Monday, June 30, 2008

A winning merger June 29, 2008

For some years now I have been on the board of Ranbaxy and have watched with admiration as the company transformed itself into India’s first real multinational. I have seen it inspire a dozen other companies and helped create a world class generic drugs industry that is feared by the Western giants for aggressively challenging their patents and admired for lowering the cost of medicines around the world. How then was I to respond to the announcement by Ranbaxy’s CEO, Malvinder Singh that he wanted to sell his family’s stake for Rs 10,000 crores to a Japanese company, Daiichi Sankyo? The family was equally shocked. A CEO’s ability to keep months of negotiations secret in a country afflicted by verbal diarrhoea speaks to the company’s character.

My initial reaction was one of dismay—how could one of India’s finest companies become a mere Japanese subsidiary? A company that had acquired 14 companies in 30 months was now itself about to be acquired. Slowly I realised, however, this momentous deal would make the merged company much stronger and create greater value to the Indian nation.

In a world where the large, drug-discovery companies are struggling with expiring patents; where rising health care costs have pushed countries to favour quality, affordable generic drugs; where intense competition between generic drug makers has dramatically lowered profit margins; the logical solution is for the discovery and generic companies to merge. This is why the drug discoverer, Daiichi Sankyo, has valued the generics Ranbaxy at $8.5 billion when its stock market value was only $5 billion and is paying 35 times its future earnings. However, it will only be able unlock Ranbaxy’s value if it does not gobble it up like most mergers, but leaves it alone, as Roche, the Swiss company, did with Genentech.

But how could selling an Indian company create wealth for India? Companies create wealth for nations when they create jobs, give returns to shareholders, and pay taxes to governments. If Ranbaxy had not been sold, it would have continued to generate steady returns. By joining hands with a larger, innovative Japanese concern, it will produce more and better products, be able to better fight patents, and provide Japanese skills in process, quality and teamwork to its employees. Daiichi Ranbaxy will potentially create more jobs, more returns to both shareholders, and more taxes to both governments. And when the family invests its Rs 10,000 crores in its other businesses-- Fortis hospitals, Religare finance --it will create more ‘Ranbaxys’ and more wealth for India.

Compare Malvinder Singh’s decision to sell at the right time to the sentimental, insecure reaction of Escorts and DCM families in the 1980s. When Swaraj Paul bid for these companies, our pre-reform government stopped him. Most companies of the two groups went downhill after that as the next generation was neither hungry nor capable. The families lost and so too did the nation. In Ranbaxy’s case, the family put the business interest before their own. Thus, Daiichi wants Malvinder Singh to stay on as CEO.

The Ranbaxy affair shows how the Indian public has also matured. Ten years ago our political class would have shed tears, waved the flag and stopped this deal. The 2008 Pew Survey of 24,000 people across 24 major nations concludes that Indians are now amongst the most confident people. Nine in ten Indians favour foreign trade and six in ten welcome foreigners buying up Indian companies. We have behaved far better than the French when Laxmi Mittal bought Arcelor. Now let’s apply this lesson and sell off our obsolete, bleeding public sector navratnas as well.

Monday, June 16, 2008

Deceits of our political class June 15, 2008

Another election has come and gone. As the dust settles in Karnataka, Election Watch, a civil society watchdog, has reported that 40 out of the 224 winning MLAs have a criminal record. Of those who contested three were brothers--all of them criminals. To make sure one succeeded the brothers obtained tickets from different parties. The bet paid off--one was elected.

We have known about criminals in our politics for some time now. It is easy to get depressed when law breakers become law makers. Yet there are reasons to feel hopeful. Karnataka has elected 20% fewer criminals. Jaffer Sharief, the former union minister, was unable to give a Congress ticket to the notorious Samiullah because of local outcry. Criminal MLAs have declined in Gujarat, Delhi, MP, and Rajasthan. Even in corrupt UP, criminal MLAs came down in 2007 from 206 to 160. There are no criminals in the Bihar cabinet. Both the BJP and the Congress have begun to scrutinise candidates more diligently.

The nation has to thank a group of professors at the Indian Institutes of Management for this. Disgusted with our politics, they formed the Association of Democratic Reforms, which filed a Public Interest Litigation in the Delhi High Court in December 1999 demanding the Election Commission provide voters with the criminal background of candidates. They won the case. The government appealed, however. The IIM professors again won in the Supreme Court in May 2002. At this point, twenty one political parties rose up against the Supreme Court’s decision. The government hastily brought in an ordinance, which the Supreme Court also declared illegal.

