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8 ISSUES AND INSIGHTS
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MUMBAI | THURSDAY, 28 JUNE 2018 1

The power that Tata trusts wield by the Trusts who may or may not be
directors, one person nominated by
and from amongst the board of direc-
tors, and one independent outside per-
> CHINESE WHISPERS

The Articles of Association of Tata Sons is a document that best illustrates
the influence the Tata philanthropic trusts have on the group
the AirAsia investigation and the par-
ent group’s confidence in Venkat (as
the Tata Trusts managing trustee is
popularly known)? While the Malaysia-
headquarterd AirAsia and its India
unit, a joint venture with the Tatas,
had earlier countered the CBI allega-
tions of lobbying to try and change gov-
ernment policies, Tata Sons had kept
quiet till its London board meeting on
NOT FOR PROFIT Tuesday. And now that Tata Sons has
spoken, questions are doing the rounds
NIVEDITA MOOKERJI on the reason behind its decision to
express confidence in Venkat.
Tata Sons chairman Ratan Tata. But
the Articles of Association (AoA) of
Tata Sons is a document that perhaps
illustrates the best how powerful the
Tata philanthropic trusts are, and how
they have an influence on the group.
Article 87 in the AoA, for instance,
is an example of what the Tata Trusts
empire, that has in the past faced gov-
ernance-related issues as well as
Income Tax investigations, is all about.
It talks about adjourning meetings
(AGM or EGM) if full quorum is not
present. “If at the expiration of half an
time appointed for holding the meet-
ing but a representative of the Tata
Trusts is present, the members present
shall be a quorum and may transact
the business for which the meeting
was called”.
Also consider Article 104 in the
same document. This is on directors
(of the board). “So long as the Tata
Trusts own and hold in the aggregate
at least 40 per cent of the paid up ordi-
nary share capital of the company, the
Sir Dorabji Tata Trust and Sir Ratan
Tata Trust, acting jointly, shall have
the right to nominate one third of the
prevailing number of directors on the
board and in like manner to remove
any such person so appointed and in
son selected by the board for the pur-
What’s brewing?
pose. It notes that the chairman of the
selection committee will be chosen by
the Trusts from amongst those nomi-
nated by the Trusts. Importantly, “the
quorum for a meeting of the selection
committee shall be the presence of a
majority of members nominated joint-
ly by Sir Dorabji Tata Trust and Sir
Ratan Tata Trust’’, the AoA mandates.
The rules of removal of the chair-
man are exactly the same as appoint-
ment, the document shows. As an insid-
er pointed out, the same route was
followed on October 24, 2016, the day Bharatiya Janata Party (BJP) Rajya
Cyrus Mistry was removed as chairman Sabha member Subramanian Swamy
of Tata Sons. There was a hastily called on Wednesday tweeted that he would
closed-door meeting at the Tata Trusts be holding a public meeting in Mumbai
on July 8, and would “unveil the

W
hy did the board of Tata Sons
break its silence to back R
Venkataramanan, a nominee
director on the AirAsia board under
Central Bureau of Investigation (CBI)
lens, on Tuesday? Was it the most
important thing on the Tata Sons
board agenda that a statement was
issued late evening mentioning only
Of course, the fact that about 66
per cent of the equity capital of Tata
Sons is held by Tata Trusts — the
biggest of them being Sir Dorabji Tata
Trust and Sir Ratan Tata Trust —
would have been a big reason for the
board backing Tata Trusts managing
trustee Venkat, who was for many
years executive assistant to former
hour from the time appointed for
holding a meeting of the Company
(Tata Sons), a quorum shall not be
present, the meeting, if convened by
or upon the requisition of members
(of the board), shall stand dissolved...’’
It adds that “if at such an adjourned
meeting, the quorum is not present at
the expiration of half an hour from the
place of the person so removed,
appoint another person as director.’’
However, only when you reach
Article 118, do you realise the real pow-
er of the Trusts. This is about appoint-
ment and removal of the chairman of
Tata Sons. The selection committee for
appointment of the chairman com-
prises three persons nominated jointly
office in Mumbai early afternoon. That
meeting, chaired by Ratan Tata, was to
“seek the permission of the Trusts for
taking necessary steps to improve
things at Tata Sons’’. The meeting didn’t
last too long. Soon after, the same after-
noon, Ratan Tata drove to Bombay
House, the Tata Sons headquarters. And
the rest is history, as they say.
conspiracy of the ‘Gang of Four’ to
topple the Narendra Modi
government”. Swamy didn't disclose
who the members of this ‘gang of four’
were, which led his followers on social
media to start speculating on their
identities. In an interview to Fortune
India a day before, Swamy had
criticised the Goods and Services Tax as
the “most stupid conception” that he
had come across, and also alleged that

