Published on: 3rd Feb, 2019

This week’s reads focus on Kotak’s lawsuit against the RBI, impact of tech education on the underprivileged, the post war US economy, Afroz Shah’s devotion for cleaning up our water bodies, cracks in global monetary system and another tech bubble burst.

1.Long read: Kotak Lawsuit: Will It Finally Make RBI Accountable?
Author: Sucheta Dalal
Source: Moneylife (
A pioneer in investigative journalism in India, Sucheta Dalal, has written a thought provoking piece on what is probably the most important court case in RBI’s history – it’s tussle with Uday Kotak on the matter of Mr Kotak’s shareholding in Kotak Bank. If the RBI loses this case it is hard to see how it will be able to maintain the legitimacy of the myriad rules it has created with regards to bank ownership in India.
“RBI ordered the promoters of Kotak Mahindra Bank (Kotak) and Bandhan Bank to bring down promoter holding to below 20%. In Kotak’s case, there has been back-and-forth on the issue for 10 long years, largely because of the many changes in guidelines and regulations in the interim. Finally, RBI gave an ultimatum to both the Banks and threatened coercive action if they did not comply by 31 December 2018….
Does RBI really have the power to punish banks on the basis of unexplained and ever-changing rules on the acceptable promoter holding? Can a regulator, which has repeatedly failed to catch wrongdoing for over 25 years (from Harshad Mehta to Nirav Modi and Gitanjali), have no accountability for capricious actions against good managements and consequent damage to shareholder value? Isn’t it absurd that two highly successful bankers are being punished by the regulator, despite exemplary performance?
The Kotak petition raises many important issues which, if  taken to a logical conclusion, will force some clarity on RBI’s powers, policymaking and supervision and its accountability….
The Kotak petition, which I have reviewed, makes four compelling points.
1. RBI’s many changes on promoter shareholding, after it was granted a banking licence in February 2003, ought not be applied retrospectively to it.
 2. RBI’s regulations are ultra vires of Sections 12, Sec 12(2) and Sec 12(B) of the Banking Regulation Act (BR Act). Kotak argues that the BR Act does not empower RBI to ask any bank to reduce shareholding; the Act only permits it to fix a ceiling on voting rights. Or, if a shareholder is found to be ‘not fit and proper’ [Sec 12-B (8)], to curtail such person’s voting rights to 5%. It further argues that RBI’s general powers under Sec 35-A to issue directions to banks and make delegated legislation, is also circumscribed by the need for these to be in public interest and to protect depositors’ interest.
 3. Kotak claims that it has complied with RBI’s direction by reducing its stake to 19.5% (below the mandated 20%) in August 2018 by issuing perpetual non-convertible preference shares (PNCPs). RBI had immediately rejected the move and demanded a reduction in paid-up voting capital to prevent concentration of control.
 4. Finally, the petition says, compliance would require the Bank to issue fresh equity of Rs1.10 lakh crore, which was “equal to the entire market-capitalisation of State Bank of India.” It calls this ‘manifestly unreasonable’, since it would not only dilute share value but require large placements to foreign institutional investors….
Whichever way one looks at it, the Kotak petition is a lose-lose proposition for RBI, whose power has been challenged for the first time in court (unlike SEBI which is routinely dragged to the Supreme Court over most decisions).
If Kotak wins—and it has a strong case—it could seriously circumscribe RBI’s powers and make it more accountable than the government could ever have done. Investors will also want to know how this extreme rigidity, backed by punitive action, helps improve its supervision and catch the next IL&FS or NiravModi/Gitanjali in time. Those failures have inflicted far bigger pain on India’s financial system. If RBI wins and forces Kotak to dilute shareholding through needless acquisitions or issue of capital, it would mean an endorsement of capricious changes and no accountability for regulators.”
Clearly, the piece has been written from Uday Kotak’s point of view. It would be really interesting if someone as distinguished as Ms Dalal could write a piece from the RBI’s point-of-view. In particular, it would be really interesting to know what transpired in July-September 2018 which prompted the RBI to go after Yes Bank, Kotak Bank and Bandhan Bank’s promoters.

