In between is that fine line that needs to be in place for markets to be efficient, transparent and trustworthy. In an emerging market like India, the regulators should be first and foremost focused on protecting the consumer. Secondly, in order to attract first time consumers the regulators should be promoting a culture of openness, simplicity and easy to understand language for financial products.

However, over the past 3 months the Indian regulators seem to be going in reverse and making it more difficult for first time consumers to make decisions. They appear to be adding more financial jargon to the process and potentially scaring off first time consumers. For most consumers in India, there are 3 government regulators that have oversight over the bulk of their money:

- IRDA (Insurance Regulatory and Development Authority) – insurance sector
- RBI (Reserve Bank of India) – banking industry
- SEBI (Securities and Exchange Board of India) – oversight of the equity/debt markets

About 3 months back the IRDA essentially shot itself in the foot when it announced new guidelines for websites that aggregate insurance information. Overnight the guidelines killed the business models for insurance aggregators. Personally, if I’m shopping online for insurance I want to be able to compare the various products and understand the pros/cons of the various offerings. However, with the latest IRDA ruling it has banned these websites from providing “opinions” on products or ratings. For first time consumers a rating is such a quick way to decide which product is better. Instead you force the consumer to read through jargon filled insurance material and in the end they will probably not buy anything because its difficult to decipher.

Likewise, SEBI recently introduced new guidelines for the type of information that mutual fund companies can provide in their marketing materials across all mediums – print, TV and web. Specifically, mutual funds companies can no longer provide a rating from someone such as Morningstar, Value Research or S&P. In addition, rankings or testimonials are also off limits. Once again this is moving in the wrong direction, a star rating is easy for someone to understand like a hotel rating – 1 star vs 5 star. Of course, consumers could just goto the websites of Value Research or Morningstar and get the star ratings and rankings themselves.  But, that assumes a first time consumer would know about Value Research or Morningstar which I doubt.

The flip side is that these rankings and ratings were leading some consumers to skip researching these new products altogether. My feeling is if consumers are that stupid to part with their money that easily, then no amount of change in regulations will curb that kind of behavior.

Kodak is a company that couldn’t handle the innovator’s dilemma and recently filed for Chapter 11 bankruptcy. As crazy as it sounds but Kodak actually invented the digital camera. However, it didn’t commercialize the technology because it couldn’t look past the highly lucrative camera roll and printing business. Those revenue streams would have been killed but it potentially could have made a killing with it’s latest innovation – the digital camera.

Another recent example is Cisco. Since the early 2000′s Cisco has been selling internet telephony products which were complex and required a lot of expensive equipment. In the meantime, Skype was building a consumer product that was easy to use and cheap. Ideally, Cisco should have bought Skype but it couldn’t look past its enterprise customers that were buying expensive equipment. And remember, back then Cisco was looking to be a consumer focused company by acquiring brands such as Linksys and Pure Digital, the makers of the Flip camera. Instead, Microsoft saw an opening and eventually acquired Skype. Now Cisco is challenging the Skype/Microsoft merger because it fears its own video conferencing solution may be blocked and enterprise customers would opt for a Skype/Microsoft solution.

This brings me to India, which I believe is stuck in it’s own version of innovator’s dilemma. Inefficiency, middlemen and leakage are all words for the same thing – corruption. When technology is pitched as a solution to curb corruption people come out of the woodwork and say how the proposed system is too expensive or too difficult to use or politically motivated. The reason for the bad press is because no one really wants to change the way they work.

One example is the government’s plan to move to an electronic system of government subsidies and social welfare payments using Aadhaar linked accounts. Initially it would appear that the middlemen would be completely cut out from the process, however by having money go directly to bank accounts many other industries/services might benefit from it. Services such as micro insurance, micro payments, micro financial services, etc… The dilemma is that the middlemen will have to do more work to benefit from these new opportunities and usually that is not taken very well. Hence, all the trash talking about how bad Aadhaar is for the country and people’s privacy will be at risk. This is a classic case of innovator’s dilemma – the middlemen are happy with status quo because they can’t think beyond their current revenue stream.

