Vodafone Victory - Measuring Arm’s length…and width

India Infoline News Service | Mumbai | January 29, 2015 13:21 IST

Attorney General Mukul Rohatgi’s epoch-making ‘advice’ has turned out to be biggest affirmation yet of the government’s intent to improve the investment climate of India. Vodafone, Shell, Essar and many other corporates will profusely agree.

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The government decision in agreement with the Bombay High Court ruling in the 3200 crore Vodafone tax dispute case will undoubtedly bring cheers for global investors, those battling similar disputes with the Indian taxmen as also prospective India entrants. In the same decisive breath, the government has finally and formally acknowledged the futility of needless litigation that seeks to unduly stretch hypothetical arguments beyond the boundaries of legal truths. Both developments spell great news for Indian industry and economy going forward.

For those unaware of the facts of the Vodafone case, here’s a brief account of the much-talked about dispute:

Opponents: Tax authorities Vs Call center Vodafone India Services, a wholly-owned subsidiary of Vodafone Teleservices India Holding Mauritius (both companies owned by Vodafone London)

Opposition: When Vodafone India issued 2,89,224 equity shares to its Mauritius-based holding company at premium of Rs 8509/- per share, tax authorities placed the arm’s length price at Rs 53,775/- per share and deemed the difference between fair market value and transacted value– Rs 45,266 per share amounting to Rs. 1309 crore – as loan and slashed Rs 88.35 crore as interest amount.

Vodafone India contended that section 92 (1) can’t be enforced since there’s no income from the equity sale. It further cited Section 2(24) (xvi), notes (i) (e) to Section 92B and 92 (2) which respectively state that:

Capital receipts are not part of income unless specifically provided for,
Only the present or future income on account of business revamp alone can be subjected to tax,
And, that the objective of ensuring against overstated losses/understated profits didn’t apply to the Vodafone equity issuance.

Outcomes: Vodafone moved the Bombay High court against the tax diktat which in turn instructed the Dispute Resolution Panel to decide on the matter. The Panel upheld the Assessing officer’s jurisdiction to impose Chapter X following which Vodafone again moved the Bombay High Court. The court ruled in favor of Vodafone on October 10 rightly pointing out the difference between charge of tax and measure of tax. It held that the issue of shares at a premium by Vodafone India to its non-resident holding company did not result in income from the international transaction.

The government nod to Attorney General Mukul Rohatgi’s counsel against challenging the High Court decision has brought a conclusive end to this unduly lingering issue. It was amply evident, all along, that when a wholly owned subsidiary issues additional to its holding company, the capital inflow has no impact whatsoever on its income. And in the absence of any ensuing income, arm’s length pricing is devoid of the very coordinate plane to support its applicability. The tax authorities clearly went too far in their hypothetical arguments, whether in misconstruing the inclusivity of the income definition as per statute or taking recourse in seemingly accommodating words like ‘any income from an international transaction’, turning more wishful than wise in their desperate contention.

The Attorney General’s momentous ‘advice’ on the Vodafone case is not a brownie point for the ruling government as it is being made out to be. It’s a supremely objective opinion on a sticky issue forcibly made sentient by tax authorities all this while. No wonder, his favorite book is Ayn Rand's ‘Atlas Shrugged’: the most authoritative endorsement of the virtues of objectivism which in the context of law courts implies settlement of disputes according to objectively defined laws.

Cloud Computing: Towards a blue sky of business benefits

IIFL | Mumbai | January 28, 2015 09:31 IST

Measurable business value from cloud computing will become evident once we dispel the dark clouds of myths and misconceptions that yet eclipse the battered buzzword.

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Once a buzzword, the Cloud is today a ubiquitous phenomenon – used by search engine giants, smartphone apps, gaming labs, tech firms, research outfits, business organizations in one way or the other. While some firms have incepted their independent cloud teams and others have launched ambitious cloud initiatives, there are several availing of a host of cloud services. Besides, many more are presumably evaluating the pros and cons. Ask any company head about the cloud, IT or otherwise, and the staple answer is “Yes, we’re weighing the options.” After all, even a cloud acknowledgement is deemed a cloud initiative in many circles. Sadly, several cloud misconceptions are doing the rounds in the same circles. It’s imperative to get rid of the muddled notions that are peddled with unfailing regularity in the ‘cloudy’ environment; else deriving measurable value out of the dynamic concept will always remain a distant dream.