As a result election candidates are now required to file an affidavit giving details of convictions or pending criminal cases. This is a big step forward. 1200 NGOs have joined together to form Election Watch to publicise criminality of candidates. A Bill on Electoral Expenses in 2003 has tried to control political expenditure, and the Central Information Commission’s ruling last month that income-tax returns of the political parties must be provided under the Right to Information Act will boost financial accountability.

Politicians argue that all this will lead to frivolous and false frame-ups by crooked rivals. It will. Note, however, that candidates are expected to disclose only cases that have been admitted for trial with charges framed. Analysis of Rajasthan Assembly elections in December 2003 showed that half the alleged criminals were, in fact, criminals who were in the midst of trial proceedings on very serious charges. The other claim of politicians that offences are mostly political in nature--related to bunds, dharnas and rallies--is also not borne out by data. It also begs the question, why should politicians flout prohibitory norms in the first place? It is true, this will not stop false cases but in the end transparency is a greater good. The real worry is that most crimes of politicians are never even booked--this is the real deceit of the political class.

You would think that political parties would not want to be tainted by criminals. So, why give them tickets? It must be because they are “winnable” with their money and muscle power. For the whole political class to unite, however, to prevent disclosure and transparency is an amazing act of deceit. One day, perhaps, the cost of harbouring criminals will become intolerable as civil society pressure grows. Meanwhile, let us celebrate the fact that a few determined individuals could take on the entire political class with the aid, no doubt, of the two institutions that we admire--our higher judiciary and our Election Commission. It restores our faith in democracy.

Wednesday, June 04, 2008

Go on, save the deal June 1, 2008

Lal Krishan Advani is a lucky man. Fortune has given him the chance of a lifetime. He can save the historic Indo-US nuclear accord and grow in stature from a politician to a statesman. Less than four weeks remain, after which the treaty will die. The Left has no room for manoeuvre, but the BJP does. If Advani seizes the day and persuades his BJP colleagues, he will go into history as the “white knight” that saved India’s energy and security future. He would also take a giant step to fill the large shoes of his predecessor, and become more worthy in the eyes of NDA’s coalition partners.

A hundred years from now history books will recount that when oil was ruling at $135 a barrel, India’s leaders were complacent. They argued that since 65% of India’s power needs are met by coal and only 3% by nuclear energy, why does India need a nuclear treaty? Oil did run out in the 21st century, but the nuclear deal rescued India. Initially, it freed the country from 35 years of nuclear apartheid, allowing it to import uranium, which helped to lift the performance of its 17 reactors from 50% to 95%. After the treaty, India’s energy needs were increasingly powered by nuclear energy while other countries scrambled for the last few barrels of oil.

History will describe how China rose in the second quarter of 21st century to dominate the world. Some Asian nations became its satellites, including its closest ally, Pakistan, to which it supplied vast quantities of arms. India was able to hold its own thanks to the treaty, which paved the way for closer ties with the Western democracies. The West stood by India during its times of trouble and eventually India went on to balance power in Asia and the world.

History will narrate that the nuclear treaty never compromised India’s right to Pokharan III. China and France did nuclear tests in 2020, which ended the CTBT regime. India was by then the world’s third largest economy, and it followed up with its own test. The Democrats in America, instead of throwing the CTBT at India, were relieved to see India balance Chinese power in Asia.

History will report that during the 2009 election campaign Advani confidently took credit for having saved India’s future from a traitorous Left and an indifferent Congress. During his campaign, Advani claimed that in saving the accord he had merely completed a process that Vajpayee had begun with Pokharan II; Jaswant Singh had followed up in his dialogues with Strobe Talbott and Brajesh Mishra with Condoleeza Rice. Manmohan Singh had crowned this effort, he said, showing great wisdom in signing the accord with Bush. He claimed that BJP’s pressure forced crucial changes in the final treaty in India’s favour. Advani told voters that when the UPA let its own Prime Minister down, BJP had to rescue the nation’s honour and energy future.

This history will also have a coda. When he was trying to persuade his BJP colleagues in June 2008, Advani quoted from Arrian’s account of Alexander the Great. As the Greeks were crossing the Jhelum in narrow boats on a stormy, monsoon night in 326 BC, just before their famous battle with Raja Puru, Alexander told his generals, “Don’t be afraid my friends, your grandchildren will sing your praises and remember your glory.” Hearing this, the BJP leadership broke into applause. They had finally found a statesman to lead them to victory at the next elections. Rescuing the nuclear treaty became the turning point in the career of Lal Krishna Advani.