Why Tamil Nadu is the most daunting liquor market in India

You would think nothing can ruffle Vijay Mallya's United Spirits LtdBSE -0.69 % (USL) in the Indian drinks market. The company controls nearly half of India's 230-million-cases-a-year market, thanks to a bevy of brands in its portfolio. Earlier this week, India's largest drinks company posted a 71% increase in net profit toRs 80.6 crore in the December-ended quarter.


But USL hardly sounded like a company that had reported spectacular earnings. Reason: the report card from Tamil Nadu. The company said it continued to be hurt by regulatory changes in Tamil Nadu where, it said, the state government is promoting local brands by artificially controlling supply.

"Against a capacity of 1 million cases per month [in Tamil Nadu] and a demand that is much larger, United Spirits' monthly capacity is being artificially pegged at 0.75 million cases... to benefit new and existing local players," it said in a statement.

Curious Market

That's the odd thing about Tamil Nadu. It is India's largest liquor market, with monthly sales of 42 lakh cases and growing at more than 12% by volume. According to a Times of India report, the state consumed liquor worth Rs 300 crore in four days to usher in the New Year. In other words, it is a drinks company's paradise. Not just USL, even a rookie player would be panting at the prospects of such a market.

But Tamil Nadu also happens to be the most daunting liquor market in India. To understand why, you need to go back to 1983, when chief minister MG Ramachandran created the Tamil Nadu State Marketing Corporation, or Tasmac, to sell liquor in the state. Tasmac has an ironclad control over distribution of liquor in Tamil Nadu.

Subsequent governments have moved to further tighten Tasmac's grip over liquor sales (6,798 retail outlets) in the state due to its potential to make money. In 2010-11, Tasmac earned Rs 18,000 crore. These revenues are important for the state government as they are diverted towards election freebies.

After the AIADMK came to power, the government ordered that even hotels and pubs should procure liquor through Tasmac. The order was lifted only because the agency did not have the capacity to store imported foreign liquor.

A tightly regulated market is not the only rub for drinks companies. Liquor produced in the 11 distilleries in the state is divvied up between the large companies and a raft of local players (see Have You Heard...).

A senior executive of a top drinks company, speaking anonymously, complained that this goes against the grainBSE -4.89 % of free market economics: "The government passes whimsical ad hoc orders and consumers drink what the government decides."

A new entrant must either establish a distillery on its own or partner an existing player. Modi Illva India, the producer of Rockford Reserve (see page 22), has launched the whisky in 18 states, but is yet to enter Tamil Nadu for this reason. That may also be why drinks giant Pernod Ricard has kept away from the state.
A senior executive of another drinks company says every local player is affiliated to a politician belonging to the AIADMK or the DMK. "It is a market neck-deep in political nepotism."

A Tasmac official agreed. "For instance, the market share of Midas [a distillery owned by an associate of the AIADMK] was negligible during the DMK reign. It picked up after the AIADMK came to power."

Political Factor

For this reason, fortunes can suffer a reversal following a change of government. The Tasmac official says Mallya's USL took a beating after the AIADMK came to power. The company's monthly market share fell to 12% in December from more than 20% in May last year. Volumes dropped to almost 5 lakh cases (of 9 litres each) from about 10 lakh. Currently, the company's share is less than 10%. USL declined to comment for this article.






The second company executive quoted earlier says USL has long benefited from government policies in Tamil Nadu. "The reaction from USL could be because Diageo [Mallya is looking to sell 53.4% in USL to the world's largest drinks company] may have started making noises about the practices in Tamil Nadu." That could be the most distinguishing trait about Tamil Nadu. It frustrates even the most powerful drinks companies.

Why Singapore scores over India on settlement of corporate conflicts

When Telenor and UnitechBSE 3.71 % had issues related to their partnership, they said they would hold formal talks in Singapore rather than in India. Most of the VideoconBSE 0.05 % Group's contracts with Indian parties provide for arbitration in Singapore, and several recent shipping disputes involving Indian companies are being settled outside the country, says Anirudh Krishnan, a Madras High Court advocate. 

