The Filter Coffee

Foreign policy, strategic affairs, defense and governance

The Show Must Go On…

The Indian Premier League must be held as planned

The Indian Premier League (IPL) must be held as planned

Home Minister P. Chidambaram has urged that the second edition of the Indian Premier League (IPL) be postponed, due to conflicts with the Indian general elections in April — May, 2009.  He argues that law enforcement forces in India will be unable to provide sufficient security cover during the games due to election commitments.  This blogger feels that the Home Minister is attempting to play it safe during election season and not be drawn into a scenario that provides a damning indictment of his party’s mismanagement of India’s internal security apparatus, should something, God forbid, happen during the event.  The Lahore terror attack on the Sri Lankan team gave Mr. Chidambaram a convenient out, before a security assessment on the matter was even conducted.   Outside the Subcontinent, there appears to be an attempt to paint India and Pakistan with the same broad brush, in terms of threat potential.  Various quarters in India have also been playing up this hyphenation.

Let’s get real.  Pakistan is a smoldering pot of jihadi fanaticism where the writ of government is undermined every hour of every day as a matter of common practice.   Extremist forces in Pakistan operate with impunity both inside and outside the federal framework.  The Pakistani establishment brought this upon itself and is now overwhelmed and unable to deal with this Frankenstein.  To compare this to the state of affairs in a country that is about to hold the world’s largest exercise in universal suffrage (the 15th such installment, since independence) is laughable.

So go ahead, Mr. Home Minister, do your security assessment.  Keep in mind, however, that your inability to provide security cover will be a condemnation of the security apparatus that you and your predecessor oversaw for five long years.   B. Raman believes that only a pragmatic security assessment should dictate whether the IPL should be allowed to go ahead as planned.  He suggests:

The national debate on this question is sought to be influenced more by commercial considerations arising from the profit-making urge of the corporate entities owning the participating teams and the money-making urge of different sections of the media and the advertising community than by security considerations…

The importance of ensuring the security of the life and property of the common citizens is sought to be subordinated to catering to the money-making urge of these sections with a vested interest in seeing that the IPL tournament goes ahead as scheduled.

I have nothing but the highest regard for Raman, but my beef with this article is the notion that just because this is a commercial venture (or a “money-making urge” as Raman puts it) that it should be brushed aside. No one in their right mind would assign anything but top priority to security during national elections, but private enterprise is an integral part of urban, middle class India, and has been for some time.  It isn’t a “money making urge”, like some sly, underhand, nefarious charade, it is the engine that is driving India’s economy.

If the Home Minister is telling me that he can’t protect private enterprise in the country, our law enforcement agencies, along with the Home Minister can just pack up and move along because they are of no use whatsoever.  Our law enforcement agencies have done little else in recent memory than raid rave parties in Mumbai and Bangalore. What message is Chidambaram trying to convey to India and to the rest of the world?  That we are incapable of holding a sports tournament and national elections at the same time in India?  Pragmatic Euphony echoes similar thoughts on The Indian National Interest:

[I]t should worry the nation that the Indian state seems incapable of holding a sporting event along with the general elections. The UPA government has done little to build these capabilities during its tenure and is intent on using Mumbai or Lahore as an excuse for its failure.

[T]he greater impact is in the signalling value of the decision taken.  It impacts the international standing of the country not only for the tourists, but more importantly, for financial, commercial and business interests, as the security advisories get revised in corporate headquarters and government departments the world over.

The show must go on.  Not for “national pride”, or for corporations’ “money-making urge”, but for the Indian government to show its people and countries outside that the fallacious hyphenation of India and Pakistan is absurd, and that it is capable of maintaining law and order it the country after the aberrations of the recent past.

Filed under: 2009 Indian General Elections, Business, Congress I, India, Politics, Uncategorized, , , , , , , , ,

US – UAE Nuclear Deal

Very quietly, the United States and the United Arab Emirates have signed a deal that will allow the UAE to develop nuclear reactors and obtain nuclear fuel from the US, under the 123 Agreement framework. Under the agreement, the UAE, which is already a signatory to the Nuclear Non-Proliferation Treaty (NPT) and the Comprehensive Test Ban Treaty (CTBT), will be subjected to nuclear safeguards inspection from the International Atomic Energy Agency (IAEA), and will forgo the right to enrich/reprocess spent Uranium fuel. The whole nuclear program of the UAE will apparently be under US management, pending IAEA approval.

Since its birth in December 1971, the UAE has experienced massive economic growth on account of its petroleum reserves. This initial economic growth gave rise to two main economic power centers in this federation of seven emirates — Abu Dhabi, the capital of the UAE and largest emirate by area, whose revenues are driven by oil, and Dubai, the most populous emirate, whose revenues are driven by trade and financial services.

