers from Telangana
started submitting their resignations, and demanded that the Centre
take immediate steps to initiate the process of bifurcating Andhra
Pradesh. Since then the drama of mass resignations has continued non
stop. Also it has brought pain, suffering and misery on the people of
the Telengana region in AP. Lives have been lost, dislocated and in
many cases virtually caught in a time warp.
Accentuating the pain and problems for Andhra was former home
secretary Gopal Pillai’s damaging announcement on December 11, 2009
where he said that Hyderabad will be Telengana’s capital. Already
under a fusillade of fire, he hastily retracted his statement soon
after. The best barometer for the future of Andhra/Telengana came in
March this year when K Chandrasekhara Rao’s Telengana Rashtriya Samiti
scored big winning four of the seven by polls. The Congress is loath
to bifurcating the state, the constituents that make up the state want
it. The Srikrishna Report has come and gone. Throw Jagan into the mix
and the numbers 33 and 29 LS MPs look more and more remote even as the
hustings loom large on the radar. A new strain of regional jingosim
has come to the fore just as it did many years ago when NTR grabbed
centrestage with the Telugu bidda pitch. Now take that strain and
split it into two – a man who reckons he has been wronged and cheated
– Jagan and the messiah of Telengana politics – KCR. The high tide
will lift and bring in all these boats. Don’t see too many Congressmen
on them though.

INDIA ACCORDING TO GAAR

The World According to Garp was a bestselling novel written by John
Irving. In the book Irving famously wrote – In the world according to
Garp, we are all terminal cases. The rupee is once again taking a
dive, as capital flows out of the stock market. In an institutionally
driven market, foreign institutional investors get the heebie-jeebies
when policy mavens unveil new laws. In fact, it borders on a kerfuffle
when the new laws impact FII transactions.

Eh, now you will wonder what Irving’s Garp has to do with the Indian
stock market? Where am I going with this. Convoluted, perhaps, but
FIIs have been hit by a close relative of Garp, he is called GAAR.
Simply put, it means General Anti Avoidance Rule. But the genie that
was released from the bottle by the Union Budget in India spooked
investors to such an extent that money began to flow out of the
markets in a hurry. This resulted in FIIs pulling out money, the
trickle became a flood very soon. GAAR overnight emerged as the new
dreaded demon.

What GAAR does is that it allows tax authorities sweeping powers to
question any transaction with retrospective effect. Let us examine
some data now to bolster this argument. Events, liquidity and
valuations determine the course of stock markets. Almost overnight, as
the year turned, foreign investors found the Indian market which they
had ignored right through 2011 as under bought, driven by attractive
valuations, and reasonably decent third quarter earnings numbers from
corporates.

In the first three months of 2012, money came gushing in from bulge
bracket foreign investors – Rs 9469 crore worth of equities was bought
in January followed by a phenomenal Rs 23,236 crore in February and
finally Rs 6526 crore in March. All told approximately $7.84 billion
was pumped into the equity markets alone in 2012. The worm began to
turn in the immediate first flush of the Union budget. And since then
the trajectory has been downwards. In April, the figure is negative,
though negligent, but the rupee is closer to Rs 51.78 versus the
greenback.

The government meanwhile is trying desperately to limit the damage, by
talking to foreign investors at all levels, convincing them that this
retrospective law is not meant for genuine investors. But to no avail
yet. Finance minister Pranab Mukherjee and finance secretary R S
Gujral have both denied anything sinister behind the introduction of
GAAR. While GAAR will in all probability come into existence from
April 1, 2012,
I asked my friend senior Supreme Court Advocate Homi Ranina what the
implications of this law was. Ranina cut to the chase by saying, “The
guidelines will only be known when the Finance Bill is passed in the
third week of April. WE don’t know under what circumstances GAAR will
be applied. The plan is obviously to weed out tax avoidance in
offshore transactions, in the main the large cross border deals.”
On Thursday, finance secretary Gujral offered some inkling of the way
forward when he said that the law will cover those FIIS which are
investing through tax havens. Importantly, he said it could be
applicable from 1 April, but would not carry out the scrutiny of
earlier transactions. The underlying credo behind GAAR from what one
gathers in finmin is that it will counter aggressive tax avoidance
schemes and will target transactions or arrangements that do not have
any commercial substance or consideration other than achieving tax
benefit. Significantly, he indicated that private equity funds will
come under GAAR’s ambit.
This could be extremely worrying and annoying for if the entity cannot
prove substantive interest in say a offshore haven like Mauritius, its
tax residency status will be rejected. Complicated. Very much. Till
such time as the Finance Bill is passed, the GAAR overhang will be the
sole talking point amongst the foreign investor community – both
direct and portfolio. Many reckon that PEs that fail to demonstrate
substantial presence in Mauritius will have to pay tax on profits, as
per GAAR and this will override the Indian-Mauritius tax avoidance
treaty.
When FIIs met Finance Secretary R S Gujral recently, he articulated
that General Anti-Avoidance Rule (GAAR) provisions would be invoked
only in case of "impermissible arrangements". He had stated, “If they
are in a permissible arrangement, clearly they are governed by the
particular treaty and GAAR does not get invoked at all. If it is an
impermissible arrangement, then GAAR gets invoked and the treaty does
not help them."
What is interesting is that FIIs are allowed after many policy flip
flops to invest in India using an instrument called participatory
notes through sub accounts. These instruments mask the identity of
actual investors and speculation has persisted that it is used openly
for the purpose of to round tripping, essentially bringing back money
salted overseas by the rich and powerful into the country. The colour
of money in the stockmarket is all the same and P Notes allow
politicians and businessmen to bring back their black money, it is
said. When the govt banned P Notes the last time round, there was a
veritable panic as FII money dried up, then the floodgates opened and
all was well. Now GAAR is the new dragon slayer.

For now one waits for clarifications from the finance ministry which
dissipate the clouds that hang over investors’ minds. FIIs have assets
under custody of more than Rs 10 lakh crore, or 17 per cent, of the
market capitalisation of India's equity markets. FIIs are also big
investors in Indian government and corporate debt which too is seeing
capital outflows due to this GAAR bogey. India also needs to realise
that is not the only investment destination, investors have other fish
to fry. Already there is talk that Indonesia will replace India in
BRICS. India can be ignored at your own peril, but India too needs to
contribute if it wants to better itself. By looking at regressive and
retrograde policies which lack consistency, the purpose of moving
forward is defeated. A capital; deficit nation like ours satrved of
funds for economic development needs to be forward looking. Yes, we
need to be jingoistic too, but if we want to improve the lot of the
last man standing, we should be progressive. So should our policies
and attitude. Money is the fastest traveling thing in the world, here
today, gone tomorrow. Remember that.