Companies in India, as elsewhere, prefer to resolve their commercial disputes outside courts, through independent third-parties and a process called arbitration. "Arbitration is popular among companies as they do not want to enter into long-drawn litigation and also due to confidentiality issues," says KS Harisankar, executive director of the Centre for Advanced Research & Training in Arbitration Law, Jodhpur. So does the government as India's courts are submerged under pending cases—about 32 million as of June 2011, according to a Supreme Court publication. 

But such are the rules, and such is the absence of urgency in the government to fix them, that they don't promote a clear and efficient arbitration ecosystem in India, pushing the large companies out of the country and leaving the small ones to navigate the long wait of the courts. 

Nine years ago, crucial changes were suggested in the Indian Arbitration & Conciliation Act, 1996. In 2010, the law ministry released a consultation paper on the proposed amendments, but the changes are still on the drawing board. "Plenty of changes are necessary," says SK Dholakia, senior advocate and an expert in arbitration. "But our law ministers do not appear to be action-oriented. I have met them all except the present one. They promise to do something, but don't do anything." 



Absence Of Defined Laws 

The lack of legislative action has meant the interpretation of different clauses of the 1996 law has been left to the courts. Till September 2012, even after arbitration was held outside India, either of the parties could challenge it in India, defeating its intended purpose as the means of last resort. "The key is to separate international and domestic arbitration," says Harisankar, assistant professor, National Law University, Jodhpur. "Singapore follows this model." 

It took a September 2012 SC verdict in a case between Bharat Aluminium Company Ltd (Balco) and Kaiser Aluminium Technical Service to clarify the Indian Arbitration Act will not apply if arbitration proceedings are held outside India. 

"It (the Balco verdict) is definitely a step in the right direction," says Dholakia. However, for every court decision that furthers the cause of arbitration, there is another that restores the status quo, says Krishnan. He cites the example of the SC ruling in the SBP versus Patel EngineeringBSE 2.62 % case on what should be done if one of the parties fails to nominate an arbitrator. The Arbitration Act says the chief justice or an institution designated by it can appoint an arbitrator. The SC interpreted this to mean a Supreme Court or High Court judge, again defeating the purpose of keeping arbitration out of the courts. 

This verdict is seen as a setback to arbitration institutions. "If this decision (Patel Engineering) had not held so, perhaps institutions would today have a huge role in appointing arbitrators, and this would have been the shot in the arm that institutional arbitration required," says Krishnan. 

Few Indian Institutions 

By one classification, arbitration is of two kinds: ad hoc and institutional. In ad hoc arbitration, typically, each party appoints one arbitrator each, and jointly agree on a third name. An example of this is the ongoing dispute between the Delhi Metro Rail Corporation (DMRC) and the Reliance Infrastructure-promoted entity over the troubled Delhi airport metro line. 

The main drawback of ad hoc arbitration is the absence of a time-frame to decide a case. For example, a party can delay proceedings by refusing to appoint an arbitrator; another cause of delay is finding a common schedule among arbitrators for hearings. A 2011 survey done by Ernst & Young of 68 companies showed that 24% of respondents had undertaken ad hoc arbitration. 

In institutional arbitration, companies approach an institution -- a wing of a court or an arm of a law firm that specialises in such cases. Compared to the ad hoc route, institutional arbitration is more defined—for example, there are set rules on how arbitrators will be selected and duration of the proceedings. 

But weak arbitration laws have meant there are few such Indian institutions. "People still prefer ad hoc arbitrations," says Pallavi S Shroff, senior partner with Amarchand & Mangaldas, a law firm. "Or where foreign parties are involved and institutional arbitration is contemplated, the ICC at Paris or LCIA in London or SIAC in Singapore. It is sad there is not a single Indian institution of repute." 

In 2009, the London Court of International Arbitration (LCIA) set up shop in India. The same year, the Delhi High Court opened its arbitration centre. "The establishment of (these) two institutions have been a gamechanger regarding the perception of lawyers and businesses vis-a-vis arbitration," says Ajay Thomas, registrar of LCIA India. He adds the Delhi High Court centre was significant as it promoted the cause of institutional arbitration in India and was a signal from the courts that the judiciary was not antiarbitration. 

