FM Chidambaram: Can't wait to fix the pension problem

It is easy to understand finance minister P. Chidambaram's desperation to set up the proposed Pension Fund Regulatory and Development Authority (PFRDA). Despite moving away from the "defined benefit plan" (contribution coming only from the government) on January 1, 2004, to a more realistic "defined contribution plan" (matching contribution by government and employees), there has been little headway. Introduced in the Lok Sabha last year, the PFRDA Bill had to be sent to the Standing Committee of Finance because of the strong opposition from the Left.

And it is only in the last week that the Standing Committee came out with its recommendations. Among other things, the committee has recommended a cap of 26 per cent on foreign direct investment, ban on investments in overseas markets, setting up a 100 per cent government securities fund, and allowing only those fund managers who can guarantee a minimum return or at least the capital invested over the years. The last recommendation is unlikely to make the private or public players happy. "It is unfair to expect guaranteed or fixed return when an employee invests in equity-linked pension plans such as the balanced and growth-oriented funds," says a fund manager with a private insurance company.

But for the government, the bigger danger lies ahead. A recent report on the pension burden by Gautam Bhardwaj and S.A. Dange of Invest India Economic Foundation shows that the central and state governments and autonomous bodies have a Rs 17,00,000 crore of implicit debt, or more than 55 per cent of the GDP, on their books for 2004-05. And this amount does not cover more than a lakh of defence employees, about two million defence pensioners and family pensioners of central ministries, including the railways and post. Also, it excludes the current state government pensioners or 28 million EPS members. The whopping Rs 17,00,000 crore implicit pension debt was only for the 23.6 million Central and state government employees. So the government's total implicit pension debt is vastly bigger.

But Chidambaram is not one to give up so easily. Realising that the only way out of this mess is the "defined contribution fund"-a practice followed by most of the countries such as the us (401 K)-he has promised to incorporate these changes in the Pension Regulatory Bill of 2005 so that it can be re-introduced at least in the next session of Parliament, if not in this session itself. After all, an interim PFRDA is already in place with D. Swarup, former Secretary (Expenditure), Department of Economic Affairs, as its Chairman. Besides, most of the public and private sector insurance players have expressed their interest in being a part of this potentially attractive sector.

The entry of pension funds will not only bring greater depth to the capital markets, but also open up a source of long-term funding of infrastructure. Just the pension money coming from people who have joined after January 1, 2004 ranges between Rs 10,000 crore and Rs 15,000 crore. Employees will now be able to decide where to park their pension money-conservative fund, where the exposure to equity market is negligible, or balanced fund, with a 10 to 20 per cent investment in the equity market, or in the more aggressive growth fund, where the exposure to equity can be as high as 60 per cent. Employees will also have the right to switch from one fund to another.

But what's egging on the various insurance players is the long-term potential of this sector. Once the unorganised sector starts veering towards a "defined contributory scheme"-as has been proposed under Phase II of the pension scheme, with the only difference that there will be no matching contribution from the government-the kitty will swell. And many players believe that this corpus could easily be double that of the mutual funds industry's $150 billion (Rs 6,60,000 crore). That's a lot of fuel for India's economic engine.

-Ashish Gupta

ROW
Blowing Hot And Cold

Volkswagen CEO Bernd Pischetsrieder: Eyeing a solution?

Will the Andhra Pradesh government and the German auto giant, Volkswagen, kiss and make up? The cheated suitor is willing to forget and forgive, and the wooed seems more embarrassed than decisive. On August 1, when former German ambassador Frank Elbe came calling on the state government, it was more a damage control move than any effort to clarify whether or not the carmaker would invest in Andhra. A government official, who declined to be named, said that the "project is on and at the moment the location under discussion is Vizag". He added that the company planned to invite a state team by the end of this month to visit Germany for talks. The German company had originally conceived the project as a CKD facility, but had later enlarged the scope to include ancillary manufacturers. Therefore, Volkswagen now wants a larger piece of land and some reworking of incentives. "Land is not an issue and we are willing to discuss any of the issues to further the prospects for the project in Andhra," a state official told BT. Now, if only the German carmaker would speak up.