Promoting good governance

We need to look at governance practices as more than a compliance or survival requirement
SOUGATA RAY & KAVIL RAMACHANDRAN
he was told he would become finance
minister. “The night before the
announcement, I was told to be ready.
In one night, I am not sure what
happened,” he said.
What's brewing?
ILLUSTRATION BY BINAY SINHA
Superimpose the fact that about 73 per
cent of all listed firms are family con- Sebi’s ‘big’ catch
trolled in India. Also, more than half of
the Nifty 50 companies are family con-
trolled. Hence, every fundamental gov-
ernance change initiative must include,
in fact must begin with, the core stake-
holders, the promoters. Whatever be the
extent of regulations imposed follow-
ing Uday Kotak Committee’s recom-
mendations on private enterprises, fun-
damental and sustainable changes will
not happen unless the promoters them-

R
egulation drives governance
practices in India that are tradi-
tionally led by compliance to
avoid legal complications. Recent events,
spanning Punjab National Bank (PNB)
and ICICI Bank to several individual pro-
moters raise fundamental doubts about
the appropriateness of this strategy.
We need a paradigm shift in strategy
to promote good governance, one that
will bring promoters to the centre stage
where they will enact the play, not
because they are compelled to do so,
but because they believe in it and enjoy
doing it. Indian promoters and business
leaders are yet to realise that they have
an important and active role to play in
building a culture of corporate gover-
nance embedded with stewardship.
They will, then, feel responsible for
adhering to or going beyond the obliga-
tory requirements of corporate gover-
nance. We need to look at governance
practices afresh as a personal corporate
value of all key stakeholders, much
beyond the current treatment of it as a
compliance or survival requirement.
Can fundamental and philosophical
changes be brought about by regula-
tions alone? Impossible! Who, finally,
calls the shots on implementation of
corporate governance in Indian private
companies? Dominant control of most
family and entrepreneurial ventures in
India are in the hands of promoters.
selves are convinced about the rele-
vance of the regulations and the long-
term benefits accruing to them. Change
cannot be imposed through legislation
alone; there has to be an internal reali-
sation and conviction in the minds of
the promoters that all the reforms are in
their best interests. Trust and not sus-
picion should be the fundamental
assumption while brining about gover-
nance reforms. Unfortunately, most
expert committees and Securities and
Exchange Board of India (Sebi) have not
paid much attention to this “develop-
mental” approach. We outline here the
core elements of such an approach:
Set standards: The norms and regula-
tions related to acceptable standards of
corporate governance — must do and
good to-do list, codes of conduct etc have
to be put down. Some are legalities/rules
to be mandatorily complied with and
non-compliance will attract penalties;
some are guidelines and advisories on
best practices that are recommended,
but better left to the judgement of the
board. Parsimony and simplification
should be the mantra in standards set-
ting. Simpler the rules, clearer the impli-
cations of not adhering to the rules,
greater the likelihood of implementation.
Communicate and evangelise: We
have come across many promoters who
are not averse to following corporate
governance standards, but often have
misconceptions about the enormity of
the tasks, cost of adherence and the con-
comitant benefits. Making companies
not only aware but making them under-
stand the core benefits of corporate gov-
ernance and the costs of not adhering to
the mandates are vitally important to
promote better corporate governance
in listed firms.
Enable: This entails helping compa-
nies embrace good corporate gover-
nance principles and practices by cre-
ating opportunities for training,
exchange of ideas, developing deeper
pool of potential directors etc. Not only
educating the minority and non-pro-
moter investors and making them aware
of Sebi norms and guidelines for corpo-
rate governance, but also how they can
play a more active and constructive role
including direct participation in gover-
nance of their companies and be more
proactive and involved in safe guarding
their interests.
Enforce: If the regulations are not
complied with, there should be quick
enforcement of penalties as per rules
and regulations. This will act as the
‘stick’ to not only prevent people from
playing games but also get the slow
movers to get into serious action.
Incentivise: Reward companies that
set sustained good examples of good
corporate governance. Not sporadic, but
an orchestrated movement of celebrat-
ing corporate governance success would
be welcome.
Given that almost all listed family
businesses had an entrepreneurial start
someday when the business was treated
as an extension of the family for both
financial and management purposes
and promoters continued to believe that
the entire organisation belonged to
them even after listing, a fundamental
change in the mindset is not easy.
Although they steadily dilute their own-
ership control to meet their require-
ments for funds to finance growth, the
promoters rarely dilute their manage-
ment control voluntarily. Our intense
interactions with promoters have reaf-
firmed the conviction that they are driv-
en by the “owners’ passion”, and hon-
estly believe that they have every right
to manage “their business” the way they
want, even if others have invested funds,
sometimes much more than them.
Added to this is the complexity of most
of them not having adequate exposure
and experience in managing a highly
governed organisation. In essence, they
have grown in size following a “discov-
ery driven journey”.
Reforms require a change in mind-
set, and this can be accomplished by a
combination of enlightenment, enable-
ment, carrot and stick, at the promoter
level. As businessmen, promoters will
definitely weigh the costs and benefits
of practicing governance. The focus of
the discussion should shift to finding
ways to make promoters the “owners” of
high quality governance principles and
practices in their organisations. Until
the Sebi and other institutional agents of
change are convinced about the criti-
cality of such an approach and take ade-
quate and relevant measures, nothing
much will happen until another com-
mittee of reforms is appointed.
Ray is Professor, Indian Institute of
Management, Calcutta; Ramachandran is
Professor and Executive Director, Thomas
Schmidheiny Centre for family Enterprise,
Indian School of Business
An India Inc honcho called up Ajay Tyagi
(pictured), chief of market regulator
Securities and Exchange Board of India
(Sebi), after the name of one of his
companies featured in the list of stocks
moved to the restrictive trade category.
To keep manipulation and volatility
under check, Sebi and the exchanges
have been imposing trading curbs on
stocks. Typically, the list of stocks is
dominated by small and little-known
companies. However, several market
experts and promoters were surprised
after some big corporations, including
the 100-years-plus company, featured
in a recent list. Sebi is said to be hearing
appeals of those aggrieved by the move.
Tej, the hero
Rashtriya Janata Dal (RJD) chief Lalu
Prasad’s elder son and former Bihar
Health Minister Tej Pratap Yadav is
priming for his big Bollywood debut. On
Wednesday, the 29-year-old released a
poster of his upcoming movie on
Twitter. A blue-tinted poster
accompanying his post said, “Rudra, the
Avatar, comming (sic) soon”. This would
not be Yadav’s first brush with celluloid
though. He played the role of a Bihar
chief minister in a 2016 Bhojpuri film,
Apaharan Udyog.