Rule Changes & Reforms 

Experts would like to see two other changes in Indian arbitration laws for greater clarity. The first, says Dholakia, is to stop one of the parties in the dispute from taking away assets or investments from India while international arbitration is on. The second, adds Thomas, is to clearly state the 'national policy', or the grounds on which a court can set aside an arbitration award citing national considerations. 

The SC, in a case between ONGCBSE 0.13 % and Saw Pipes, included the term 'patent illegality', which is not defined under the Arbitration Act. This has resulted in added confusion on what grounds arbitration awards can be challenged in local courts. 

A third reform experts are seeking is the establishment of commercial courts. The Commercial Division of High Courts Bill, 2009, was passed by the Lok Sabha in December 2009, but is yet to be passed in the Rajya Sabha. The bill envisages each high court having a division to handle commercial disputes above a certain value; it also specifies processes and time limits. 

All this will make for easier, smoother arbitration, and keep more companies out of courts and in India. The government has to act. 

Dark horses emerge top wealth creators in 2012, UB Group tops the list along with Ramco, Godrej & Birla Groups

The year 2012 appeared to be the year of the underdogs. The highest wealth creators this year were the less-fancied groups such as Chennai-based Ramco Indiabulls, Godrej and BK Birla. The surprise, however, was the embattled UB Group.


The UB Group, which has under its fold seven companies, mainly in liquor and aviation, topped the list of wealth creators for 2012, as its market capitalisation tripled in the past one year, driven primarily by theUnited SpiritsBSE 2.81 % (USL) deal, its biggest company with Diageo, the world's most profitable liquor company, which led to a rerating of USL.

Both the Ramco and the BK Birla Groups, which mainly have interests in the cement industry, gained from the favourable outlook of the industry. The BSECement Index rose by 45% in 2012 compared to a gain of 27% in the Sensex.

"The cement industry suffered last year due to demand-supply mismatch. However, this year due to better production discipline, companies were able to maintain their margins.

The Street believes that the margins in the coming quarters will go up, which has led to a rally in thesestocks," said Rajesh Ravi, senior analyst at Karvy. The Indiabulls Group, with a presence in real estate and housing finance, on the other hand gained from the reversal in the interest rate cycle.



"Indiabulls' financials reported a healthy growth in disbursements and become the second-largest housing finance company this year," says Hardik Shah, analyst at KR Choksey.

The Godrej Group, with a diver-sified presence in consumer, real estate, agro and chemicals, benefited from an improved show across all its businesses. All its group companies outperformed the respective industry indices, propelling the company to the list of top five leading wealth creators of 2012.

Amongst the top five groups by market capitalisation, the Mukesh Ambani-led Reliance Group and Tata Groupunderperformed the benchmark Sensex. Their market capitalisation rose 16% and 25%, respectively, while theSensex gained 27%. The HDFCBSE 0.60 %, Aditya Birla and ICICIBSE 1.92 % Groups outperformed the Sensex as their market capitalisation rose 48%, 37% and 66%, respectively.

10 Corporate buzzwords that will dominate 2013

1. Money 

Contrasting imperatives will bring about many unions between those in need of funds and those with a surplus, via mergers and acquisitions, and public and private issues. Many cash-starved Indian companies will hawk assets to cut debt, while the better ones will raise capital to grow. Companies with heavy debt will restructure to sharpen focus on core business, while foreign companies from the US and Japan will hunt for Indian assets to expand. 

2. Women's Safety 

The outpouring of anguish following the recent gang rape of a young woman in a Delhi bus and her tragic death is wending its way to India Inc. It is putting pressure on companies, especially those in 24x7 sectors, to not treat safety of women at the workplace and beyond as a blind spot, and instead fortify internal processes, take initiatives and sensitise male co-workers. The urgency to do so has never been more. 

3. CSR 

With a new law likely to make it mandatory for companies above certain thresholds to spend 2% of their net profi t on corporate social responsibility (CSR) activities, this aspect could acquire greater focus and structure among the well-intentioned. Most companies are currently below the 2% mark. To scale up and to make their CSR spend count, CEOs will have more professionals on board, choose and structure initiatives thoughtfully, and make auditing and reporting of it more stringent. 