2.Long read: Dharavi Diary – What happens when girls in one of the world’s largest slums start coding and building apps
Author: Ananya Bhattacharya
Source: Quartz (
Part of India’s renaissance is ordinary people making extraordinary efforts to life of the people around them. This, in a sense, is the continuation of the million mutinies that VS Naipaul wrote about in his 1990 book. Here is one more example if India’s million mutinies.
“Dharavi Diary, a non-profit organisation run by documentary filmmaker Nawneet Ranjan…For the children there, Dharavi Diary is more than just an after-school academic programme. Ranjan teaches them—mainly girls—English, math, computer applications like MS Powerpoint and Excel, and basic coding. In fact, using the open-source developing tool MIT App Inventor, some girls have even built mobile apps to tackle problems like sexual harassment, water scarcity, and lack of education….The premise of the venture is his belief that storytelling and technology should play a bigger part in learning—a world away from India’s system of rote learning. ”When you understand the process of creation, you care more, which is completely missing in our education system. Through this (project), I get to inculcate an attitude of questioning the status quo,” Ranjan, who is from Muzaffarpur, a small town in Bihar, said.
So at Dharavi Diary’s Naya Nagar centre, open from 9am to 11pm through the week, science is taught through experiments. To hone language skills, movies are screened every Saturday….
Getting the project up and running burnt a hole in Ranjan’s pocket. He put all of his $30,000 personal savings into finding a venue, getting laptops, internet, and learning kits, organising field trips beyond the neighbourhood, sports events, film screenings, and even urban gardening.
When the funds dried up, Ranjan’s family and friends helped in cash and kind. In 2016, GO Campaign extended a grant of $10,000 for Dharavi Diary’s Girl Coding Project. As the project gained traction, corporates chipped in. In 2016, California-based Nvidia provided some funds. Later, Dharavi Diary went on to win the Google Rise Award which is helping it expand beyond the shanty town to other underprivileged localities of Mumbai, as well as those in Hyderabad and Pune. The organisation has already met nearly three-quarters of its current Rs1.5-crore (over $233,000) fundraising goal from corporates and individual backers. Ranjan has also applied for a grant to get a 3-D printer….
Instead of pushing technology products, Dharavi Diary gives girls from underprivileged communities the tools to create their own relevant apps. “In fact, a small group is now known as the Tech Girls of Dharavi,” Ranjan said…
Seventeen-year-old Ansuja Madival, for instance, was one of Dharavi Diary’s first members. Before that, she had minimal exposure to computers in school. Today she has achieved something unimaginable to her earlier—launching her own app on Google Play store.
Using MIT App Inventor, an open-source coding platform, Madival created Women Fight Back, which allows one to set off distress alarms and send SMS alerts. It has been downloaded 500 times, Madival said.”