Economic growth lead to investments in infrastructure and construction, resulting in the arrival of hoards of blue – and white collar workers, primarily from the Indian subcontinent, to fill the employment vacuum. This sustained population growth, particularly in Dubai, has forced the UAE to consider alternative sources of energy. By some estimates, UAE’s demand for electricity is likely to rise to 40,000 megawatts (MW) by 2020. However, UAE’s energy sector is projected to be capable of meeting only about 50% of this demand.

The 123 Agreement is yet to be ratified by Congress, and will still need to be approved by the President of a new US administration. Barack Obama has not publicly stated his views on the issue. The deal has already met with vociferous disapproval from members of Congress. Rep. Brad Sherman, the chairman of the House Foreign Affairs Terrorism, Nonproliferation, and Trade subcommittee, said:

“Any (nuclear cooperation) agreement between the United States and the UAE should not be submitted to Congress until, at a minimum, the UAE has addressed the critical issue of transshipments and diversion of sensitive technologies to Iran.”

If that’s the Congressman’s line of thought, then this is yet another classic example of the kind of cluelessness that has come to typify the thinking of successive US administrations on matters concerning the Middle East. Indeed, Iran is the one country that can be counted on to get irked by the proposed deal.  Relations between “Shi’a” Iran and “Sunni-Arab” UAE have always been icy.

A major bone of contention between the UAE and Iran is with regard to the Abu Musa and Lesser Tunb islands, unilaterally occupied by Iran, but claimed by the UAE. The Abu Musa archipelago lies within the strategic Straits of Hormuz corridor, an area vital to the petroleum driven economies of the Arabian Peninsula. In addition, as Anthony Cordesman points out, there are two specific areas of concern for Abu Dhabi — (a) the presence of a significant Iranian immigrant (potential “fifth column”) population in the UAE, and (b) the strategic proximity of Dubai and Sharjah to the old Iranian port-town of Bandar Abbas. The vulnerability of the northern emirates’ shipping channels to Iran’s airbase in Bandar Abbas is a source of worry for UAE’s rulers.

For its part, Iran can’t be too pleased with the cosiness exhibited smaller Arabian Peninsular countries like the UAE and Qatar towards the United States. US military bases in the UAE, like those in Jebel Ali and Al Dhafra, and UAE’s ambivalence towards the US invasion of Iraq can’t have helped matters much either.

This nuclear deal is a bad idea — not because of an alleged UAE-Iran nexus, but because the UAE will be susceptible to an Iranian military assault either if Iran-UAE relations deteriorate, or if Iran has its back to the wall in any future US-Iran military confrontation. The UAE can ill afford be in a military conflict with Iran — the repercussions will be felt far beyond the region, given that expatriates make up about 80% of the total population of the UAE.

Allowing the accumulation of nuclear material in a politically and militarily weak country situated in the most unstable region on earth, and in the proximity and cross-hairs of Iran, is foolish. To think that this will impress upon Iran the virtues of towing Washington’s line with regard to nuclear technology is an exercise in naiveté. Far from making the UAE politically and strategically more secure, the deal will prove to be an albatross around Abu Dhabi’s neck.

Filed under: 123 Agreement, Abu Musa, America, Barack Obama, Business, Dubai, Iran, Nuclear Energy, Politics, UAE, United Arab Emirates, World, , , , , , , , , , , , , , , , , , , , ,

Satyam IT Scandal

If the global economic downturn wasn’t bad enough, incidents such as the Bernard Madoff issue, and now the Satyam scandal can’t have helped matters much in providing confidence to the already skeptical investor. India’s fourth-largest IT company admitted to “irregularities” in its books, thanks to the imaginative accounting practices of its Chairman Ramalinga Raju.

The company, which ironically received the Global Peacock Award for Excellence in Corporate Governance, first raised investors’ concerns with the apparent bid to acquire Maytas Infra, a construction company owned by Raju’s son. Once word of the proposed acquisition got out, shareholders rebelled, forcing the deal to fall through. The attempted unilateral acquisition, though, opened up a whole host of issues at Satyam with regard to systemic corporate mismanagement, which culminated in Ramalinga’s shameful admission on Wednesday.

Some people have put the whole episode down to poor corporate governance. Unfortunately, the issue is much deeper. Like everything else in India, the larger issue is archaic laws; the dilapidated securities and internal control legislation of the country is not congruent with the current business environment of India. The issue is compounded further when you consider countries like the United States, where despite the attempts to heavily regulate internal control, dramatic failures such as the Madoff scandal, or even the sub-prime mortgage scandal come to light.