4. New Banks 

After eight years of dithering, new banks are a possibility. There are high hopes, and fears about business houses returning to own banks after four decades. Many groups such as the Birlas are keen, but will the conditionalities be so tough that it makes banking an unviable proposition? It will a discussion topic, more so if many big ones don't make it. 

5. Accelerators 

After eight years of dithering, new banks are a possibility. There are high hopes, and fears about business houses returning to own banks after four decades. Many groups such as the Birlas are keen, but will the conditionalities be so tough that it makes banking an unviable proposition? It will a discussion topic, more so if many big ones don't make it. 

6. Corporate Governance 

The new Companies Bill, if passed, could change the way India Inc looks at governance. From greater shareholders rights (class-action suits) to scrutiny of related-party disclosures (board now has to justify them), from rotation of auditors (maximum tenure of fi ve years for an auditor) to stringent penal provisions (fraud is defi ned for fi rst time and imprisonment now introduced in many cases)...companies will have to make themselves more accountable. 

7. SMAC 

SMAC (social, mobility, analytics and cloud) is the most beloved acronym now in the jargon-fi lled enterprise software world. The promise is that this set of technologies will give more power to employees and customers, turn data into insights and deliver software in an on-demand form. Eventually, SMAC may mean that enterprises need be concerned with outcomes alone, and not what goes into the plumbing.

8. Gender Diversity 

Gender diversity in India is still a notion practised in pockets. Having said that, there is a greater consciousness that more women in the workforce — across levels and functions — is a good thing. 

It's not acceptable that women occupy just 5.3% of the total board seats of the BSE-100 companies or have only a 20% presence in engineering institutes. Many companies and organisations are proactively trying to correct this imbalance -- for example, by promoting and nurturing women, by offering fl exihours and by setting up corporate creches...This will continue in 2013. 

9. Solar Power 

From Rs 18 per unit three years ago, the cost of producing solar power is now about Rs 11, making it a viable alternative to, say, gensets. As of November, according to PricewaterhouseCoopers India, the country had an installed solar capacity of 1,047 MW; this is projected to increase to 1,650 MW in 2013. More states are following Gujarat to incentivise investments. Big groups like Reliance ADAG and Birla are coming in. Gigawatt scale (Above 1,000 MW) installations per year, as expected from 2013 onwards, will attract global component makers (glass, cells, batteries, panels) to set up units here, further lowering costs. 

10. Digital Marketing 

Just when marketers thought they had nailed what digital marketing stands for, it has gone and changed again. It has variously stood for creating websites, search engine optimisation, marketing on social media and engagement, and maybe even sales via mobile platforms. In 2013, it will stand for all of the above, and more — swot up on buzzwords like SoLoMo (social, local, mobile) and gamifi cation (think of the point system in games like Farmville applied to mundane tasks to make them more engaging)

Piramal Group in talks to buy US PE firm TPG Capital’s 20.27% stake in Shriram Transport Fin for Rs 3,500 cr

Mumbai-based billionaire Ajay Piramal's eponymous Piramal Group is in advanced talks to buy US private equity firm TPG Capital's 20.27% stake in India's largest truck financier, Shriram Transport Finance Ltd (STFL), for around Rs3,500 crore, two people with direct knowledge of the negotiations said.

"TPG Capital has already sounded out its partner (Shriram) about Piramal Group being a potential buyer, and it has given its consent," one of the persons told ET, adding that contours of the proposed deal involve TPG selling its entire holding in a block sale to Piramal HealthcareBSE 0.31 % at current market price. "The sale will fetch around Rs3,500 crore and the block sale will help TPG save on capital gains tax."

The second person said negotiations are in advanced stages and a deal is likely to be sealed by January-end or early February.

Puneet Bhatia, head of TPG Capital in India, declined comment while the Piramal Group, whose businesses span healthcare to real estate, said in an emailed response: "As a policy, we do not comment on market speculation." Piramal, who is sitting on a moun-tain of cash since selling his formulations business to America's Abbott Laboratories in 2010 for $3.72 billion, has made no secret of his desire to diversify into financial services.