3.Long read: How This All Happened
Author: Morgan Housel
Source: Collaborative Fund (
Morgan Housel distils the post war US economy into this lucid piece which brilliantly converges the discourse towards inequality. “But a central theme of this story is that expectations move slower than reality on the ground. That was true when people clung to 1950s expectations as the economy changed over the next 35 years. And even if a middle-class boom began today, expectations that the odds are stacked against everyone but those at the top may stick around.” However, whilst Morgan explains how such inequality came about, he leaves out the why for another debate.
1. August, 1945. World War II ends.
Morgan starts the article with US victory and end of World War II in 1945 and the big question being faced by US decision makers –“ What happens now”. Sixteen million Americans ( 11% of the population) who served in the war were freed-up with the war ending and the question in front of the Government was        – What were they going to do next?, Where were they going to work?, Where were they going to live?
2. So we did something about it: Low interest rates and the intentional birth of the American consumer.
Fed kept the interest rate very low which resulted in borrowing to buy homes, cars, gadgets, and toys really cheap. “An era of encouraging thrift and saving to fund the war quickly turned into an era of actively promoting spending.”
3. Pent-up demand for stuff fed by a credit boom and a hidden 1930s productivity boom led to an economic boom.
“The answer to the question, “What are all these GIs going to do after the war?” was now obvious. They were going to buy stuff, with money earned from their jobs making new stuff, helped by cheap borrowed money to buy even more stuff.”
4. Gains are shared more equally than ever before.
“The defining characteristic of economics in the 1950s is that the country got rich by making the poor less poor….Average wages doubled from 1940 to 1948, then doubled again by 1963…. Real income for the bottom 20% of wage-earners grew by a nearly identical amount as the top 5% from 1950 to 1980…. The rich man smokes the same sort of cigarettes as the poor man, shaves with the same sort of razor, uses the same sort of telephone, vacuum cleaner, radio, and TV set, has the same sort of lighting and heating equipment in his house, and so on indefinitely….. This was important. People measure their well being against their peers. And for most of the 1945-1980 period, people had a lot of what looked like peers to compare themselves to. Many people – most people – lived lives that were either equal or at least fathomable to those around them.”
5. Debt rose tremendously. But so did incomes, so the impact wasn’t a big deal.
Sharp jump in household debt (5X from 1947 to 1957) did not have much impact due to strong income growth during the same period
6. Things start cracking.
“1973 was the first year where it became clear the economy was walking down a new path. The recession that began that year brought unemployment to the highest it had been since the 1930s. Inflation surged. But unlike the post-war spikes, it stayed high. Short-term interest rates hit 8% in 1973, up from 2.5% a decade earlier.”
7. The boom resumes, but it’s different than before.
The biggest difference between the economy of the 1945-1973 period and that of the 1982-2000 period was that the same amount of growth found its way into totally different pockets. Between 1993 and 2012, the top 1 percent saw their incomes grow 86.1 percent, while the bottom 99 percent saw just 6.6 percent growth. Joseph Stiglitz in 2011:While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone.
Why this happened is one of the nastiest debates in economics, topped only by the debate over what we should do about it. Lucky for this article neither matters.
All that matters is that sharp inequality became a force over the last 35 years, and it happened during a period where, culturally, Americans held onto two ideas rooted in the post-WW2 economy: That you should live a lifestyle similar to most other Americans, and that taking on debt to finance that lifestyle is acceptable.
8. The Big Stretch
The lifestyles of a small portion of legitimately rich Americans inflated the aspirations of the majority of Americans, whose incomes weren’t rising. And to fulfil their aspiration, Americans started to borrow heavily – from housing loan to car loan to personal loan.
“A culture of equality and Togetherness that came out of the 1950s-1970s innocently morphs into a Keeping Up With The Joneses effect.
Now you can see the problem.
Joe, an investment banker making $900,000 a year, buys a 4,000 square foot house with two Mercedes and sends three of his kids to Pepperdine. He can afford it.
Peter, a bank branch manager making $80,000 a year, sees Joe and feels a subconscious sense of entitlement to live a similar lifestyle, because Peter’s parents believed – and instilled in him – that Americans’ lifestyles weren’t that different even if they had different jobs. His parents were right during their era, because incomes fell into a tight distribution. But that was then. Peter lives in a different world. But his expectations haven’t changed much from his parents, even if the facts have.
So what does Peter do?
He takes out a huge mortgage. He has $45,000 of credit card debt. He leases two cars. His kids will graduate with heavy student loans. He can’t afford the stuff Joe can, but he’s pushed to stretch for the same lifestyle. It is a big stretch.
This would have seemed preposterous to someone in the 1930s. But we’ve spent a half-century since the end of the war fostering a cultural acceptance of household debt.”
9. Once a paradigm is in place it is very hard to turn it around.
“A lot of debt was shed after 2008. And then interest rates plunged. Household debt payments as a percentage of income are now at the lowest levels in 35 years.”
Morgan discusses the human psychology of expecting something which in reality is not possible – “It just matters that it did happen, and it caused the economy to shift away from people’s expectations that were set after the war: That there’s a broad middle class without systematic inequality, where your neighbours next door and a few miles down the road live a life that’s pretty similar to yours.
Part of the reason these expectations have stuck around for 35 years after they shifted away from reality is because they felt so good for so many people when they were valid. Something that good – or at least the impression that it was that good – isn’t easy to let go of.
10. The Tea Party, Occupy Wall Street, Brexit, and the rise of Donald Trump each represents a group shouting, “Stop the ride, I want off.” So people haven’t let go of it. They want it back.”
“The details of their shouting are different, but they’re all shouting – at least in part – because stuff isn’t working for them within the context of the post-war expectation that stuff should work roughly the same for roughly everyone…
You can scoff at linking the rise of Trump to income inequality alone. And you should. These things are always layers of complexity deep. But it’s a key part of what drives people to think, “I don’t live in the world I expected. That pisses me off. So screw this. And screw you! I’m going to fight for something totally different, because this – whatever it is – isn’t working.”
Take that mentality and raise it to the power of Facebook, Instagram, and cable news – where people are more keenly aware of how other people live than ever before. It’s gasoline on a flame. Benedict Evans says, “The more the Internet exposes people to new points of view, the angrier people get that different views exist.” That’s a big shift from the post-war economy where the range of economic opinions were smaller, both because the actual range of outcomes was lower and because it wasn’t as easy to see and learn what other people thought and how they lived.