BUSINESS LIFE > LETTERS

Investors, not banks, could spark the next crisis Prevention is better matic and legal courses.
K V Seetharamaiah Hassan
Valued for their simplicity, exchange-traded funds pose worrying risks This refers to Arup Roy’s report “PSU
banks more prone to frauds, says RBI’s Then and now
SATYAJIT DAS outright. For one thing, they don’t financial stability report” (June 27).
analyse prices, meaning that they There is no denying that most of these It refers to “Modi government raking

B
anks must bear much of the
blame for previous financial
crises. In the next one, ordinary
investors could play a more central role.
Ironically, they’ll do so through
vehicles created with them in mind —
exchange-traded funds, or ETFs. These
listed funds are passive by nature,
designed to track the performance of
an index of stocks, bonds, currencies or
commodities rather than to pick and
choose among individual companies.
The popularity of ETFs has soared
in the past decade. The proportion of
US equity-fund assets that are pas-
sively managed has nearly doubled in
that time to nearly 40 per cent.
Vanguard alone owns positions greater
than 5 per cent in 491 of the stocks on
the S&P 500, adding up to nearly 7 per
cent of the index’s total market cap. In
Japan, where the central bank owns
big stakes in ETFs, passive investors
hold over half of all equity assets.
It’s easy to see why such funds have
thrived. ETFs, invested in indices that
are theoretically diversified, have con-
sistently outperformed active managers.
Their simplicity is appealing to lay
investors, who can focus on broad asset-
allocation strategies rather than guess-
ing at individual winners and losers.
Costs are low, with fees typically run-
ning between 0.05 per cent and 0.50 per
cent. That’s become even more impor-
tant as returns broadly have declined.
ETFs, however, are riskier than
many investors appreciate. With cap-
weighted indices, for instance, funds
have no choice but to load up on stocks
that are already overweight and neg-
lect those already underweight. As
prices have risen, investors may
become overexposed to a few large
securities. That’s the opposite of “buy
low, sell high.”
ETFs can replicate indices in com-
plicated ways. Rather than purchasing
all the assets consistent with index
weights, some funds use a sub-set, thus
exposing investors to tracking error.
Others use derivatives, creating credit
exposure to the counter party. Some
ETFs use leverage to enhance returns.
Like other funds, ETFs can lend out
the fund’s securities to short-sellers,
which creates exposure to the return of
the borrowed assets. The rules gov-
erning indices can be changed, some-
times arbitrarily.
Worse, the ways in which ETFs —
by their design and their sheer size —
are warping markets aren’t well-under-
stood. ETFs encourage concentration
in a few, liquid, large-cap stocks, cre-
ating homogenous and momentum-
following markets. Markets become
susceptible to flows from a few, large,
passive products.
Artificial factors, such as inclusion
or exclusion from an index, forces buy-
ing and selling; this can lead to misal-
locations of capital. In the current equi-
ty cycle, for instance, over-weighted,
liquid, large-cap stocks have benefited
disproportionately from forced buying.
ETFs may even distort valuations
don’t contribute to price discovery.
They arguably weaken corporate
activism, as passive owners have little
interest in corporate governance.
Finally, ETFs increase volatility and
shrink liquidity. Passive funds exhibit
significantly higher intraday and daily
volatility, driven by arbitrage activity
between ETFs and the underlying
stocks. With ETFs increasingly impor-
tant as the marginal buyers and sellers
of securities, this may increase volatil-
ity in periods of instability.
At the same time, passive funds
lock up a large percentage of stocks
that can only be traded on changes in
market capitalisation or other index
metrics. Thus, the actual number of
shares available to trade may be a lot
smaller than investors realise.
Especially when dealing with small-
cap shares, certain bonds and com-
modities, many ETFs are predicated
on greater liquidity than is actually
available in the underlying assets.
If a crisis does arise, this is likely to
exacerbate the downturn. Where ETFs
have been the primary buyers, they
may have trouble finding anyone will-
ing to purchase the holdings they’re
trying to liquidate.
The good times, driven by a con-
fluence of policies favouring passive
strategies, have been very good to
