RESISTING BUREAUCRATIC CORRUPTION: ALACRITY HOUSING

CHENNAI (B) (TEACHING CASE STUDY)

S. Ramakrishna Velamuri
Associate Professor
China Europe International Business School (CEIBS)
699 Hongfeng Road
Pudong, Shanghai 201206
Peoples Republic of China
Tel: +86-21-28905890 (Switchboard); +86-21-28905663 (Direct)
Email: rvelamuri@ceibs.edu

1
Electronic copy available at: http://ssrn.com/abstract=1009467

RESISTING BUREAUCRATIC CORRUPTION: ALACRITY HOUSING

CHENNAI (B) (TEACHING CASE STUDY)

ABSTRACT
Alacrity Housing Chennai is a two-part case that shows Amol Karnads ethical and
innovative approach to launching and operating a construction business in Chennai,
Southern India. Part B of the case shows Alacritys business downturn and the precarious
situation that it faces in 2002. The company has severe cash flow problems and is able to
neither pay its employees salaries nor distribute dividends to its shareholders. With new
leadership initiatives, a change in management, and a home-schooling program,
Alacrity is accused of being inefficient and having lost its focus.

2
Electronic copy available at: http://ssrn.com/abstract=1009467

RESISTING BUREAUCRATIC CORRUPTION: ALACRITY HOUSING

CHENNAI (B) (TEACHING CASE STUDY)
Introduction
By March 2003, Alacrity was in deep financial difficulties, and fighting a grim battle for
its survival. At the end of this period the companys revenues had declined nearly 40%
with respect to 1997. Rumors had started to circulate in the industry that Alacrity was
going out of business, and that the founders were planning to emigrate to Australia.
From 1994 to 1996, Alacrity had gained strong revenue and income growth. However,
the company experienced a consistent decline in business results from 1997 to 2003. As
a result, Alacrity had severe cash flow problems. The one area that was still very
unpredictable was governmental relations, and especially relations with the Chennai
Metropolitan Development Authority (CMDA). An online equity analyst report dated
April 10, 2003 had this to say:
Alacrity Housing Ltd has been facing a cash crunch as the sanction of cash credit
limits to replace the company's term loans with ICICI and Union Bank of India
has been taking longer than expected, according to the company's annual report.
As a result of this progress in construction and delivery times have remained
unpredictable and even customers who had displayed great faith to stay in delayed
projects, justifiably, were cautious in paying their installments. The main
contributions to sales came from new booking for a project at Saligramam.
The operations have slowed down because of the liquidity constraints, only two
projects with 58,000 sq ft of built up area worth of Rs 82.6 million could be
completed. Another two projects with 29,000 sq ft valued at Rs 58.4 million are
close to completion. These projects apart, the effective business on hand is worth
Rs 1.8 billion, the report said. The report said that while large housing businesses
have taken the delayed permit phenomenon in their strides, the liquidity crunch
has constrained the company in its efforts to make up for the lost time. The
consortium of banks in the State Bank group is in the process of providing the
company with the required additional working capital in the form of cash credit.
The company also proposes to explore more opportunities for taking up
construction other than housing following the completion of the housing project.
Apart from Alacritys cash dilemma and building projects, Amol had introduced some
new programs bringing about changes in the organization and emphasizing the
companys values. With a struggling business, cash flow problems and a number of new
initiatives underway, observers wondered whether Alacrity was on the right path.
Business Performance
During 1995 there was a rumor in the market that the Chennai Metropolitan Development
Authority (CMDA) would increase the amount of permissible construction per square