The above example is par for the course all over India. People don’t like technology because it speeds up everything, makes people accountable and introduces transparency. People are afraid of technology because they feel they will become irrelevant, but you become irrelevant if you ignore technology.

The dust has settled between SKS Microfinance and Vikram Akula and the verdict is in…a complete disaster for investors in the public markets. Rewind back to 2009 when Akula was the poster boy for microfinance institutions (MFI) and was on the cover of Forbes India. A year later SKS went public on August 10, 2010 at Rs. 935 a share and closed at Rs. 1171 for a gain on the first day.  Today, SKS is trading at under Rs. 100 a share, down over 90% from its peak of Rs. 1407. Akula has since resigned from SKS and investors are resigned to the fact that they lost a lot of money during the IPO. So what happened?

The press has had a couple theories of that went wrong, one of them states there was a power struggle between Akula and the duo of CEO (Rao) and CFO (Raj). The SKS model is similar to other MFI’s in that they loan small amounts largely to village women and then the village women ensure they all pay off the loan with interest. It’s a great way to push the risk management down to the village level. This has been done successfully for many years and continues to do well. What hurt SKS more then anything else was being a publicly traded company.

When you have shareholders, their goals are pretty simple – grow the top line revenue, grow the bottom line profits which will lead to a higher stock price. In order to do that at SKS you have to find more people and give out more loans, which is very similar to what caused the economic crisis of 2008. If the investment banks wanted to sell more mortgaged backed securities (MBS) they needed more loans which meant the lending standards were relaxed – if you had a pulse you got a loan. With SKS something similar happened, they were giving loans to anybody and everybody in the state of Andhra Pradesh. Some people had 4-5 loans outstanding and those people couldn’t manage to pay them back. This led to SKS reporting less than impressive quarterly numbers which led to a downward spiral of their stock price. In addition, once the government realized people had multiple loans and SKS was charging as high as 36% in interest they hit the pause button on the SKS business model. This again led to the stock price getting pushed down even further.

I believe SKS would have been fine if they remained a for-profit but privately held company. I can understand the founding team of SKS wanting an IPO as it provides an excellent liquidity event for them to cash out, however the short term goals of the investors are completely out of sync with the long term mission of what SKS was trying to achieve.

The new rules allow major big box retailers that sell many brands like Walmart, Carrefour and Tesco to own 51% of the business. Whereas single store brands such as Reebok, Apple and Prada can own 100%. The timing might not be great but India is the last big market that has not been tapped yet and many brands might try their luck at the Indian consumer to grow their sales.

Locally, the retail industry is divided into two categories: organized and unorganized (aka kirana stores). Many reports have shown that 90% of all sales flow through the unorganized retail segment.  With the new guidelines, many are hoping that the organized retail sector can grab a larger share of the pie and in the process bring about a better experience for the consumer. Once of the reasons the bill was stalled for so long was the concern about how the “kirana guy” would cope if Walmart setup shop next to his store. That’s a valid point, however I think it forces the kirana shop owner to provide a much better customer experience since he can’t compete on price. Unfortunately, the concept of customer experienece is so alien to them that many will end up closing shop since they won’t be able to adjust.  On the flipside, I see many kirana shops converted into an extension of a major retailer who would service the local area and deliver the goods.

The bigger question for me is how the e-commerce space is going to play out with the new rules in place. If Amazon.com sets up shop in India will it partner with FlipKart.com or Pantaloons? Will the kirana store replace companies trying to build out the last mile mechanism for delivery (Chhotu) and payment collection (GharPay)?

It’s very early days in the retail sector and I would imagine whatever worked for these big box retailers in other countries will be very different from what ends up working in India. That’s where the local retail partner comes in and adds value since they know the local demographs, environment, buying patterns, etc… Most of the retail stocks are up today since the future looks very bright for retail and the companies that are already executing in the retail space.