ETFs. What investors should be wor-
rying about now is how resilient they’ll
be when conditions change. In every
crisis, untested structures have
revealed hidden weaknesses which
have threatened wealth and financial
stability. There’s no reason to think
next time will be any different.
© 2018 Bloomberg
public sector banks (PSB) would be
found abjectly lacking when it comes to
internal controls/audit mechanism,
work ethics and professional attitude,
besides the near absence of risk appetite
(with their hands virtually tied at their
backs) vis-a-vis their counterparts in the
private sector. No wonder the Reserve
Bank of India’s 17th Financial Stability
Report of June 2018 goes on to make
some highly scathing remarks about
their ability to prevent frauds such as
those that have rocked the country.
The observation, “In terms of the rel-
ative share of frauds, public sector banks
have a disproportionate share of over 85
per cent, significantly exceeding their
relative business share of about 65 to 75
per cent”, tells the real story. This also
points at a sort of nexus between the
erring staff of the lending banks and the
loan seekers as was the case with Punjab
National Bank. One needs to identify the
real causes by incorporating some sort
of auto-detection mechanism of all such
transactions. These banks must also take
due note of the highly enlightened path
suggested in this report to be able to wrig-
gle out of their current predicament
before it is too late. Since prevention is
always better than cure, the ball lies in the
court of the fraud-affected PSBs. They
should rise to the occasion, more so when
they are vested with the onerous respon-
sibility of safeguarding public money.
Kumar Gupt Panchkula
Worsening NPAs
Apropos “PSU banks more prone to
frauds, says RBI’s financial stability
report” (June 27). It is a matter of grave
concern that the health of many banks is
deteriorating with rising non-performing
assets (NPAs). The situation is a serious
threat to the security of depositors’ mon-
ey in banks. Already the interest on
banks deposits is low. To make matters
worse, even this cannot be fully pocket-
ed by the depositors since a portion of it
has to be earmarked as Income Tax.
The reason for the accumulating
NPAs can be traced to loans given to
high-profile people without adequate
collateral security. While politicians
wield their influence to get loans sanc-
tioned, a common man is scrutinised at
every step for the same. Waiver of farm
loans further hits the performance of
banks prompting commercial banks to
reduce interest rates. Reduction of
interest rate will be reasonable only
when the prices of goods and services
show a declining trend. Banks should
exercise utmost caution and not allow
NPAs to grow. Steps should be taken to
recover the bad debts through diplo-
> HAMBONE
up emergency issue to hide its failures,
says Congress” (June 27). Finance
Minister Arun Jaitley is right in com-
paring late Indira Gandhi to Hitler. The
late Prime Minister took many wrong
steps like Hitler and put country in seri-
ous crisis. While the Congress has called
this government’s rule as undeclared
Emergency and the party chief Rahul
Gandhi had even compared Narendra
Modi to Hitler before the general elec-
tions 2014, there is not an iota of truth
in their allegations. There might be cas-
es of beef lynching and attacks on Dalits
that could have been avoided, but it
would be unfair to term it an unde-
clared Emergency. We all have a right to
express our views and criticise the gov-
ernment. We shouldn’t forget that dur-
ing the 1975 Emergency, Opposition
leaders and the media were jailed. So
there definitely is a difference between
now and what happened in 1975.
Bal Govind Noida
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201 · E-mail: letters@bsmail.in
All letters must have a postal address and telephone
number
BY MIKE FLANAGAN
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OPINION 9
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Volume XXII Number 227 ILLUSTRATION BY BINAY SINHA

Seehofer and Markus Söder, the Minister-President of
MUMBAI | THURSDAY, 28 JUNE 2018 Bavaria. This looks very dubious and Ms Merkel’s CSU
partners will remain adamant as they are looking at

From bad to worse next October’s regional elections and don’t want to
risk losing ground against the AfD.
Ms Merkel cannot hope to get any succour from
The NPA crisis needs market-based solutions the new Italian government that is refusing to let
ships from NGOs rescuing migrants at sea to enter

