shrink rap

Some orphaned notes that I had scribbled during my summer stint in India and wanted to just disseminate the information to anyone planning to do internships in India or just get an idea on the Indian markets.

Blogreader Beware! any information cited here is taken from pure hearsay during my india trip and interspersed with some of my own opinions and observations about the Indian financial market. I don’t claim to be a subject matter expert in any of the topics discussed below. Any political incorrectness, efforts to appear humorous gone awry,  apparent uptightness or just plain immaturity: blame it on the shrink. An extreme version of what I am trying to tell you is: You may not want to believe a word of what is mentioned below. (Hopefully this removes any room for misinterpretation on my disclaimer). If you find this info useful, ..great. If not, then these are some 10 minutes of your life you will never get back. I profusely apologize for that.
Also, lacking any creativity, i have used the master-grasshopper template. (How could you not be into Kung-fu, man ?!?!)

Master : Grasshopper, tell me I’m listening. How have you been doing?

Grasshopper : Not too well, Master. After investing a lot of time and effort in IB, it seems that suddenly the recruiting scene isn’t very good. I am still holding strong against giving into peer pressure. A lot of my Chicago Booth friends are trying to jump ships into consulting. Some are hedged, given their consulting backgrounds while some are not and trying to spin whatever story they can (I don’t blame them). I am beginning to wonder if I have quasi-rational expectations of myself. Am I succumbing to some self-serving biases?

Master: I don’t know what you mean.

Grasshopper: Do you watch the HBO TV series: Entourage, Master?

Master : Yes I follow it avidly.

Grasshopper : well, the other day I was watching a repeat of last season. This particular episode shows Vince (the protagonist) and his cronies at various crossroads in their life. (I tried hard not to analogize). They seem lost and they need to make a crucial career move. Thats when they decide to head to the Joshua Tree National Park with magic mushrooms to look for epiphanies in Eric Roberts’ ultra-cool Winnebago. Naturally they are depending on hallucinations to give them some inspiration. I thought to myself, ‘if only it were as easy as that’. Then it hits me…Wait a minute..haven’t I been on these magic mushrooms for the past year ? Hasn’t Chicago Booth been my Joshua Tree? the courses and the internship and the drive to get into banking ?  ..those are the magic mushrooms. No wonder I have been having visual hallucinations and feelings of euphoria all through last year.

Master : Yes, these ’shrooms are said to increase emotional awareness and possibly cause visions of grandeur. It is also reported that the biggest danger associated with these magic shrooms is misidentification. You may be going through that.
Looks like you need some antidote from the Career Services office at Chicago Booth. I felt that they came out with some great advice. Here’s a quick snapshot of what they said ‘ If you are considering a career shift, with the market turmoil, you may be tempted to broaden your focus and pursue anything and everything.  “The market’s not great, I should cast a wide net, you might think.”  Not really. Avoid that temptation.  Especially in this market, companies are going to hone in on people who are genuinely interested in them.  And frankly, passion is tough to fake.  So our advice is to really focus in on what you want to do, figure it out, figure out why you’d be great at that, and then research the industry and the firms that excel at it.  We’re not saying don’t have a Plan B – you should have a Plan B and a Plan C – but make sure your Plans B and C leverage your strengths too – and that there are synergies between your plans .’ You see Grasshopper, passion is tough to fake.

Grasshopper : Master I am confused. I don’t know what you mean.

Master : okay, let me explain to you in words that you can understand,  do you watch the Showtime tv series Californication?

Grasshopper : Yes, I avidly do.

Master : Do you remember how the second episode (last season) opens up with Pamela Adlon’s character waxing a p0rn star while Evan Handler talks to this p0rn star who is undergoing a mid-life. She talks about how she loves what she is doing but is not able to get the jobs she wants. Thats when Evan gives this star a piece of advice. He asks her to go mainstream ..he asks her to graduate from p0rn movies to regular commercial movies (for the glitz and glamor) which is when Pamela interjects with yet another mother lode of a quote demanding Evan not to fill her client’s head with such BS saying  ‘She does what she does and is pretty good at it. You find your f***ing niche and you stick to it’. See Grasshopper! do you get it now? ‘You find your f***ing niche and you stick to it’.

Grasshopper : Ah yes master I get it now! That was very profound.

Master: good ! Now On a related note, how was your India internship experience.

Grasshopper : I have already commented a bit here and here. But I am not happy with the Chicago Booth exposure back home. I think a lot of awareness needs to be created. Very few people I talk to are fully aware of the Booth brand. How does one leverage the school if one wants to work in India.