The latest collapse is even more sinister then the first one. At least during the Refco collapse Phil Bennett took a loan to cover his proprietary trading (aka prop trading). However, it appears MF Global took customer segregated funds to shore up their losing prop trades on bonds which is hugh no-no. The reports are still filtering in as to what exactly happened and who knew what. However, this quote from a lawyer really ticked me off “To the best knowledge of management, there is no shortfall”. A very carefully worded statement which essentially says “don’t hold the management team accountable”.

When working with Refco during the transition to Man Financial (which eventually became MF Global) it was surreal. I just landed into India with plans to stay for 6 months while we got everything up and running. And within 10 days my dreams turned to despair. I had a great vantage point as I was sitting next to Vineet Bhatnagar, MD of Refco-Sify India, as everything was collapsing around the world for Refco. We would hear reports of what was happening via the newswire or rumors from the “New York guys” but during all this craziness Vineet was calm and cool throughout the entire ordeal. He gave interview after interview saying how the India operations were “ring-fenced” and things would be back to normal. Certain parts of the business came back to normalcy faster then others, it was a trust thing. I think the institutional guys understood their money was safe but many retail clients didn’t care what was being said.

In any event, our new fund was completely crushed…100% wanted their money back NOW. All the investors got their money back and said they would re-invest once the dust had settled. Sadly, some of India’s most prolific investors who were in the first fund did not return for the second fund which we started in March 2006 under the Man Financial banner.

Right now there are two types of people that exist at MF Global-Sify India, people that witnessed the first collapse and the “new guys.” Anyone who was there during the first collapse is a little concerned but have seen this movie before. The “new guy” is probably shitting in his pants. Having worked with the Indian management team there is no doubt they are top notch and everything continues to be above the board. There was a report in DNA Money newspaper that Vineet “had put in his papers”, I almost choked on my morning coffee when I read that. Not because “oh my god he is leaving” but rather “oh my god he would NEVER leave India”. Of course, people love sensational headlines and the MF Global collapse definately provides it.

One of them is Sucheta Dalal, who is a highly acclaimed journalist who broke the story on India’s largest insider trading scandal in 1992 involving Harshad Mehta (he was the first person in India to buy a Lexus LS400). I’ve actually had a chance to meet Sucheta and she is a straight shooter. I’ve commented in the past that I feel Aadhaar will help to ease corruption. On Twitter, Sucheta had a more direct question for me:

@mrjain  please enlighten me how a number allotted to you will curb corruption? I am all ears

One of the misconceptions about Aadhaar is that it will solve every problem that affects India, it won’t. The other misconception is that it will be 100% fool proof and rock solid from day one, it won’t.  Aadhaar is a technology startup that happens to be ventured backed by the Government of India. As with any startup or government program there will be teething and integration issues that will have to be dealt with in real-time.

My answer to Sucheta’s tweet is “yes, but probably not for Sucheta and me.” It would benefit people that suffer from the “poverty tax”, which is a large percentage of the Indian population. If you receive a pension, you might have to pay a “fee” to the clerk to speed up the transaction. Same issue with food, subsided kerosene, government jobs, etc…if you want something you have to pay a fee.  That fee hurts more if you earn less and hence it’s called the poverty tax or you can call it what it really is…corruption. With an Aadhaar number the government would directly deposit the money into your bank account. No middle man to slow down the transaction or take money from you to speed up the process of getting YOUR money.

Fear, uncertainty and doubt are the 3 things that critics raise when talking about Aadhaar. Fear of what the Indian government will do with the data. Uncertainty about how much money is being spent on the project. And lastly, doubt of whether the program can achieve anything impactful.

The other complaint I’ve heard from several people is they feel it’s just a large technology project to benefit system integrators like Infosys, Wipro and TCS. In particular, a friend of mine questioned why Aadhaar was so keen on using iris and fingerprint scanners to authenticate people. Was it because that would force new hardware sales for iris and fingerprint scanner vendors. Why not use voice verification via cell phones that are so readily available? Granted, there might be issues with voice pattern recognition but why not open it up to a college competition for the top technology schools (read IIT’s) to try and solve the problem.