I
n its Financial Stability Report (FSR) released on Tuesday, the Reserve
Italian ports and is now at the centre of the migrant
Bank of India (RBI) insisted that India’s financial system remained stable crisis. The Northern League-Five Star Movement
overall. But the prognosis for the bad loan crisis should cause policy- coalition won the elections on a strong anti-migrant
makers to worry. The FSR predicts that, if the prevailing macroeconom- platform expressing the popular anger, frustration
ic environment stays the same in the coming year, the ratio of gross non-per- and anxiety triggered by the unrelenting waves of
forming assets (NPAs) to total loans and advances will rise to 12.2 per cent in migrants — mostly Muslims — seen as a threat for the
country’s culture and identity. The Italian govern-
March 2019, an increase of 60 basis points over the figure for the end of the
ment will thus not budge. Another factor contributes
financial year 2017-18. This would be the highest since 2000, the last time India to the position of the Italian coalition in power: One
was faced with a banking problem in the wake of the Southeast Asian crisis. reason for which people voted against the established
Of course, if the economic situation turns adverse — perhaps due to global fac- political parties was that the preceding prime minis-
tors — the gross NPA ratio would rise further, to 13.3 per cent in March 2019. ters and their governments were seen as too submis-

Europe: The crisis

For public sector banks (PSBs), which are the locus of this current crisis, the sive to Brussels and to Germany and its northern
allies’ edicts on some eurozone economic policies
gross NPA ratio would be 16.3 per cent in March 2019 under current circum-
seen as hurting Italian interests. So Italian Prime
stances, and 17.3 per cent if things get worse with the macroeconomy. For six Minister Giuseppe Conte and his interior minister
banks subject to the RBI’s prompt corrective active (PCA) framework, which Matteo Salvini are in no mood to accommodate.

that will not go

limits their functioning, the capital adequacy ratio would dip to 6.5 per cent
in March 2019, below the 9 per cent regulatory mark. Banks with exposure to
infrastructure, gems and jewellery, cement, and engineering are particularly
in danger.
It is clear that, contrary to expectations in some quarters, the NPA crisis is
not going away. Nor are current plans for the recapitalisation of PSBs likely to
be adequate once all is said and done. While the new insolvency and bank-
ruptcy code has taken great strides over the past year, it is also clear that it can-
not yet be declared a success in terms of overcoming the current crisis. The
The European Summit on June 28 will presum-
ably come up with some measures such as reinforc-
ing EU border patrol operations and creating “cen-
tres” outside the EU — in Tunisia and Libya — for
processing migrants who are rescued or intercepted
at sea, and deciding on whether they will be accept-
ed or not before they reach the continent. Whatever
The European Summit is unlikely to come to grips with the migrant support French President Emmanuel Macron will
crisis nor should one expect significant progress on eurozone reforms provide to the beleaguered Ms Merkel — as he needs
her political survival in Berlin despite their differ-

T
hursday’s European Union (EU) summit is
FSR points out that only recently have financial creditors — meaning banks meant to discuss institutional and structural
— taken to using the new insolvency process. Of the 701 cases admitted by the issues crucial to the future of Europe. But once
National Company Law Tribunal, only 176 have been closed — of which only again, the meeting will be overshadowed by the
22 have been resolved. The government’s current approach appears to be to migrant crisis and the deep divisions it has been cre-
seek regulatory forbearance where possible, and to rely otherwise on existing ating over the last six years.
recapitalisation schemes and the insolvency process. It is true that in many ways Europe
brought that calamity upon itself by
But given the growing magnitude of the problem, a more systemic approach refusing to make a number of tough
is needed. The only sustainable solution remains governance reform in the choices that would have created a lot
banking sector. The RBI’s prompt corrective action framework is all very of controversies at the time but might
well, but the hope that PSBs subject to PCA will somehow return to business- have helped reduce the magnitude of
as-usual must be accepted as a fiction. Nor can a bad bank, which seems to the crisis now straining European
cohesion to the limit. It was clear from
have found favour again in the Union finance ministry, be seen as a solution.
the beginning that Europe was court-
It may be politically unpalatable in an election year, but the government ing disaster by not enforcing an iron-
must seek out more permanent solutions to the problem of PSBs — which, the clad distinction between economic
FSR points out, are also more prone to fraud. Market-based reform must be the
CLAUDE SMADJA
migrants and genuine political asy-
priority. The central message should be that all banks will eventually be sub- lum-seekers; by becoming the de fac-
ject to market discipline or they will be closed or otherwise rendered irrelevant. to accomplice of human traffickers, who would aban-
don migrants in the middle of the Mediterranean
Till that happens, the government should consider converting some of the
giving them the phone number of Italian or Greek
worst performers among PSBs to narrow banks, which won’t lend at all and coastguards — or non-governmental organisations
therefore carry virtually no credit risk. (NGOs) — who would then bring them onshore; by
refusing — under hypocritical pretexts — to use mili-
tary means to put out of business human traffickers
migrants have made matters even worse, the crisis is
not only exposing the EU’s inability to come up with a
collective solution to an issue of existential social, polit-
ical, ethical and economic importance but also high-
lighting the fact that Ms Merkel, once the most pow-
erful leader in Europe, is now a political ghost whose
authority is challenged in Europe as
well as in her own government.
The Dublin agreement, according
to which the asylum request has to be
presented in the European country
the person arrives in — mostly Italy or
Greece — and which thus makes that
country assume the greater share of
the asylum burden is now dead in the
water with Italy refusing to comply as
it was left holding the bag by other
member states. And there is a revolt
in Germany against Ms Merkel’s 2015
initiative and the social, political and economic prob-
lems it has brought that led to the spectacular rise of the
ultra-right Alternative for Germany (AfD), which got
into the Bundestag for the first time last September as
the country’s third-largest party.
Under pressure in her own Christian Democratic
Union (CDU) party and from the Christian Social Union
ences on eurozone reform — it is not expected to
lead to more drastic policies being adopted.
So, don’t expect this European Summit to come
to grips with the present crisis. Whatever will be
decided might not be a sufficient deterrent for the
economic migrants who today represent the large
majority of those trying to reach Europe. The kind of
tougher policies adopted by Hungary, Poland or
Austria — and now Italy — will not be followed by
the rest of the EU members who see them as contrary
to “European values”.
In the same way, don’t expect any major progress
beyond the minimal agreement that Ms Merkel and
Mr Macron achieved on eurozone reforms during
their meeting in Meseburg ten days ago. The impli-
cations of this situation are quite significant. Europe
will continue to be bogged down by challenges that it
does not have enough cohesion to manage: From US
President Donald Trump’s frontal trade assault to the
migration crisis and from the management of Brexit
to the continuing strength of the populist movement,
apart from dealing with the competition from Russia
and China. As Ms Merkel’s authority fades away with-
out a commensurate increase in Mr Macron’s heft to
replace her as Europe’s leader, the German-French
duo’s ability to steer the evolution of the EU and the