foot of land (known as the Floor Space Index, or FSI) by 67%, from 1.5 times to 2.5
times 1 . Construction companies, seeing huge profits, started buying land in the city. The
landowners, who had no intention of being left out of the property boom, started raising
their prices. The speculation on land prices was such that a leading international bank lent
Rs. 1.5 billion for the construction of a huge multi-storied complex to one individual who
owned a large piece of land in a prime commercial area. This individual had no
experience in construction whatsoever. As a comparison, in 1996, Alacrity was managing
85 projects, and had total loans of only Rs. 80 million.
At the beginning of 1997, Alacritys management saw the escalation of land prices in the
city, and accordingly changed its strategy and decided to invest in the suburbs. The
company invested Rs. 136.69 million in payments to land owners. The CMDA did not
increase the FSI, and the construction companies that had purchased large parcels of land
in the city started to offer flats at distress prices. Many started going out of business
and defaulted on their loans to banks and other financial institutions. The banks then
withdrew funding to all constructors, including Alacrity, sending the industry into a
recession. Ashok (Amols brother) explained:
What also happened is in 1996 the crash, but for a full year it did not touch us,
but by 1997 media reports, which were not very well done in the sense they were
not too accurate; the media has the habit of sensationalizing things. So in Bombay
the market crashed. Bombay, I have always believed has been a very speculative
market. we believed Chennai market was less speculative or there was very
little speculation because we had the largest market share, on day one we would
advertise the prices, no black money, and it has a sobering influence on the
industry. In this phase everybody came in. Bombay builders came in a big way,
the bank speculated with them in their own way, and when the market crash came,
the media reports said the prices have fallen 50% and the reports were common,
but that was not the case in Chennai. Chennai had dropped maybe 15% to 20%,
but they made those reports common (this was in 1997). In one year, 125 people
withdrew from our projects. See, we keep agreements as simple as possible. There
is no deterrent or there is no forfeiture fee on their part for withdrawing from our
projects. We never kept that, believing people are always responsible and they
wont withdraw unless they have good reason to. No financial planning can be
done in these circumstances and on the other hand, the banks had got jittery and
withdrawn support.
From 1998 to 2002, the company was fighting the effects of the unfavorable events of
1997. Payments to suppliers started getting delayed. Suppliers were increasingly being
asked to set off their outstanding balances by purchasing Alacrity flats. Delivery of flats
to customers was systematically delayed, due to two reasons: longer processing times for
documents at CMDA, and the companys severe cash flow problems. One customer,
whose flat was originally scheduled to be delivered in December 1995, was able to move
1

An FSI of 1.5 meant that a construction company could construct a built up area 1.5 times the area of the
land. If the land area was 4,000 square feet, then it could construct 6,000 square feet of flats. If the FSI
were to go up to 2.5, then on the same land, 10,000 square feet of flats could be constructed.

into his new home only in October 1999 a nearly four year delay. This customer was
very happy with the quality of the construction and the honesty and integrity of the
Alacrity managers. However, he accused them of creating false expectations, especially
about the completion times of the projects. While acknowledging that Alacrity was a
company that followed principles, he added You cant compromise efficiency for
principles alone. In his extensive interaction with the companys officers over a fiveyear period, he had reason to suspect that its internal efficiencies were low. As an
example, he cited the inordinate delay by the company in collecting monies from him for
work that had been done after he moved in.
The competitors were faring even worse. Several companies went out of business. A few,
including the construction divisions of large diversified corporations, became inactive,
hoping to reinitiate business once the economic scenario improved. As a former manager
pointed out, Alacritys survival in a very difficult economic environment was a major
achievement, especially in light of the closure of many of its rival companies.
The shareholders had received dividends for only one year in the 1998-2003 period. The
share price of the company was also performing very poorly it was trading below its par
value of Rs. 10 per share. An investment weekly had the following to say about
Alacritys financial performance:
In the process of setting high moral and ethical standards for business practices it
created a sense of confidence in individual buyers of its residential outlets that
most of its competitors could not. Yet, for all this path-breaking positioning and
pioneering culture in a corruption-ridden industry, Alacrity has perhaps not
encashed its brand equity as much as it should have done. Consequently while the
buyers of Alacritys flats might not have any major complaints against the
company, it is a pity that the same cannot be said about its shareholders. 2
Alacrity responded to this assessment with the following statement in its Annual Report
for 1999:
Alacrity knows that any exclusive attempt to encash brand equity particularly
in a recession exposes the very source of that equity product quality, customer
satisfaction and market goodwill to the risk of dilution. In fact Alacrity believes
that it is such shortsighted and non-institutional attempts to gratify shareholders
that create market recessions in the first place and they are best avoided. 3
One former manager summed up Alacritys attitude towards profit There was no profit
goal. Today they are struggling because there was no profit goal, there were only other
goals.
See the companys financial statements in Exhibits 1A and 1B.