Personally, I think that’s where the Aadhaar team has done a rather poor job of openly communicating and should really improve in that department. I still firmly believe Aadhaar is a step in the right direction and will eventually benefit a large percentage of the Indian population.

Safety in this country is a joke. The police patrol the streets with nothing more then a stick and a fat belly. Money that should go towards police issued revolvers, CBs and police cars has surely been pilfered by the higher ups. When a terrorist attacks, the police are clueless and powerless as they don’t have the tools to deal with this type of threat. In the end, people die.

About two years back my parents visited Bombay and they had an extra suitcase which we had no place for. Since real estate is a premium in Bombay, I had the brilliant idea of sticking the empty suitcase in the trunk of my car. For 5 months we visited pretty much every hotel and/or mall that had security and NOT ONE person questioned what was in the suitcase. They opened the trunk looked at the suitcase and then proceeded to shut the trunk. If the government was truly concerned about it’s citizens it would not let private companies conduct security checks and instead use the military as it does for the airports. This decision allows the government to save money but puts the public at risk and in the end, people die.

A politician first and foremost should be doing everything to take care of people in his/her district, but in reality they are more worried about taking care of themselves first. Another great example are the roads in Bombay. Building roads is a fairly simple thing and is done around the world and other parts of India without an issues. However, for some strange reason the roads in Bombay are always in a state of disrepair, of course corruption plays a part. If the cost of the road is Rs. 100, by the time the road is completed only Rs. 5o might have been spent on sub-standard materials, the rest is classified as “leakage”. When roads are so badly constructed it could be a death trap or lead to a serious injury for someone that is riding on a motorcycle and happens to hit a pothole. If you hit that pothole and are taken to a government hospital, let’s just say I wouldn’t even send my worst enemy to a government hospital for treatment. Yet again, the mixture of money and disregard for life creates an environment where government hospital facilities are on par with hospitals from when dinosaurs roamed the earth. In the end, people die.

You get the point, I could go on and on with examples. So what do we do? We create our own bubbles. Who cares if the building we live is filthy, as long as your home is clean. Who cares if people are begging on the street, you are sitting in an air conditioned car. Who cares if someone’s office got bombed, you and your staff are safe.

The problem with bubbles is that they can pop at any moment. When it pops who will help you? The government or will your strength, courage and resilience pull you through.

Long Term Commitment
Enough of the history lesson, back to VW’s big bet on India. VW’s foray into India started in 2001 when it launched the Skoda brand and started selling the Octavia. Around 2007, the VW Group also added Audi, Bentley and VW to their Indian product line. These cars were available by importing them individually, however servicing was always an issue since they didn’t have official dealers on the ground in India. In another sign that VW is here for the long haul it opened a massive manufacturing facility in Chakan (near Pune) in 2009 and spent USD $500 million in the process. Towards the end of 2011, VW will add the high-performance brand Lamborghini to the mix. They will most likely unveil the first Lamborghini showrooms when they ship the highly anticipated fire breathing 691hp Aventador to India.

Breakout Hit
In the 4 door mid-luxury segment, the market leader for years has been the Honda City. The break out hit for VW has been the Vento which was introduced in 2010 and already has beaten the Honda City as the number 1 selling car in that segment. The Vento’s success is a combination of Honda lagging and VW bringing the right product to the market, namely a diesel engine. With petrol prices only going up VW was right to tap into the Indian psyche of affordability. The Honda City has been around since 1998 and all the brand loyalty it built up went down the drain once the Vento was launched and petrol prices started to rise. Honda hit back in early June 2011 with price cuts by attributing it to “cost reduction efforts in the supply chain” which sounded like public relations speak then reality. But it didn’t matter, by then the damage was done and the Vento took the top spot.