Master : Well, building a brand always takes time. The Booth ambassadors (adcom, student clubs etc) are trying their best to raise awareness. If you are looking for a job/internship back home then during interviews and such, try focusing on your past work experience in India. Its imperative to have local work experience. (For now) slipping in the Booth name would be a tactical after-thought at best (for some companies)

Grasshopper : What about the part-time Banking Club ? Won’t they help?
Master : Well, so far that club looks like a Mickey Mouse club with the students (mostly the fob-mob) running it not knowing what they are doing; none of them seem to have prior banking experience. If you’re in the part-time program and you’re running a club like banking (where you intend to generate traffic via recruitment and building strategic relationships), then by gosh by golly, you better have some street cred. Which is why they have to be supervised by at least 3 members from the Career Services office. Thats a shame. You should look at the banking club in the full-time program. They are prolific and worth it. Even the private equity club in the part-time program isn’t as active as its counterpart in the full-time program. Just by inviting speakers and holding such events isn’t going to help the neophytes. It takes a lot more than that.
I am going to put my money on masala-style publicity. By this I mean using Bollywood to expand the Booth name. Rumor has it that you will soon see a Bollywood movie called ‘Whats your Rashee‘  (starring Harman Baweja and Priyanka Chopra) releasing soon where Chicago Booth has been advertised. I am looking forward to it. Be prepared to watch a scene shot in the Hyde Park Campus where you see Baweja’s charater as a Booth student (with a Chicago Booth sweatshirt) and a Booth professor as well If all else fails, this is a sure-shot way of creating brand recognition in India.

(On the M&A scene in India, inbound investment, cross border acquisition mentality, private equity ..)

Grasshopper : Let’s talk about some work-related stuff. I have heard that the Indians are very afraid of takeovers. So they will have provisions like SPV’s in which they will invest some % of their holding. Is that true?

Master : The family aspect is so entrenched in India that even the SEBI guidelines talk about a Hindu Undivided family (HUF). HUF is actually an assessable entity. PE firms in India have had a tough time convincing family owned biz to surrender some control in return for cash especially as a near-6 yr bull run meant these companies could get generous valuations from the stock market.
Indian family owned firms (small cap) tend to be sprawling entities with diversified interests and lacking clear succession plans, which makes smaller firms particularly vulnerable at this time. These firms see merit NOW in selling non-core assets or a stake to PE. They would rather sell a stake to PE than sell out to a rival.
On the M&A scene, foreign companies can be merged with Indian Companies, but not the other way round. RBI (Reserve Bank of India) is strict and does not look favorably at repatriation of investments (capital in india being paid out as dividends abroad). Restructuring is hot and happening too. The deal activity has declined, but m&a activity hasn’t – there is still a lot of delisting going on, share buybacks etc. (well..statistically the m&a activity has come down. As of this writing, total number of M&A deals for the first 6 months were 265 valued at a total of USD 18.5B compared with 335 deals valued at a total of USD 43.9B for the first 6 months in 2007. Total deals in 2007 were 676 valued at USD 51.1B and I don’t have numbers for 2008). MNC’s are trying to delist their indian subsidiaries, promoters of companies are trying to sell out a stake of their company they think is not running well. This applies to the big Indian companies.  Look at Tata Group selling a 26% stake in Tata Teleserices to Japan’s DoCoMo for $2.7B. Even Ranbaxy sold about 66% of its stake to Japan’s Daiichi Sankyo for nearly $5B. Bigger Indian companies (large cap) are willing to divest their holdings.

The banking sector within the country is another story. Currently, NBFCs (Non-Banking Financial Companies) are set up because the Indian govt does not want the private banks to compete with the public sector banks and hence they (NBFC’s) have their own regulations (NBFC guidelines) compared with the SEBI guidelines for public sector banks. Currently the RBI is not ready to open up the space to foreign players. the local banks are ‘not there yet’ to compete. Once the PSU banks are all shored up and ready to compete, the RBI will then deregulate the banking industry. RBI was planning to have these PSUs ready by 2009, but since its not ready yet, another 3-4 yrs shall be ripe enough to do so.

Grasshopper : So what about all the Foreign Direct Investment (FDI) inflows to India. They have gone up from 503,573 INR in 2006 to 797,356 INR in 2007 (Source: CEIC data)

Master : Here’s the skinny on foreign investment in India. There are 2 ways by which foreign investors can invest: the FII (Foreign Institutional Investor) route which is mostly used by buy-side companies to invest their funds in equities or debt in India. You will usually observe PE firms using this FII route to make investments in Indian companies. The second route is via the FDI way where foreign companies set up operations in India or make investments in publicly listed companies. The time horizon for FDI is usually longer than that of an FII.
India’s attitude towards foreign investment has been ambivalent at best. The regulatory risks pose a huge barrier to foreign inward investment. For e.g. in the telecom sector, the foreign equity cap was 49% on considerations of national security. But getting Indian entrepreneurs to come to the remaining 51% was a tough task. So the rules changed to allow this ForeignCo to hold a 49% equity in some Parent company whose IndianSubCo could invest the remaining 51% in the sector. This increased the bandwidth to 49% + 49% of 51% = 74%.  (As per the new Press Note 2, this cap is now 100% with 26% divesting in 5 yrs). Not only this, back in 2007, to allow the NYSE Group and other investors to buy a 20% stake in the National Stock Exchange of India, the government lifted a ban (just 3 weeks before it allowed the investors to do so) on foreign ownership of Indian stock exchanges. Prior to this, the limit for a single investor was set at 5%. Thats why I say ‘ambivalent’.