2
3

Express Investment Week, January 18-24, 1999.

Alacrity Housing Ltd, Annual Report 1999.

Alacritys Organisation: 1995 to 2003

Leadership Program
Amol had set in motion a third leadership selection process in 1995. Eight individuals, of
which three were outsiders, were chosen to be groomed into future leaders. They were
placed in two grades that reflected individuals with two different temperaments, one
radical and the other more disciplined. The first grade, Grade T was made up of
specialists an architect; a journalist and activist; and a medical doctor. The second
grade, Grade P was meant for individuals who were disciplined in the implementation of
standards. Although both grades had the potential to become members of the top
management team, Grade T individuals were on the faster track.
Amol commented on the social resistance to Alacritys many unconventional initiatives:
I became convinced that similar leadership initiative and risk taking were now
called for if the experience of organized business, the most active and pervasive
institution of our times, was to be taken advantage of for influencing a qualitative
change in social living; there was clearly an irresistible case for making human
change a central part of the very purpose of business.
Amol gave up operational responsibilities by appointing his brother Ashok to the position
of Managing Director during 1997, but retained the Chairmanship of the Board.
During the same year, a new group of youngsters joined the leadership development
process, which was referred to as the Research Program. This group, with one exception,
was made up of sons of Alacrity managers. Amol felt that these youngsters, having
grown up in the Alacrity community, would find it easier to imbibe the companys
values. Around the same time, the Alacrity managers started participating in the process
of individuation (a concept first articulated by Carl Jung). This process was initiated after
considerable discussion and internal debate.
The core group of young managers who had been through the leadership development
process (Grade T) left the company in 1999 and 2000. Amol reflected on the departure of
these four managers and of another senior manager, and concluded that they were
specialists architect, journalist / activist, doctor, psychiatrist - who had all chosen to
return to their respective fields of specialization. He felt that perhaps they believed that
their aspirations could not be fulfilled within an organizational context.
The first three leadership selections had not been very successful 17 of the 26
individuals who had been selected to participate in them had left the organization,
although some had left for personal reasons (such as relocation due to marriage).
Employee Morale
The employees were also suffering the effects of Alacritys precarious financial situation
as of 2003, the managerial cadre had not been paid salaries for more than a year, and

the junior staff had not been paid for several months. A large number of employees
resigned and took up jobs elsewhere. Almost all the senior managers had pledged their
flats as collateral for the companys loans. Some had contributed cash by way of loans.
For most of these senior managers, the assets pledged represented a significant
percentage, and in some cases the entirety, of their life savings. Many had convinced
their relatives to give loans to Alacrity.
Alacritys Home Schooling Program
Another of Amols initiatives that created considerable controversy was the concept of
home-schooling. Unlike North America and Europe, where home schooling had been
recognized as an alternative route for education, India did not have any recognized home
schooling system 4 . At the time the initiative was adopted in Alacrity, it was unclear how,
or whether, the children who had been home-schooled would be able to go back to the
formal educational system. When the question was raised whether there was a future for
the youngsters outside Alacrity, one of the youngsters stated, After all, Alacrity, as we
view it, is a process of human development before being either a business enterprise or a
community.
As of 2002, there were eight children in the Alacrity home-schooling system, with ages
ranging from 6 years to 15 years. Not all the children of school-going age of the
managers were participating in the system; several continued to attend conventional
schools. These home-schoolers interacted closely with five young home-makers (all
females) aged 16 to 20 years, and six male trainees (Grade T) aged 16-25 on the fast track
management development program. A company document drafted by sons and daughters
of Top and Senior Managers in the 16-25 age group wrote, Every pioneer goes through
turmoil while balancing on the one hand, the benefits accruing from the evolving system
and on the other, the constant criticism that is received from the conservative sections of
society.
A reporter from a national newspaper was on the verge of publishing a story that was
very critical of the company and particularly of Amol. Before publishing the story, the
Editor asked Amol to present his side of the story. The Editor opened the meeting with an
aggressive remark he said that if Amol continued to pull children out of school, people
would call him a madman. Amol replied that it would not be the first time, as people had
done so even twenty years earlier, when he had declared his intention of setting up a
construction business without any bribery.
One former manager criticized the progressive loss of focus of the business - It can
never be. You cant be confused. See, you want to run a university, you have the facilities
of a university. You want to run a building company, run a building company. You want
to run a research center, run a research center. But you cant do a kitchdi 5 of the whole
stuff and say here I am all right
4