Of course such an exhaustive endeavour can’t ever be summarized in bullet points claiming to be silver bullets. Nevertheless, a numbered list of Dos and Don’ts subconsciously steers us towards positive action as US-brand marketing literature has taught us over the years. So, here’s a generic mini-primer, tailored to help those providers or users yet in cloud contemplation mode.

Game above Name, Perspectives above Practices
A word that once implied water or ice particles in suspended form, or hinted at anything obscure or opaque, has today become the sole prerogative of the IT universe. Unfortunately, the focal point of many a cloud debate and discussion is unduly skewed towards its baptismal name. Despite much time and energy wasted on the exercise, there is no unanimity on the origins of the name ‘cloud’. Though the Amazons, Googles and IBMs of the world are often held as the founders of the term, the term is believed to be the brainchild of two mavericks – inventor, entrepreneur and filmmaker Sean O’Sullivan, then the founder of the now-defunct internet start-up Netcentric and George Favalaro, then Compaq marketing executive and now chief of a Massachusetts-based consulting firm. The former had filed a trademark on the concept in 1997 while Favalaro had mentioned it in a Compaq business plan of the immediately preceding year. Both used cloud computing as a marketing term but none is sure who coined it first, may be because Compaq was then contemplating a $5 million investment in Netcentric which brought both guys together in a brainstorming session. According to O’Sullivan, it could have been either of the two or both. With both founders clueless about the fact, it’s futile to dig the debris of genesis which has only piled up owing to umpteen false claims and arguments by several opportunistic players who used the term ‘cloud’ to sell anything under the sun and got away with it too. For our purpose, it would a safe conjecture to assume that O’Sullivan and Favalaro named the concept after the metaphorical icon representing the network of networks called the internet. You can call it whatever you fancy, just don’t call it names for beneath the seemingly geeky name lies a business solution of unlimited possibilities.

Before we come to appreciating the credence of the cloud, it’s important to comprehend its essence. Cloud computing refers to an internet-based delivery of a host of service offerings – whether servers, storage or applications – divided into three broad segments: Infrastructure as a service (IaaSc) like the Amazon EC2, Platform as a service (PaaS) like Microsoft Azure or Software as a service (SaaS) like Google docs. A more detailed classification would define services by offerings like storage, databases, processes, applications, integration, security, testing, governance etc. The cloud can be public which is open to one and all with access to the internet or private which is proprietary service offerings to a select few. A mixed bag is a virtual private cloud which employs the public cloud wherewithal to run a private cloud. Cloud stakeholders include both consumers and providers of infrastructures, platforms and software.

The principle paradigm for the cloud is resource sharing. By virtue of its ubiquity, the cloud enables the retail space, just like the defence and research establishments, to reap the rewards of high-performance computing through a shared IT infrastructure, platforms and software solutions. Imagine the alluring possibilities for a small firm which invariably faces constraints in owning and managing its own software, servers and storage. Depending on its business need, the firm can define its IT requirements and then pay for the exact utility, just like a telephone or electricity bill.

Value ahead of Cost, Business ahead of Technology
One of the popular misconceptions about the cloud is that low cost is its sole value proposition. This myth is linked to another fallacy that the cloud is only about hosting services. No, the cloud is actually about smart scalability of operations, astute accessibility of resources and risk mitigation in business. Yes, it’s cost effective but more importantly, it’s geared to make a business entity more agile, flexible and inventive, and hence loaded with the promise of profound business engineering and dramatic time-to-market innovations. With the cloud, you can seamlessly switch between peak loads and lull periods of business. In these times of cut-throat competition, what can be a better edge for a firm, whether a start-up or a seasoned player? As regards the cost-effectiveness, the most important point to bear in mind that the cloud helps you lower your cost of ownership. By reducing your acquisition costs in favour of a fixed outgo based on usage, you free your capital for other productive uses. So far as the cost advantage is concerned, it’s never absolute. It depends on the scope and size of your cloud needs which encompass a range of offerings – from mere storage facilities to business intelligence services. The cloud is a unique umbrella of rainbow possibilities across business verticals. The cost will depend on the service you opt for.