Grasshopper : So why don’t we liberalize the FDI upto 100% in a sector

Master : Just by doing so, doesn’t mean there will be a deluge of investments. In the power sector, for example, foreign investment of 100% has been permitted for many years, however every foreign company in that sector that entered India has had to go back.

Grasshopper : What do you think about the innovation in the financial markets ? I am afraid some sectors (life insurance in India for example) are in the transition phase to being regulated. Thus, deals that were executed during such a time were effected at a significant premium to market estimates. This does raise the bar of valuation, benchmarks and estimates, doesn’t it?

Master : Don’t worry, there are valuation overhangs which should have a sobering effect on the valuation levels. These are mainly: (1) relatively low regulatory entry barriers: while there are international players pitching in, this could be disruptive to market profitability and could spread value across more players. (2) there is a relatively large linkage of business to the equity markets for certain sectors. This potentially raises the risk of growth and hence could also impact the profitability of additional growth. (3) Usually, for sectors growing at a rapid pace since opening up, there is always a market sentiment of mis-selling. So there are often regulatory or return reversals to prevent the dangers of mis-selling. Further, this reversal will not be too damaging to the economy if there is a reputed and relatively efficient (desi style ‘efficient’) government owned player or a PSU in that sector for the market to fall back on. And usually there is one PSU at least in any sector ..you see.

Grasshopper : OK I see. I have a gut feeling that most of the international heavy weights are working around the lack of disclosures in some sectors/companies and consequently in fine tuning their valuations by engaging in proxy investing via holding companies. Isn’t that the case with  the life insurance sector in India.

Master : Yes, I think you are getting somewhere. I feel its a vicious circle. Some players believing in the under valued sector, tend to wait for a few years before listing themselves. They are hoping to achieve greater valuations from an accounting standpoint and from the perspective of value creation. The drive to boost business and earn more commissions by the agents could ultimately impact the credibility of the life insurance industry. This is where adverse selection forebodes a possible  downturn.

Grasshopper : But you haven’t answered my question on innovation. Do you see it happening in the financial markets in India?

Master : Patience Grasshopper. there’s this outlook where the whole opening up to foreign players has stifled innovation. Look at the life insurance sector. There are about 16 private players so far (since deregulation) in India and each of them has a joint-venture with a brand name abroad (eg TATA AiG, Max NYL, Bajaj Allianz), with the foreign promoter not holding more than 26% of equity stake. The local companies, instead of innovating on newer insurance products with varying risk aversions, do a joint venture with a global brand and flush the indian market with already devised products. I am not sure if the preferences/characteristics native to the indian demographics is even taken into account. Of the premium collected via these private life insurance companies, 85% of the total is invested in RBI bonds and the remaining 15% is given to the global company to play with. Where can you think of innovation in this?

(this being a blog on ‘oneness’, there had to be some cocktail spirituality)

Grasshopper: While we are on innovation, I think that gives me a perfect segue to the Satyam fraud. I realize the MD of Satyam went for the old-fashioned reason: greed. But he could have at least shown some innovation while committing the fraud. He used such a hackneyed way of doing so. If he had to commit fraud, couldn’t he have come up with something innovative like Enron’s FAS 140 Transactions: the infamous Hawaii II Trust transaction. He would have succumbed to public disgrace..no doubt, but at least he could have gone out in style ?

Master : (!!) See, what is really needed in today’s corporate culture is a dose of spirituality. Its often overlooked and badly needs a redux. The corporate leaders ought to understand that spirituality pervades every sphere of life, be it business, family, education, ..or other engagements.
Kautilya’s Arthashastra is a fruitful starting point. This pioneering comprehensive classic is dated 4th century BC and is the grand daddy of Competitive Strategy. Kautilya was the mentor of Chandragupta (the great empire builder of the pre-Christian, post Buddhist era). Together they founded the Maurya Dynasty and built the first empire in India. This tome talks not only talks about the art of war but also lays down guidelines and principles for the grooming and conduct of a king. This classic shows what timeless fundamentals underlie spirituality-grounded leadership and hence spiritually guided secular institutions too – businesses not excluded. Today’s prescription of running corporations smack of feudal authoritarianism which stultifies personality development. This is a perennial fact of the animate world. Hence kautilya’s spiritual pragmatism for leaders has to be evaluated in today’s light.

Master: Weren’t you going to start a new group called Spirituality in Business when you joined Chicago Booth, what happened?

Grasshopper : Well, I …

Master : Okay Grasshopper, your time is up. There are other lost souls waiting for their McSessions.