Even in the US and Europe, home-schooling was not universally accepted. For example, it was not
allowed in some US states.
5
An Indian dish, mixture of several ingredients.

Future Prospects
Yet, in spite of all the difficulties the company was facing, and the suspicions it was
arousing in some quarters, there was consensus that its product quality was excellent.
Even a former manager, who was critical of Alacrity in other respects, stated that he
would unhesitatingly purchase another flat from the company.
The Alacrity managers, especially the youngsters, would not entertain the notion that the
business could close down. They were convinced that it was only a question of time
before Alacrity recovered its strong position in the construction business.

Exhibit 1A
Alacritys Financials
Balance Sheet

In Rupees

1995

1996

1997

1998

1999

2000

2001

2002

Share Capital
Reserves and Surplus
Shareholders Equity
Deferred tax
Secured loans
Unsecured loans
Total long term debt
Current liabilities and provisions
Total liabilities

80,000
34,888
114,888
30,637
1,581
32,218
97,053
244,159

80,000
56,786
136,786
70,417
9,000
79,417
130,038
346,241

80,000
60,809
140,809
101,536
37,500
139,036
207,536
487,381

80,000
63,320
143,320
87,519
119,555
207,074
192,545
542,939

80,000
67,954
147,954
52,981
91,309
144,290
159,303
451,547

80,000
71,793
151,793
200,000
5,671
205,671
130,366
487,830

80,000
75,876
155,876
232,541
3,949
236,490
125,378
517,744

80,000
73,656
153,656
9,942
247,308
2,655
249,963
111,999
525,560

Gross fixed assets

Depreciation
Net Fixed assets
Investments
Inventories
Work-in-progress
Less: Progressive payments from customers
Net Work-in-progress
Sundry debtors
Cash and bank balances
Loans and advances
Total current assets
Miscellaneous expenditure
Total assets

3,401
845
2,556
519
16,646
206,085
259,182
(53,097)
125,777
11,643
113,018
213,987
27,097
244,159

7,320
2,051
5,269
164
29,081
379,021
447,917
(68,896)
154,257
31,767
172,456
318,665
22,143
346,241

14,612
4,612
10,000
63
34,960
567,013
624,321
(57,308)
127,964
13,732
342,086
461,434
15,884
487,381

15,761
7,631
8,130
45
18,377
738,495
728,949
9,546
212,112
10,680
272,873
523,588
11,176
542,939

15,783
9,513
6,270
38
12,200
844,249
820,203
24,046
155,734
4,695
243,470
440,145
5,094
451,547

16,186
10,899
5,287
25
8,935
922,066
892,155
29,911
180,982
7,130
249,765
476,723
5,795
487,830

16,346
11,908
4,438
20
6,856
878,839
845,202
33,637
211,856
2,116
253,977
508,442
4,844
517,744

16,479
12,653
3,826
47
8,273
786,260
747,148
39,112
222,883
1,764
246,235
518,267
3,420
525,560

0.99
2.20
25.02
63.66
0.28
1.13

1.01
2.45
30.25
69.02
0.58
1.53

0.9
2.22
29.16
81.14
0.99
2.46

Asset Turnover (times)