Integration before implementation, Design before Deployment
The cloud, for all its super benefits, does not negate the criticality of your in-house IT department. It just makes the responsibility of the CTO or CIO more strategic than operational. He/she needs to devote adequate time and energy to come up with a feasible cloud strategy aimed at making the transition smooth and seamless as also mitigating the risks of mindless adoption. This necessitates a holistic view of the organization’s IT environment, its business objectives and current shortcomings in addressing the business needs of the enterprise. Smart configuration in the pre-cloud phase will help make the most of the cloud which should be diligently backed up by a smart cloud monitoring plan with commensurate visibility across the organization. The in-house IT needs to play a pivotal role in integrating the cloud environment with existing applications, ensuring prompt and secure authentication and authorization as also decide on critical fine print issues like cloud pricing plans, service levels, customer support, downtime strategies, latency issues, and business continuity planning. Contrary to the loud claims replete in cloud marketing literature, it’s rather tough to switch between cloud providers as in the event of a soured relationship, data migration back on premise can prove to be a nightmare. It’s always prudent to connect the dots before you sign on the dotted line.

In this regard, the virtues of baby steps can’t be overemphasized. It would always be prudent to begin the cloud tryst to solve a burning issue – say trying a public cloud alternative for storage purposes. Making the Cloud initiative an integral part of the business vision will also help dispel sticky myths prevalent among business users like the one that security is a function of proximity. More often than not, on premise data turns out to be more risk-prone than the one on the cloud. The cloud is not a safe haven either. What’s important is to put the risk in perspective before trying to address it.

Corporate history is replete with blunders caused by ridiculous interpretations of technological propositions. A glorious case in point is the Service Oriented Architecture (SEO) concept that was misconstrued by many IT and business managers as only a sanctified form of system integration, overlooking the radical reengineering of IT applications and governance it implied in line with ever-evolving business needs. Similarly, if the cloud computing is misread as a cost saver alone, it won’t blossom into the business enabler that it is. If the cloud strategy is business-centric, the IT head will automatically regard cloud computing as an evolution of concepts like SOA or technologies like virtualization. Given the right perspective and sterling conviction, your cloud initiative will neither float in the clouds nor come under a cloud.

Economic Indices: Let’s move from datum to dictum

Courtesy: http://www.indiainfoline.com/article/print/news-top-story/economic-indices-lets-move-from-datum-to-dictum-115011700030_1.html

Once again, the Wholesale Price Index (WPI) and the Consumer Price Index (CPI) are back in the news in the context of the recent RBI rate cut which some experts deem ‘unexpected’ while others call a ‘foregone conclusion’. The diversity of opinions essentially stems from the difference in the interpretations of the WPI and CPI figures.

This time around, the furore and fervour was over the 0.1 per cent December 2014 mark (0.0% for the previous month and 6.4% during the corresponding month of the previous year). The rapid fall in inflation rate has been attributed to a host of factors – from falling crude oil prices to the dramatic drop in prices of cereals and vegetables. The status quo proponents who had earlier advocated no immediate RBI rate cuts argued that the inflation drop was transient and the fiscal situation was yet dicey. The ones who find the rate cut obvious held that the WPI and CPI results were in itself sufficient evidence of the monetary easing that followed suit.

Of the host of other opinion makers and shakers, some predicted a negative trend for WPI going forward but assured us all the same that India’s robust growth story would insulate us from any deflationary intrusion. Some identified the decline in manufactured articles component of WPI to be a worrisome factor signalling stagnant entrepreneurial action in favour of non-productive endeavours. There was a section attributing the inflation drop to the new government at the centre and its clarion call of ‘Make in India’ which they believed had a desirable effect on commodity prices much the same way it affected the momentum on the bourses. Then there were those who advised us to be wary of the 0 per cent WPI, stating that huge foreign capital inflows with no commensurate economic growth would only create infertile liquidity and rampant speculation which, if not reversed through concrete economic growth, will lead to a massive FII exodus.