Audi’s Rise
Around the world Audi has always been number 3 when compared to the more well known German brands of Mercedes and BMW. However, that is changing in India partly because Audi was able to capitalize on the new designs featuring the “LED eyelids” that are now copied by every other car company. In addition, the Japanese strategy of not bringing their luxury brands of Acura, Lexus and Infiniti to India was a missed opportunity that Audi used towards its advantage. Toyota which has been in India since 1997 has built a large distribution channel and could have easily used that existing network to seamlessly introduce the Lexus brand but failed to do so. Lastly, Audi got some great mileage with their feel good advertising campaign featuring cricketer Ravi Shastri. Ravi was shown sitting on an Audi 100 on the cricket field when India won the World Championship of Cricket in 1985 where he was selected as the man of the match (most valuable player). Obviously it was unplanned and Audi capitalized on the imagery.

Market Segmentation
Possibly the only issue with the VW Group’s arrival into India is their market segmentation for their brands. When Skoda first came to India, it’s reputation in the Western European countries was not very high and thought of as a sub-standard product. However, under the VW umbrella it slowly upgraded its perception and in India it’s often thought of as a premium brand. Many consumers gravitate towards the  Skoda Superb who want luxury but want to “fly under the radar” and not appear to flashy. With the arrival of Audi and VW the lines of market segmentation have started to blur. The Audi A4, Skoda Superb and VW Passat are all very similar and in fact share the same chassis. And therein lies the problem, if a consumer wants to spend Rs. 30 lakhs on a car which one – A4, Superb or Passat?

Summary
Overall, the timing of VW’s entry into India couldn’t have been more perfect as other competitors have been busy with their own problems. The American automotive giants are dealing with their domestic demand issues. The Japanese automakers are taking a very slow approach to India when it comes to their luxury brands – Acura, Lexus and Infiniti.  Lastly, the German automakers Mercedes and BMW have been battling for the top spot for number of cars sold in India. BMW took the crown with over 6,200 cars sold in 2010, which is a very small piece of the overall Indian car market. Since the VW Group has many brands and able to target a much wider audience it will most likely lead overall sales in the years to come.

The above article was syndicated on VCCircle.com.

When I lived in Chicago one of our closest family friends had a son that was basically a supercomputer made to look like a dosa eating South Indian. Shyam was the all-star brainy kid of Chicago and I’m sure I was not the only kid in the greater Chicagoland metro area to get compared to him. Typical comments like “Well, Shyam can spell that” or “Shyam did 1599 on his SAT, he missed a point because he was busy writing to the New England Journal of Medicine about curing cancer.” At one point I thought the Chicago suburb of Schaumburg (pronounced “shyam-berg”) was named after him because he was so damn smart.

When I moved to India in 2005, I thought I would be surrounded by human Intel dual-core processors that would put Excel to shame. Slowly though I started to realize that only a subset of Indians are good at math. The more I looked around, the more I realized Indians are generally REALLY bad at math. This assumption was not from intensive research but looking at one simple product – the credit card.

Everyone wants to live the American dream which is really just consumerism fueled by credit cards and Indians are no different. 10 years ago credit cards were nowhere to be found in India but once the young work force started to work in call centers they started getting credit cards. The theory is these kids were pushing credit cards to Mike in Montana during the night at their call center job (remember the 12.5 hour time difference) and during the day they wanted to live the “American dream” so they would charge up a storm on their own credit cards.

Everything up to this point seems legitimate until you open the first bill and see the interest rate the banks charge. I got my first Indian credit card about 3 years back and almost had a heart attack while looking at my monthly statement where it said they would charge me 3.3% per month. I have NEVER in my life paid a nickel in interest but I was shocked at the arrogance of the banks to charge such high interest rates. It’s also part marketing, they never talk about the annual rate because that would scare people off. Instead, when people see 3.3% per month they probably think its okay and harmless. However, when you do the quick math of 3.3 times 12 you come up with 39.6% per year to have the luxury of carrying a balance.