Current ratio
Days inventory
Days debtors
Long term debt/Equity
Total debt (including Current Liabilities)/Equity

0.77
2.72
15.99
174.69
1.44
2.79

0.64
2.76
15.45
108.77
0.98
2.05

0.52
3.66
12.97
112.27
1.35
2.21

0.5
4.06
9.7
109.73
1.52
2.32

0.5
4.63
11.47
101.75
1.63
2.36

Exhibit 1B
Profit & Loss Statement
In Rupees except number of employee

1995

1996

1997

1998

1999

2000

2001

2002

Sales in thousands of square feet

Sales turnover (including land)
Income from Operations (excluding land)
Other income
Total income

562
721,100
240,157
2,659
242,816

470
815,800
340,602
10,267
350,869

301
575,600
429,116
8,469
437,585

190
443,200
411,016
8,376
419,392

269
522,600
280,216
8,023
288,239

288
588,400
245,501
5,871
251,372

369
704,700
251,419
6,493
257,912

390
799,500
260,908
2,400
263,308

Construction Expenses
Employee Costs (excluding contract laborers)
Marketing Expenses
Administration Expenses
Financial Overheads
Deferred Revenue Expenditure written off
Preliminary Expenses written off
Depreciation

148,443
9,073
10,531
14,407
4,556
6,399
35
655

222,460
16,835
21,037
22,817
5,990
6,618
35
1,206

319,230
18,751
30,314
33,458
8,063
7,225
35
2,561

300,998
19,391
23,781
28,070
34,066
6,528
35
3,019

174,221
23,455
17,880
25,018
33,091
7,371
35
1,882

149,271
23,304
17,459
22,568
29,629
2,841
35
1,386

138,518
22,020
24,159
19,655
40,225
2,692
35
1,120

142,732
21,821
19,417
23,792
40,877
2,893
35
1,002

Total expenditure

194,099

296,998

419,637

415,888

282,953

246,493

248,424

252,569

Profit before tax

Provision for Income Tax
Provision for Income Tax - Deferred
Profit after tax
Number of employees as of March 31

48,717
17,266
31,451
190

53,871
18,373
35,498
222

17,948
5,125
12,823
255

3,504
368
3,136
267

5,286
560
4,726
254

4,879
1,000
3,879
229

9,488
1,000
8,488
209

10,739
3,000
3,762
3,977
197

Per capita employee costs (in thousands)

Employee costs per square foot sold (in Rs)
Income from operations per square foot (in Rs)

47.75
16.14
427.33

75.83
35.82
724.69

73.53
62.30
1,425.63

72.63
102.06
2,163.24

92.34
87.19
1,041.70

101.76
80.92
852.43

105.36
59.67
681.35

110.77
55.95
668.99

2,049

3,933

Liquidated damages (in thousands)

% Net Profit/Total Income
% Construction Exp/Total Income
% Employee Costs/Total Income
% Marketing Expenses/Total Income
% Admin Expenses/Total Income
% Financial Overheads/Total Income
% Total Income/Sales Turnover
% Liquidated Damages/Total Income
% Liquidated Damages/Profit after Tax

12.95
61.13
3.74
4.34
5.93
1.88
33.67
0.84
6.51

10.12
63.4
4.8
6
6.5
1.71
43.01
1.12
11.08

3649

4,424

2.93
72.95
4.29
6.93
7.65
1.84
76.02
0.83
28.46

0.75
71.77
4.62
5.67
6.69
8.12
94.63
1.05
141.07

4965

4131

11483

3644

1.64
60.44
8.14
6.2
8.68
11.48
55.15
1.72
105.06

1.54
59.38
9.27
6.95
8.98
11.79
42.72
1.64
106.5

3.29
53.71
8.54
9.37
7.62
15.6
36.6
4.45
135.29

1.51
54.21
8.29
7.37
9.04
15.52
32.93
1.38
91.63

10