This is not to undermine the insights and opinions of different experts, some of which seem logical and incisive. But it’s indeed surprising that a very few of them feel the need to validate the authenticity of the compilation that forms the basis for the macroeconomic computation, leave alone seeking a reform spree in this neglected space.

While it’s fine to draw patterns out of the published economic data, we should collectively and aggressively demand more clarity in the way WPI or its distant cousin CPI is collated and calculated in the language of the common people for whom they are supposed to matter the most.

It’s pertinent to note that Amar Ambani, Head - Research, IIFL had aptly stressed on the need to rationalize the computation of economic indicators with specific reference to the IIP calculation, in his perceptive blog piece titled Provision without vision.

We need more of such independent industry crusaders to highlight the criticality of data quality and integrity in policy formulation and its ensuing impact on industry, business and households.

It’s high time we demystified the glorious economic abbreviations that fuel a debate among practicing economists and fiscal experts and yet mean little or nothing to the common man. Rather than board ceremonial flights of imagined realities consequent to the published data, our experts would do well to demand a governmental initiative to simplify the data for better public comprehension. It’s not enough to set up information websites and portals, the whole process should be articulated in lucid terms such that common people are able to make sense of the WPIs and CPIs which are indices, meaning they are relative in essence, to be studied in comparison to some base year. Not many households are even aware of the basic difference between the two, the fact that WPI pertains to the price change of specified goods, classified under three heads; each assigned a per cent weightage: 1 Manufacturing articles – chemicals, metals and food, 2 Primary Articles – Food items, Non-food items & minerals and 3 Fuel – oil, electricity and coal while CPI is a reflection of changes in the urban and rural retail prices of five heads in descending order of weightage – 1 Food, beverages, tobacco, 2 Miscellaneous – Health, Education, Amusement, 3 Housing (not considered for Rural CPI), 4 Fuel and lighting and 5 Clothing, bedding, footwear. It’s only when they gauge the difference will they learn the fact that CPI is more relevant to their day to day life as compared to WPI. Can the government initiate a MyGov-like retail-centric campaign aimed at better public awareness of these seemingly arid indicators?

As for our experts, before they bombard the public domain with tons and tons of opinionated literature, they should unfold, in public interest, the subjective considerations in basing trends and patterns on the given indices. The common people should be made aware of the inherent challenges involved in the voluntary collection of weekly and monthly WPI data from different manufacturing entities of the country, notwithstanding the web portal incepted for the purpose or the help rendered by the National Sample Survey Organization and post offices. How many of us know that India’s rural expanse poses a huge problem in the monthly CPI data collection as not all villages can yet be covered under the said purview.

Once the problem becomes crystal clear, it would become obvious why the provisional WPI data is at times starkly different than the annual version and why the CPI data is not wholly adequate. Other related concerns related to indices would also become apparent, including that of shifting base years which call for periodic revisions and the inherent inadequacy of the Laspeyres formula used for calculating weighted arithmetic mean. Named after the German economist, this formula on its own can’t address the changing product mix thriving on an ever-evolving economic landscape. Products once popular become redundant with time and hence the components considered for calculations call for constant if not frequent modification. Already, the suitability of the formula is being questioned by entities like the IMF which have prescribed alternatives employing geometric averaging to weed out the Laspeyres bias from the computation.

Not that the government has not addressed the subjectivity of the given exercise. Based on the Abhijit Sen Committee recommendations, the base year was shifted to 2004 and the WPI basket was stuffed with 676 items as against 435. Direct imports and exports were also excluded from the WPI purview. The ensuing Saumitra Chaudhuri Committee has recommended several key modifications like taking the tally of previewed items to 1200, expanding the data collection drive for more accurate estimates and making component weightage alterations, more in favour of manufacturing goods and less for primary articles. And not to forget RBI Governor’s decision, in line with the Urjit Patel recommendation, to consider CPI in lieu of WPI for designing monetary policies.