Charging 39.6% is almost criminal. Oh wait, it is criminal but only if you take money from a microfinance institution like SKS Microfinance. Legally, if you take a loan from SKS they cannot charge you more then 26% a year, granted we are talking about different needs. Microfinance is about helping people get out of poverty, whereas credit cards seem to be helping people go into poverty.

Being in India, I can finally feel smart when it comes to numbers.

Mark Mobuis

Since 2005, India has been the destination of choice for institutional money mangers to invest their clients money. As a refresher, India was one of the 4 countries mentioned in the now famous 2003 report from Goldman Sachs titled “Dreaming with BRICs: The Path to 2050.”  The acronym BRIC stands for Brazil, Russia, India and China. It’s a report that many managers used as their investment thesis for entering the 4 countries mentioned and led one of the authors Roopa Purushothaman to land a gig with the largest retailer in India – The Future Group.

I’m all for research reports and believe it serves a purpose for investors that might not have a clue about certain markets and/or companies that are operate in those markets. These country reports are all very similar, they are super positive about the growth of a country and how big these markets are. However, what is really annoying is when foreign analysts, fund managers or super investors fly to India and tell Indians how their markets operate. It’s what I call “white on brown” – white guys telling brown people about their own markets.

Mark Mobius is the most recent fund manager to fall into this category. I have a lot of respect for Mark Mobius who is the emerging markets rockstar with Franklin Templeton where he oversees $50 billion in assets for them. In fact I got a chance to hear him speak in Bombay in October 2007 and was quite impressed. Recently in an interview with the Times of India he talked about his investment philosophy in India and was asked about corruption in India, he had the following view on corruption:

Corruption is rife everywhere in the world. It’s only when it really impacts the process of a business in a big way, you’ve got a problem. But that’s not the case here.

I read that quote and had to re-read it to see if he was talking about India or some other country. Mark, If you can’t speak the truth then don’t say anything but don’t insult my intelligence. Currently, India is embroiled in the largest corruption case involving one of the darling sectors for institutional fund managers – the telecom industry.

Ex-telecom minister A. Raja, industrialist Anil Ambani and heaven forbid Ratan Tata are being brought in for government questioning on how telecom licenses for the 2G mobile spectrum were allocated. If Ratan Tata who runs the Tata Group which is the largest business house in India and viewed as the most honest and above corruption is being questioned, it shows how wide the net of corruption is and it absolutely affects the process of a business in a big way. From what telecom insiders are saying the corruption is only going to get deeper and affect more individuals and companies.

Mark is correct, corruption is everywhere even in the US but happens at such a high level it doesn’t directly affect the average US citizen.  In India corruption starts at home, want to get a phone connection? want to get a gas connection? You better be ready to slip some cash to these service providers to get service or “your file” might get lost. Some say that’s not corruption but just paying for a speedier “value added service” but don’t fool yourself, the entire value chain is corrupt. I don’t fully blame Mark for his myopic view on corruption because when he visits a country like India, the red carpet is rolled out for him.  Government officials want his stamp of approval, companies want him to invest in their companies and the press wants something to print. Mark doesn’t have to really get his hands dirty when he comes to India, he gets to view everything through a rose colored lens and everything delivered on a silver platter.

Any fund manager that says corruption is not a major issue I offer you a challenge. Buy a flat in Thane and commute for 6 months to South Bombay for work.  Let’s see how you deal with the following:

• Getting your flat registered without paying a bribe
• Landline MTNL phone connection
• Gas cylinder or piped connection
• Power cuts (corrupt power grid)
• Water shortages
• Commuting by car (road infrastructure badly maintained)
• Commuting by local trains? Don’t even try it.

Staying at the Taj is not a proxy for how the majority of Indians live, work, play and learn (yes, that’s an old Cisco marketing campaign slogan).

NOTE: If you are interested in downloading the BRICs report “Dreaming with BRICs: The Path to 2050″ you can download it here.

The above article was syndicated on Huffington Post.