Don’t derail justice easy to identify and locate.

Mallya’s offer to settle should not affect legal process
And then German Chancellor Angela Merkel made
things even worse with her unilateral decision in
August 2015 to open her country’s doors to 1.2 million
migrants, and subsequently trying to lessen the
(CSU) of Bavaria, without which she would not have a
majority, and facing an ultimatum from Minister of
Interior Horst Seehofer, who wants to enforce faster
asylum procedures and increased deportations of
those being refused asylum, Ms Merkel was trying to
eurozone will decline. This, even as Poland, Hungary,
the Czech Republic, Slovakia and Austria continue to
look at certain political and institutional issues their
own way and countries such as Italy pursue, first and
foremost, a purely national agenda.

F
ugitive liquor tycoon, Vijay Mallya, declared a wilful defaulter by
the banks, has long been silent in exile as the Indian government’s
request for his extradition wends its way through the British courts.
Mr Mallya had fled the country in March 2016 and has been living in
London since then, evading Indian efforts to bring him to book. He has now
broken that silence, becoming active again on the micro-blogging website
German burden through the imposition of mandato-
ry quotas of migrants that other members would be
required to take. She hit a brick wall with the opposi-
tion, among others, of the Poles, the Hungarians, the
Czech, and the Austrians.
As the deadlock and the continuing inflow of
get out of this situation by engineering an EU-wide
solution. This, unsurprisingly, failed last Sunday dur-
ing the impromptu Migrant Summit among 16 EU
members. The German chancellor is now desperately
trying to pull out bilateral agreements that would help
assuage her Bavarian coalition partners led by Mr
You can bet your money that Mr Trump, Vladimir
Putin and Xi Jinping are observing all this with a lot of
interest… and glee.
The writer is President of Smadja & Smadja, a Strategic
Advisory Firm @ClaudeSmadja

Twitter and releasing letters that he wrote two years ago to the prime minis-

Crypto-universe expands beyond bitcoin

ter and other officials. These letters lay out Mr Mallya’s case — not in legal
terms, but for the court of public opinion. He outlines his claims to being a
legitimate, indeed successful businessman; argues that the difficulties faced
by Kingfisher Airlines were beyond his control and that he had appealed for