The moot point, however, is the honest acknowledgment and clear communication of the challenges in collection, collation, computation and curation of economic data which don’t get the attention and visibility they deserve despite being the basis for a variety of key economic and business decisions – from formulating policies and monitoring prices to fixing escalation clauses and computing dearness allowance. Needless to say, caring for this precision and validation is the collective responsibility of the government and the private sector.

We can’t agree more with former RBI governor Dr. Duvvuri Subbarao’s astute reflection during his inaugural address at the July 2011 Statistics Day Conference: “The decisions that we in the Reserve Bank make have a profound impact on the macro economy, and errors can be costly. Our policy judgement should therefore be based not only on state of the art skills in data analysis and interpretation but also on an intellectual value system of ruthlessly honest validation and peer review.”

Francly Speaking

Courtesy: http://www.indiainfoline.com/article/news-top-story/francly-speaking-115012000165_1.html

IIFL | Mumbai | January 20, 2015 11:50 IST

Whether you are planning an Alps excursion or dying to tie a Tissot or Rado round your wrist, think again! Notwithstanding the frantic claims of subsidized special trains and discounted shopping, your Swiss indulgence will now cost you dear, thanks to a furious franc surge.

Apart from the majestic Alps, the once-invincible Roger Federer or its exquisite brands of cheese, chocolates and clocks, Switzerland is also known for its robust banking and tranquil financial ecosystem. No wonder, the country is the favorite parking lot for scores of blue chip investors across the globe.

One would hence not have expected the Swiss National Bank (SNB) to become the circumstantial creator of a quake measuring exceptionally high on the financial Richter scale of currency markets. But the unexpected did happen, though given the why and how of the U-turn story, there’s little obscurity in the Franc move to insulate itself from the changing Euro-Dollar equations favoring the latter.

Not long ago, in 2011, the SNB had fixed a 1.20 floor cap on the Euro-Franc exchange to safeguard CHF from the perils of overvaluation and the huge inflow of funds from all over the world that had made the explosion nuclear. Being a commanding exporter of goodies from diverse sectors, it couldn’t afford to make life difficult for native entrepreneurs. ‘Print more francs, Buy more euros’ was the SNB mantra for almost three years in what was a pure maintenance job to honor the cap commitment.

In the light of Euro consistently going down vis-à-vis the dollar coupled with downward pressures of the near-imminent ECB quantitative easing, the bank now saw the futility of the euro accumulation and hence removed the cap. But given the long lull of steady state, this single-day decision of reversal as also the market-led consequence of a 30 per cent jump in CHF compared to the Euro allowed the shock value to overshadow the logic behind the move. Needless to say, the consequences for market players of diverse families were nothing but disastrous. Given the Franc’s trading ubiquity, brokerages and banks were among the worst hit, especially on Euro deals, while many Swiss equities plummeted, from the diluted competitive edge as a direct outcome of the currency gain. In another blow, many East European families now face a mounting mortgage burden emanating from Swiss Franc debts.

Pundits, FX gurus and otherwise, are busy analyzing the mid-term and long term impact of the SNB intervention and diversity of theories is obvious in such a volatile scenario. A probable SNB-to-ECB Euro sale spree, further Euro weakening, rate fixation warfare across Europe and growing dollar sustainability…the window of probability and possibility is more accommodating than authoritative.

What’s crystal clear however is the immediate adverse impact on Swiss industry both in terms of eroded competitive edge in export markets and fears of a depressed scenario at home from cheaper imports and falling prices. SNB chairman Thomas Jordan may well have dismissed the ensuing panic in his measured observation (‘if you decide to exit such a policy, you have to take the markets by surprise’) but the reflection of the ‘market surprise’ is more than evident in the tourism and prized buys segment, two of the leading Swiss sectors in both terms of volumes and value.

Swiss chocolates, cheese, watches would all now be decidedly expensive propositions. As for scores of travel enthusiasts, they would have to put their Swiss ski sloping plans on hold, save for the privileged World Economic Forum delegates who would definitely make it to the Davos ski resort, Franc up or Franc down. The Franc up story, however, could well be foremost on the Davos agenda this time round.