In the United States, the Sarbanes-Oxley Act (“SOX”) was passed in response to the Enron and Worldcom drama of 2001. The Act’s Section-404 requires both management and an independent external auditor to assess the adequacy of the company’s internal controls over financial reporting (ICFR). In addition, a public accounting oversight body, the Public Company Accounting Oversight Board (PCAOB) was constituted. However, as of 2009, SOX has effectively run its course in terms of its usefulness.

Companies have had a few good years to understand the scope and approach of SOX audits and have taken comfort in the fact that the demands of the Act, despite the design, merely result in scratching the surface of ICFR. Despite the design, there is a fundamentally flawed bottom-up approach to ICFR that all SOX audits assume. For example, more hours are spent reviewing mundane transactional detail than investing in a robust review of the “bigger picture” and asking why company executives are doing the things that they are doing.

Most “white collar” crime is committed by corporate executives, and not, for example, by staff accountants or system administrators. Corporate fraud uncovered by the United States Department of Justice (DoJ) indicted 214 CEOs and Presidents, 53 CFOs, 23 Corporate Councils and Attorneys and 129 VPs, in 1,236 cases registered since 2002. Fraud can occur with the marriage of — (a) Opportunity, (b) Motive, and (c) Means. Usually, these three elements fall either directly or indirectly within the purview of corporate executives. Corporate executives didn’t get where they got by boiling potatoes; they’re sharp, know their businesses inside out, and are driven to excel. The intrinsic flaw in public auditing is the relationship between the auditor’s independence in assuring the accuracy of their client’s books, and the dependence on the client for revenue. An imbalance in this relationship creates scenarios such as Arthur Andersen’s willful connivance in cooking up Enron’s books in 2001.

So where does India proceed from here? Clearly, investor confidence will be down, both at home and abroad (Satyam trades on the New York Stock Exchange). Lack of investor confidence may very well translate into reluctance to invest in India’s growth — negatively impacting Foreign Direct Investment (FDI) and an already slowing economy. Despite the drawbacks of legislation like SOX (as described above), regulation of internal control must be standardized in India. If the 2008 financial crisis has proved one thing conclusively, it is that companies and people operating in a capitalist and/or entrepreneurship friendly environment will look out for their own interests; the capitalist system, by design, is anti-self regulation. India needs to look into the following areas:

  • Developing robust legislation to regulate publicly traded companies in India, including the regulation of internal control, corporate governance, independence and financial disclosure requirements;
  • The creation of a federal body, separate from, but reporting to the Securities and Exchange Board of India (SEBI), that will enforce the legislation described above;
  • Auditor independence (I find it hard to believe that PricewaterhouseCoopers genuinely had no idea that Satyam was cooking its books); public auditors should not be allowed to provide consulting or advisory services to companies on whose books they issue opinions;
  • The constitution of an independent Audit Committee to review the company’s state of affairs; the requirement of having an independent Internal Audit department that reports only and directly to the Audit Committee;
  • A national whistle-blower program to report instances of possible corporate fraud to the newly constituted federal body;
  • A requirement of full disclosure of any business interests held by executives’, their spouses, and immediate family;
  • A comprehensive review of the company’s corporate governance as part of audits and investigations, assessing the reasonableness of significant corporate decisions (asking the question “why” instead of regular checklist auditing);
  • Stringent penalties for committing corporate fraud (e.g., holding executives personally liable), and a body to investigate and adjudicate over fraud cases.

At the end of the day, the Satyam saga is a tragic multi-point failure of a government that doesn’t sufficiently regulate publicly traded companies, of an Executive Board that didn’t probe suspicious transactions (why does an IT firm need to acquire a construction company?), of lower level management and staff who wouldn’t notify authorities of irregular accounting practices, and of auditors who chose to turn a blind eye to obvious accounting irregularities.

Adopting the recommendations above will not completely solve India’s problems (indeed the pressure to report significant revenue increases in a rapidly developing economy such as India’s will remain and will bare fruit to more ingenious accounting practices), but should be looked at as a good starting point. The central government, in trying to ensure investor confidence and tackle other cases of corporate fraud, must show that it is serious about providing a clean and transparent business environment and that it still upholds that timeless credo of the Nation — Satyam eva jayate — Truth alone Triumphs.

Filed under: Business, corporate fraud, corporate governance, economics, India, information technology, internal control, Politics, sarbanes oxley, satyam, sebi, securities and exchange board of india, Technology, World, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

By-two Kaapi (Twitter)

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