A
government assistance at various times in vain; and insists that he is being sort of “cryptobrawl” broke out last month at
the Milken Institute Global Conference
turned into a scapegoat or “poster boy” for bank defaults. He objects in par- between economist Nouriel Roubini and pan-
ticular to being called a wilful defaulter, claiming that he took a loan of ~55 bil- el participants more optimistic about the future of
lion and paid back ~13 billion — and is willing also to pay back another ~44 bil- cryptocurrency technologies. I had the opportunity
lion but the banks are demanding that he also pay interest charges that take to participate in a partial rematch at Battle of the
up the whole amount to ~90 billion. Mr Mallya has also offered to sell assets Quants, where Roubini was just as negative and DMS
worth ~139 billion under judicial supervision, and said that if this is rejected Governance's John D’Agostino pre-
sented a moderate defence.
then it proves that he is being treated unfairly. All of the heat concerns the bor-
How should the government respond to Mr Mallya? First of all, this is not der of crypto and traditional
the first time that Mr Mallya has reached out in this manner. In March of 2017, finance, but much of the impor-
he had similarly argued that he was willing to come to a one-time settlement tant stuff is happening far from
with the banks, saying “Hundreds of borrowers have settled. Why should the border. For example, one of
Roubini's claims is that advances
this be denied to us?” At that point, he had also called for a Supreme Court
in financial technology by exist-
intervention. The fact is, however, that the banks have rejected Mr Mallya’s ing financial institutions and start-
offer previously. Now the law must take its course; Mr Mallya has already been ups are delivering on many of the
dubbed a “proclaimed offender” in the courts. The Enforcement Directorate promises of crypto-enthusiasts, AARON BROWN
is set to soon file a fresh charge sheet against him and his companies on and these will continue to trans-
charges of money laundering and alleged cheating. In fact, this outburst form financial markets. That’s
true. However, many of those advances were
from Mr Mallya is a reminder that the government must, in fact, do whatev-
spurred by the threat of crypto-competition. It’s
er is necessary to speed up the legal process; justice must not be derailed. often said that the financial industry uses 1990s
Mr Mallya has his own reasons for going public at this point. He is in the technology. A better description is 19th-century
midst of a complex extradition process in the United Kingdom, and part of his paper technology with many layers of patches to
argument is that he will not receive a fair trial in India. His claim of being made automate it, but no redesign.
a scapegoat and denied the right to settle his dues for political reasons is part Roubini attributes the recent change of attitude to
advances in technology, but previous advances were
of this larger narrative that he seeks to build up in order to frustrate Indian
accepted only in minimal doses. It took credible
attempts to extradite him from Britain. This also comes just days after the gov- white papers showing how the new technologies
ernment has sought to move on him under the new Fugitive Economic could bypass the traditional financial system entire-
Offenders Ordinance. There can be no reason to suspend the due application ly to spur a change of mindset. Finance has always
of law in Mr Mallya’s case. Mr Mallya’s argument that he is being made a scape- been an information-processing business, but for
goat, even if taken at face value, should merely be a reminder that other cas- the first time it’s acting like it.
Another Roubini claim is that crypto hasn’t
es should also be prosecuted with similar zeal.
delivered significant value except to a few criminals.
True, there has been no crypto-application that has
touched the lives of more than a few million people,
and even then mostly in areas that are either silly or
circular, or that facilitate controversial peer-to-peer
transactions. Although I think it will be five years
before crypto is a significant part of a hundred mil-
lion people’s lives, it has already caused change by
liberalising attitudes toward transactions that both
buyer and seller desire. (Full disclo-
sure: I own bitcoin and other cryp-
tocurrencies.)
I claim grudging agreement from
Roubini on my big point. 1 There’s a
crypto-universe unrelated to the dol-
lar price of bitcoin. The code base is
increasing and improving every day.
The flow of top developers is still
strongly out of traditional tech and
into crypto. Computer science grad-
uates from top schools are signing
onto crypto because they find more
fulfilment changing the world than
hoarding other people’s data and selling ads. 2 Add to
that enormous contributions from open-source
developers who are pure altruists.
So what’s the problem? We have a bunch of
technophiles slaving away on a speculative vision
of the future, which most of us don’t understand
well, but whose potential is causing financial reg-
ulators and institutions to up their games. That’s
all good, whether crypto causes a social revolution
or never progresses beyond vapourware and a few
niche applications. The problems crop up when
crypotcurrencies get exchanged for dollars. This
has led to fraud, flouting of securities laws, delu-
sional promotions, boom and bust. 3 Roubini
thinks that’s all it has led to, but I think that
beneath the fuss there has been slow and thought-
ful progress toward peaceful coexistence of cryp-
to and traditional finance.
One possibility is that the crypto-universe will
run independently of traditional finance, but that
would require it to become self-sustaining, and it’s
nowhere close to that happening. Another possibil-
ity is that a method of exchange will evolve that
brings in enough dollars to pay developers and elec-
tricity bills, but avoids fraud and allows the vast
majority of crypto to circulate for its intended purpose
rather than be hoarded or dumped based on its dol-
lar price fluctuations.
Should you invest in crypto? For Roubini, the
answer is a resounding no. For D’Agostino, it’s dan-
gerous but careful investors can find attractive situ-
ations. I think it’s appropriate for 0.5 per cent to 5 per
cent 4 of one’s portfolio, but only for those willing to
take returns in the things they will be able to purchase
with crypto. Buying crypto is like buying a residence.
It might or might not make you money in dollar
terms, but if you’re happy living there — taking your
return in the asset itself rather than its value — it can
be an unbeatable investment.
©Bloomberg
1.
His reply was only, “They're not all altruists,” which is the
most you can hope for from someone known as “Dr. Doom.”
2.
They want good salaries plus the chance to get rich, of
course, but by directly building something of value, not
collecting stock grants from a giant corporation in which
they play a tiny role.
3.
I accept D’Agostino's estimate that 80 per cent of ICOs are
frauds, 12 per cent were already failures at time of issuance,
and only 8 per cent are ideas that remain viable. Roubini
actually quoted this in the debate, but D'Agostino pointed
out that he supplied the estimates.
4.
I use 2 percent myself, and have since 2013, but I have no
strong basis for that calculation.