Architects of Armageddon

| Mumbai | January 14, 2015 16:29 IST
Chain of Blame, a scrupulous sketch of the American subprime crisis by journalists Paul Muollo and Matthew Padilla, may have become passé in the context of its publication date but remains more than relevant in its observations that greed can get the better of even the very best minds in business.
- Courtesy: http://www.indiainfoline.com/article/lifestyle-book-review/architects-of-armageddon-115011400369_1.html#sthash.ImPLtApe.dpuf

Chain of blame, beyond doubt, is a good resource on the American subprime housing mortgage breakdown. The authors do a very good job of sketching the tumultuous history of the subprime market but hinge rather heavily on the rise and fall saga of Angelo Mozillo (fondly called ‘Tangelo’), co-founder, chairman and CEO of Countrywide Financial and the intriguing tale of philanthropist and Ameriquest Mortgage founder Late Roland Arnall.

Narrated like a film script, the book recalls the horror in the making years spanning the first decade of the 21st century – how top-notch financial institutions were bowled over by the hypnotic charm of subprime lending, how home financing risks scaled new heights with zooming home prices, how prudence unanimously became a bad word, how liar loans became unbelievably popular and low-doc and no-doc became everyday parlance in real estate lexicon and how Wall Street ‘bonded’ with the mania thereby spreading the doomed virus to non-US shores including Europe, Asia and Australia. The conclusion was foregone but far from foreseen. Falling real estate prices broke the very back of the financial world which came face to face with a self-engineered Armageddon.

The duo’s screenplay sounds a tad overdone at times. If the intention was to adopt the style of a racy novel, the outcome is clearly off the mark. Consider this uncalled-for verbosity, one of the many spread across the pages:

“He was dressed in a dark gray suit, and was wearing a white shirt with a blue collar and a red tie. It was the kind of shirt that investment bankers wore when they appeared on CNBC (FNN) to discuss the vicissitudes of the stock market. Later on I would learn that Angelo was none too fond of investment bankers, though he did like the shirts they wore. (He also was a big fan of CNBC.)”

The best part of the book is its lucid elucidation of cryptic financial jargon, undoubtedly the biggest value-add for an everyday reader. The fag-end glossary is exhaustive and painstakingly illuminated. Very few financial books would bother to explain the meaning and significance of loaded terms like Collateralized Debt Obligation or Structured Investment Vehicle.

The duo, however, misses a few key contextual points in the single-minded pursuit of drawing their own conclusions as also the occasional temptation to trivialize the moot point. A case in point: “American teenagers were now using subprime as a verb to describe screwing up, doing something bad. As Sherry Muolo, the 13 - year - old daughter of co - author Paul Muolo, once put it, “I’d better not subprime that test.”

Surprisingly, there’s no mention of Fed Reserve’s 15th chair Janet Yellen’s 600-pound Gorilla 2007 premonition which had been dismissed outright at that time. It was also disappointing to find no mention of Raghuram Rajan, who had predicted the 2008 crisis three years before doomsday (and devoid of the vanity of a financial soothsayer, Paul and Matt, please take note) inviting the then Fed boss Alan Greenspan’s wrath in the process. Nobody has put the crisis in perspective like Rajan has in his incisive account ‘Fault Lines’ wherein he points out that avaricious bankers, dishonest home buyers and reckless investment managers were only responding to three sets of fault lines: domestic political pressures, trade imbalances and incompatible financial systems.

Rajan’s argument, as also his advice, deserves attention, more than mere mention:
“I buy the AAA tranche of a CDO, not because I am confused by the rating, but because I am selling a deep, out of the money put option, which will give me a steady return most of the time, but default with serious adverse consequences occasionally. By the time it defaults, I have hopefully made my money and am enjoying my own private beach in the Bahamas. A number of managers including Stan O Neill of Merrill Lynch did generate higher returns for their firms for some time, but alas we now realize it was hidden risk. Of course, his parting compensation did nothing to dissuade the rest of the flock from following his example in the future. The broader point I am making is that we need to think about incentives of financial market participants as an important factor in the current crisis. How to improve those incentives will, no doubt, be an important issue for discussion in the years to come.”