-E. Kumar Sharma

NIFTY
eChoupal Ver. 2.0

ITC's e-Choupal: Going into overdrive

Rural India, meet hypermarket. ITC's Choupal Sagar, the second layer of its e-choupal initiative, recently opened its first rural hypermarket in Sehore in Madhya Pradesh. Apart from buying and selling agricultural commodities, it provides farmers with training in agricultural best practices. "We invite leading agricultural scientists for lecture-demonstration sessions on water management, cropping patterns and other farming practices," says S. Sivakumar, Chief of Agri Business, ITC, adding: "We also offer medical facilities at these multi-utility service centres." The Choupal Sagars will also sell FMCGs, white goods, and even mobile phones and SIM cards. ITC is expanding these facilities fast. The target for this fiscal: 30. Over the next seven to 10 years, the count could touch 700, and once in place will add Rs 5,000-7,000 crore to ITC's topline. Wal-Mart, eat your heart out.

-Arnab Mitra

Exodus At Convergys
The American outsourcing major is bedevilled by senior exits.

Convergys' Ross : There's nothing amiss, the man says

Human resources head Nandini Aggarwal and country Operations Head Jaswinder Ghumman were respectively the first and second Indian employees of Convergys when it was set up in June 2001 in Bangalore. Aggarwal quit Convergys in May this year and Ghumman's last working day is August 22. Another strategic Head of Operations in Mumbai, Uday Sanghani, has also put in his papers and is leaving on the same day as Ghumman. Covergys suddenly looks vulnerable.

The gossip mill is hinting at possibilities of financial irregularities. But according to Dennis Ross, General Manager (Off-shore Operations) at Convergys Corporation, "There is no truth to the financial irregularities rumour; we have not filed anything with the government in India or the us where we are listed." What led to the speculation then? "Events that were sensationalised," says Ross while explaining that a number of audits were conducted this year when contracts with a number of clients ended and the purchasing organisation of Convergys, which employs more than 10,000 people in India, moved to India from the US.

Ross, however, admits that his clients are asking them questions. Besides, employees seem concerned too, since Convergys is currently holding large town-hall meetings and talking to employees about sizeable client wins. "We are hiring a great deal of management, the growth trajectory is steep," says Ross. With 757 internal promotions last year alone, the rest of Convergys doen't look like it is going anywhere soon.

-Amanpreet Singh

Up, Up And Further Up
Robust corporate results and fresh FII inflows will continue to take the Sensex higher.

There's hope for all those who missed out. The bull in the stock market still has plenty of steam left. Robust corporate results and fresh inflows from FIIs (foreign institutional investors) in South Korea and Japan are expected to continue to fuel the boom in the foreseeable future. A DSP Merrill Lynch report early last year had predicted that the bellwether BSE Sensex would hit the 10,000 mark in 2006. The PE (price-earnings) multiple at that point: a very reasonable 15. "The current uptrend is driven by the strength of the Indian economy," points out Nilesh Shah, President, Kotak Mutual Fund.

Over $3 billion (Rs 13,200 crore) has flowed into Indian stocks during the first five months of this calendar year, compared to $8.5 billion (Rs 37,400 crore) in the whole of 2004. The icing on the cake: the rally is broad-based. Says Andrew Holland, Executive Vice President, DSP Merrill Lynch: "We are still at the beginning of the mid-caps story. India is probably a mid-caps market and could trade at 16-17 times PE multiples."

But there's apprehension that a correction may be just around the corner. Ambareesh Baliga, Vice President, Karvy Stock Broking feels: "There will be a 500-800 point correction; but the Sensex, following this breather, should still close the year at around 8,500 levels."

It will be prudent for investors to take a long-term view of the market. Holland maintains that there will be action in a host of sectors like textiles, construction, engineering and banking. "Software margins, however, may come under pressure and pharma companies will face a tough market," he says. But overall, earnings are expected to grow 20 per cent (y-o-y) over the medium-to-long term, adds Kotak's Shah. Our take: don't wring your hands if you missed out on the bull run; the markets are expected to remain on steroids.