A significant foothold in Shriram, one of India's biggest and most successful finance firms, could help him realise that dream. A successful purchase of a sizeable minority stake in Shriram TransportBSE 0.11 %Finance would rank as the latest instance of an opportunistic acquisition by Piramal.

Other recent acquisitions include the deal for an 11% stake inVodafone India, the country's second-largest mobile telephony company by subscribers, for about Rs6,000 crore.

In June this year, it bought US-based Decision Resources Groupfor $635 million.

A deal with Piramal would mean a tidy profit for TPG, which bought into Shriram for Rs 486 crore and has been trying since last year to exit it. TPG bought into Shriram in 2006 through affiliate Newbridge Capital, which acquired a 49% stake in unlisted group holding company Shriram Holding Madras Pvt Ltd.

TPG found it difficult to exit the investment initially because of certain non-transferable covenants in the shareholder agreement with Shriram that diminished its allure. But the merger of the holding company with the listed STFL, completed just a few weeks ago, now offers it an exit.

TPG, a global buyout fund with around $54.5 billion of assets, owns 4.6 crore shares, or 20.27% of Shriram Transport, which can be sold either in pieces or in one block. At Friday's closing price of Rs 750.20 a share, these shares command a value of Rs 3,450 crore. STFL, which controls up to a fourth of the pre-owned truck financing business and 7-8% of new truck financing, commands a market value of Rs 17,018 crore.

While the Shriram Group declined comment, one official, who requested anonymity, said the group was not averse to the Piramal Group coming in as a minority shareholder, although details about the rights the new minority shareholder would have were yet to be finalised.

"The valuation part of the deal is more or less finalised. However, the relationship between the new financial investor and the management is yet to be defined," the official said. Although it may not enjoy the same covenants held by TPG, it is expected that the Piramal Group could be granted some privileges by virtue of its large holding.

The senior Shriram official said the group was not keen to give special rights of the sort TPG enjoyed to the buyer. "But, we have not reached that stage," the official added.

A former head of another US private equity firm said ideally for Shriram, TPG should have sold its interest to another like-minded financial investor.

"Knowing Piramal's interest in financial services, a sale will be like bringing in a Trojan horse," said the person, requesting anonymity.

Why India does not have a vibrant strategic culture

Manmohan Singh bemoans its absence. In the halcyon days of his first term, Singh, attempting to change the strategic outlook of this giant nation, was often heard complaining, "We must develop a strategic culture in this country."

He joins a large number of Indian intellectuals who decry our apparent lack of ability to plot out India's "strategic thought" or even plan a "grand strategy".

To a casual observer, India's actions — or lack thereof — often appear to be a result of who the government spoke to last, or based on ad hoc considerations that undermine India's interests. What makes this outlook interesting is that foreign analysts writing about India, seem equally clear that India does not have a vibrant strategic culture.

So Inchoate 

Many of us would agree with George Tanham who wrote in his seminal RAND study on Indian strategic thought: "[India] is an extraordinarily complex and diverse society, and Indian elites show little evidence of having thought coherently and systematically about national strategy."

Why do we seem to be an inchoate mass of chattering classes, government, national security establishment and politicians, all working at cross purposes, with the result that nobody quite knows why we do what we do or whether Indian interests are at all being advanced in the global marketplace?

India, many argue, does not have a strategic culture because it has never faced an existential threat. The burden of being around for millennia has given a sort of timelessness to its strategic outlook.

Off the Mark

On a more mundane level, though, part of the problem is the lack of an articulated grand strategy — that makes it difficult for either practitioners or analysts to figure out exactly why we do what we do. For instance, why do we hanker after a permanent seat in the UN Security Council, even without veto power?

The fact is, it is part of an otherwise unarticulated Indian trait that we must be acknowledged as a great nation, even if we missed the boat in the first place. Second, the wild accusations of "sellout" during the negotiations before the India-US nuclear deal missed the point about why we were entering into the deal in the first place. This resulted in most of the strategic debates being wide off the mark. When "strategy" does find voice, Indian "interests" are often expressed as third person "values", again unnecessary in the modern age.

Ironically, this is why think tanks or strategic analyses remain hopelessly emasculated even in this information age — their discourse depends mainly on published stuff in the media, because the establishment freezes them out of the processes behind real decision-making. This means think tanks are also personality-driven, depending on their personal contacts within the "system".