Neither East nor West: An Iranian rhapsody

Shiraz. It is very famous as the friend-
liest city in Iran, it is the city of poetry
and gardens and wine!!! Your Persian
friend, Habib."
Intrigued by the note whose writer
Ms Pryce could not locate but eager to go
BOOK REVIEW on a new adventure after successful trips
VIKRAM JOHRI to South America and Africa, she set
about organising a trip that would prove
foundational for her understanding of
land gleaned from media and popular or checking that they were in agree-
perception often differed significantly ment about the plan.”
from her private experiences during Her fears about the Islamic
travel. Armed with this burst of opti- Republic largely prove unfounded.
mistic thinking, Ms Pryce boarded the She meets ordinary Iranians who
train from Turkey that would drop her assure her that images of the angry
off at Tabriz, in northwestern Iran. protester shouting “Death to America”
From there, she would travel close to beamed on screens around the world
3,000 km by bike to represent a minority.
finish her journey in The author’s fears about the In upscale Tehran
Islamic Republic largely
sounds strange but in Iran I feel alive,
even when I am out, walking around in
the streets,” a software engineer tells
her. “In Canada I often felt alone, lonely,
cut off, even with other people. It is as if
they are not fully alive…”
Due to her contacts, Ms Pryce natu-
rally interacts with well-off, Westernised
Iranians, the kind who denounce the
religious order running the country. She
road, of the picturesque route along
the Caspian Sea that she is eager
to travel.
But her plans are torpedoed by the
remnant of a heavy snowstorm from a
few days ago. Ms Pryce, nevertheless,
makes the trip as far as she can and
only when confronted by the possibili-
ty of utter and total exhaustion and
possibly death does she give in and
retrace her steps.
It is pluck of this sort that sees this
daring woman through her long jour-
ney into the heart of Iran. Luck plays a

I
n 2011, protesters, livid at the sanc-
tions imposed against their country,
stormed the British embassy in
Tehran and set it on fire. In retaliation,
the British government shut down the
Iranian embassy in London. At about
the same time, Lois Pryce, the author of
the book under review, found a note
tagged to her bike parked outside the
Iranian embassy in Kensington.
"I have seen your motorbike and I
think you have travelled to many coun-
tries,” the note read. “Please do not think
of what has happened here and in
Tehran. These are our governments, not
the Iranian people. WE ARE NOT TER-
RORISTS! Please come to my city,
not just Iran but the larger West Asian
world with its, to the Westerner, secret
codes and inexplicable social etiquettes.
No sooner had Ms Pryce firmed up
plans to travel to Iran than she was bom-
barded by warnings about the land. This
was reasonable, given that Ms Pryce was
to cover the country on a bike, an idea
that may not have many takers among
the ruling establishment. She was
reminded of the strict mores enforced
by the Revolutionary Guards and the
Basij, armed militia that took orders
directly from the religious order helmed
by Ayatollah Khamenei.
Yet, Ms Pryce’s earlier travels had
taught her that the impressions of a
Shiraz, Habib’s prom- neighbourhoods, she meets youngsters who feel oppressed by role no doubt, particularly when a
ised land. prove unfounded. She meets mingles with men the series of regulations they are meant friend saves her from an altercation
The book is a com- ordinary Iranians who assure and women who live to live under and long for the pre-1979 with four members of the dreaded
pendium of the peo- her that images of the angry Westernised lives, era that had defined their parents’ Basij. Yet, the joyful tone of the book is
ple Ms Pryce meets protestor shouting ‘Death to drinking bootleg youth, during which the Shah, even a testimony to how safe, ultimately,
and the experiences America’ beamed on screens liquor and wearing though corrupt, permitted greater per- Iran turns out for her. Ayatollah
she has, most of around the world represent well-fitting outfits sonal freedoms. Khomeini’s ominous words for his
which are surprising- a minority that are as far from Apart from the political nature of country — “neither East nor West” —
ly pleasant. She is the chador and hijab the trip Ms Pryce undertakes, the book turn into altogether less sinister in Ms
welcomed by strangers everywhere she as they could be. is particularly good at capturing the Pryce’s humour-filled telling.
goes –– in the bazaar at Tabriz, she is In due course, Ms Pryce comes to dichotomy of the lonely traveller as
asked by a family of three to join them know a country whose image as a victim she both longs for and is reluctant to REVOLUTIONARY RIDE
for dinner. “I was struck, not only by of Western sanctions tells only part of partake in company. After spending a On the Road in Search of the Real Iran
their hospitality and kindness, but the story. She meets prosperous Iranians rapturous night in a hotel in the Lois Pryce
[also] by the ease of it,” she writes. who have studied in the West but since foothills of the Alborz mountain in Hachette
“There was no muttering between returned to run family businesses or the company of bohemian Iranians, 287 pages
them as to whether it was appropriate, become entrepreneurs. “Yes, I know it Pryce longs for the solitariness of the ~499