-Krishna Gopalan

TYCOON
Birla No. 1

He's the youngest Birla. He's also the biggest. And he just got a little bigger. Kumar Mangalam Birla, Chairman of the Aditya Birla Group, recently bought out the 21 and 7 per cent stakes held by G.P-C.K. Birla and S.K. Birla, respectively, in Pilani Investments for Rs 300 crore. This takes the B.K.-K.M. Birla combine's holding in Pilani to 51 per cent. "K.K. Birla offered to gift me his shares (worth Rs 100 crore) in Pilani. I declined, but plan to buy him out soon," says B.K. Birla, who also plans to mop up the 15 per cent stake held by non-family shareholders. That will give him a 75 per cent stake in Pilani, which holds a controlling interest of 36 per cent in Century Textiles & Industries, and small stakes in various other Birla companies like Grasim and Hindalco. "I want Kumar to take over (at the helm of Century and Pilani) immediately. But he wants me to carry on as long as I'm fit," says the doting 84-year-old grandfather. Kumar Birla's office declined to comment on the issue.

-Arnab Mitra

New Boss, New Ideas
HCL Tech's Vineet Nayar wants to do a Comnet-again.

HCL Tech's Nayar: A tougher encore

Guess what Vineet Nayar has been doing since he took over as HCL Technologies' President in April this year? He's spent more time shaking hands with employees than customers. If that sounds strange, consider this: He's actually going around telling customers that he wants to put his employees, and not them, first. It may sound like a crazy thing to do, but Nayar says he's got good reason to do that. It has everything to do with the new business model that he has started putting together for HCL Technologies, a late entrant to the software services business. "The next five years are very dangerous for the Indian it industry," he warns. "External factors (like y2k) that drove demand before are no longer there, and there is commoditisation of it services."

To compete in such an environment, Nayar, who joined HCL as a senior management trainee in 1985, is borrowing a leaf out of Chan Kim and Renee Mauborgne's Blue Ocean Stratetgy, which talks about "how to create uncontested market space and make competition irrelevant". Of every $100 (Rs 4,400) that a typical customer spends on it, says Nayar explaining his "blue ocean" strategy, 20 goes towards application development, another 20 to BPO, 10 to technology, and 50 to infrastructure management. HCL Tech's strategy, the XLRI grad says, is to touch more customer points (i.e. do more in each of all the five categories) and bill customers based not on effort (how many man-hours) but performance. "We want to be a value leader, not volume leader," says Nayar.

To be innovative, though, mere codejocks won't do. So, now you begin to see why he wants to make HCL Tech a preferred employer-something he managed to do at HCL Comnet, which he oversaw until his new job. His focus is on boosting employee satisfaction and productivity. He's almost done away with the variable pay system for non-senior employees, he's brought in 360-degree feedback from Comnet, introduced a "trouble-ticketing" system that keeps finance, hr and administration on their toes, and even launched an ideas portal for employees to post and "patent" their ideas. "Like Comnet, HCL Tech will be a unique place to work, with a unique business model," says Nayar. We'll be watching.

-R. Sridharan

DEALS
Purwar The Predator

SBI's Purwar: Taking SBI to the world

With apologies to lou gerstner, who says elephants can't dance? India's biggest bank, but a global minnow, the State Bank of India has embarked on global M&A with a vengeance. It recently acquired the Indian Ocean International Bank of Mauritius, and is said to be eyeing Giro Commercial of Kenya and Bangladesh's Rupali Bank. That's all part of Project Vijay, SBI's ambitious globalisation plan, unveiled by Chairman A.K. Purwar during the recent announcement of the bank's quarterly results. The stated goal now is to be among the top 50 banks globally and top five in Asia in terms of assets and Tier I capital. The bank's Managing Director, T.S. Bhattacharya, has also said that SBI would buy by October this year banks with $50-200 million (Rs 220-880 crore) in assets. Had Purwar a longer stint past his May, 2006 retirement, he may actually have had reason enough to pen Gerstner-like memoirs.

-Rahul Sachitanand