Second, a severe lack of capacity constrains India's national security apparatus — the number of bureaucrats in the foreign office has been a subject of discussion for some time. What is less talked about is the system itself, which doesn't really lend itself to strategic thinking. Since the national security/ foreign policy system functions through silos, the division "handling" say, Iran-Pakistan-Afghanistan, is also responsible for the grand strategy therein. This sucks the oxygen out of any policy planning or strategy exercise within the foreign office.

Back to the Epics

The truth, as always, is complex. What is strategic culture, and do we have it? Kanti Bajpai writes: "Strategic culture consists of two parts. The first is the central strategic paradigm — the basic assumptions about orderliness in the world. Included here are assumptions about the role of war in human affairs, about the nature of the adversary, and about the efficacy of the use of force. The second part is grand strategy, or the secondary assumptions about operational policy that follow." Bajpai says there are three streams of Indian strategic thought — Nehruvian, neo-liberal and hyperrealist, saying that core values remain common to all, but strategies differ.

Is there a strategic culture in India? Actually, yes. There are core strategic values that India has embraced and lived by since Independence despite changes in strategic, foreign and security policies. It is inspired by not only the Arthashastra, but the Ramayana and the Mahabharata also, leavened by the complexities and contradictions inherent in Indian thought that have evolved over centuries of being a culture that encompassed and assimilated "foreign" influences.

Tanham says, "Four principal factors help to explain Indian actions and views about power and security: India's geography; the 'discovery' of Indian history by Indian elites over the past 150 years; Indian cultural and social structures and belief systems; and the British rule (raj)."

The Need for Autonomy

Shivshankar Menon, in a tribute to strategic guru K Subrahmanyam, describes the bedrock of Indian strategic thought as defined by "Subbu" — the need for "strategic autonomy". Often mistaken as a synonym for non-alignment, this is actually much closer to flexible realism. Menon says, "India is alone, along with the USA in an earlier age, in seeking to industrialise and accumulate power as a democracy."

Therefore, Indian strategic culture is a function of our assimilative history. As Menon says, "Strategy is not just about outdoing an adversary who is trying to do the same to you. It is also about finding cooperative solutions and creating outcomes in non-zero-sum situations, even when others are motivated by self-interest and not benevolence."

India could face shortage of air traffic control officers

With burgeoning air traffic, India could soon face a severe shortage of air traffic control officers (ATCOs), a top aviation official said today, asking theAirports Authority of India to take immediate steps to recruit them in large numbers. 

Responding to the suggestion by DGCA chief Arun Mishra, AAI Chairman V P Agrawal said the average annual intake of ATCOs was about 250, apart from an almost similar number for communication officers. "We will step up this recruitment process in the coming days," he said. 

They were speaking at the opening of the four-day Asia Pacific Regional Meeting of the International Federation of ATC Association here. 

Expressing concern over airlines criticising "high airport charges", the AAI chief said the navigation charges in India were "25-30 per cent lower than Europe and China. And yet, the IATA (International Air Transport Association) speaks of high charges." 

He said the improvements in air traffic flow management and navigation systems had led to lesser fuel burn for aircraft and has helped airlines save lot of resources. 

Referring to the new satellite-based augmentation system GAGAN to be implemented next year, Agrawal said the Indian Air Force has also come forward to cooperate in the flexible use of airspace that would considerably improve air traffic flow over the Indian airspace. "This will be a game-changer". 

Terming ATCOs as "unsung heroes of aviation" who kept the skies safe, the DGCA chief said a major challenge facing the aviation sector was its rapid growth which was yet to be matched by developments in infrastructure and manpower. 



He said the country would "very soon face severe shortage of ATCOs" and asked AAI to think of innovative ways to produce such professionals to meet the high growth in civil aviation. 

Mishra also asked the AAI and other professionals in the field to carry out more studies to facilitate fatigue risk management, pointing towards the "arduous and tiring nature" of their job to keep air travel safe and secure. 

The ATCOs not only cover 130 airports across the country, but the vast Indian airspace comprising 9.5 million square kilometres, including the oceanic airspace.