4. Short read: Afroz Shah’s New Year Lesson
Author: Priya Ramani
Source: Mint (
Priya Ramani, the Mint columnist whose spunk catalysed the “Me Too” movement in India last year, profiles a very different type of Indian – Afroz Shah. Unlike people like us who sit in air-conditioned offices and fulminate about the challenges facing India, Afroz hits the beaches and riverbanks of Mumbai to deal with messiest of problems, namely, the accumulation of garbage, of sewage and of industrial pollutants on the beaches of Mumbai and in the Mithi River (whose source lies 3 miles away from Marcellus’ offices).
“The story of the Mithi—named so because its waters were once sweet and fit to drink—is a bitter one. The 18km-long river, which carries the overflow of the city’s Powai and Vihar lakes to the Arabian Sea, has been dismissed by experts as the city’s biggest sewer. After its starring role in Mumbai’s 2005 floods, when instead of playing its part as an efficient storm water drain, the river vomited thousands of litres of sewage and industrial waste-filled water on to the streets, any residual love the city had for it dried up quickly.
Observers who have tracked the erosion of the once dense mangroves around the Mithi were not surprised by the havoc the river wreaked. “Over a decade, the river’s course had been diverted ninety degrees by the extension of a runway at the airport, its width narrowed by the Bandra Kurla Complex, and its mouth pinched by the Bandra-Worli Sea Link,” author Naresh Fernandes says in A City Adrift, adding that middle-class Mumbaikars predictably glossed over this and instead blamed the catastrophe on the slums that had come up on the river’s banks. Crores have been spent—mostly unsuccessfully—trying to revive the river.
But these are just details for Shah, who recently completed the “world’s biggest beach clean-up” (in the words of the United Nations’ environment arm) at Versova in Mumbai. After clearing 20 million kilogrammes of garbage in three years, Shah handed over a pristine beach to the city’s municipal body in November.”
What makes Afroz even more interesting is his financial model and operating philosophy:
“Shah does his work without any external grants or organizational support; the money comes mostly from his earnings as a successful lawyer. His is an entirely volunteer-run effort. “Each one does his or her bit and goes home. Ten per cent of what I earn I give back,” he says. “If I need three tractors or four excavators, I go to the bank and withdraw money and rent them,” he says….
Every weekend, he cooks and carries with him food for 50-100 people. He uses community meals as a platform to educate the millions who live along the river, explaining ideas such as recycling and sustainability. In recent weeks, the Dawoodi Bohra community has pitched in with food….
He gets exasperated when, like your average annoying adult, I ask him for solutions to our couldn’t-care-less attitude about garbage. “Your assumption is that there is a solution. After working for four years, I’m not under any illusion that there is any solution,” he says, adding that the only thing we can do is to start our own personal journeys. “If a solution comes, so be it. If not, we still have to do our duty.”

5. Short read: Cracks are opening in the global monetary system
Author: Russell Napier
Source: Financial Times (
Part of the fun of reading the legendary strategist Russell Napier is that we are reminded that we have so much more to learn about the world we live in. In this succinct piece for the FT he explains (once again) what he has been saying for the past ten years – now that the post-Lehman damage limitation job is done [in the form of QE] we are heading towards the collapse of the global monetary system.
The system we are living in at present, says Napier, was stitched together post mid-1990s Asian crisis wherein central banks implicitly agreed that they would keep their currencies weak by constantly buying US government bonds. This resulted in most countries other than America accumulating massive forex reserves and it allowed America to fund its burgeoning public debt at low yields. For equity investors around the world this created conditions in which they could make lots of money – growth was punchy thanks to weak currencies and the global cost of capital was low since US government bond yields were held in check. In effect, the rise in American public debt was funded by central banks in other countries thus freeing up American savings (and savings in other countries) to invest in the private sector.
Napier says that this party started coming to end from 2014 onwards as other central banks started cutting back on their purchases of US government bonds. “Foreign central banks ownership of US Treasuries has fallen from a third five years ago to just under a quarter today. Savers must take up the funding slack, while also buying Treasuries being sold by the Federal Reserve. This structural shift in the demand for Treasuries comes as supply is boosted by the Trump administration’s fiscal policy. Savers now have to fund the US government, and to do so they have to either sell other assets or save more. All the movements in asset prices over the past six months bear witness to the huge shift in savings under way, with negative implications ultimately for economic growth.”
Napier reckons things will get worse going forward. (1) Lower growth, lower inflation and higher cost of capital will lead to lower asset prices and lower cashflows. That in turn will create solvency issues since the global ratio of non-financial debt: GDP is 234% now vs 210% in Dec 2010. (2) China looks like it is heading for a train wreck as the “country’s debt:GDP ratio is rising at probably the fastest rate ever for a big economy is peacetime….the burden of the economic adjustment enforced by the end of the growth in its foreign exchange reserves, and hence money supply, will probably be deflationary and will involve debt default. China will probably move to a flexible exchange rate, thus creating the freedom to grow and inflate away these debts. It is that exchange-rate adjustment that will destroy the current global monetary system.”

6.Short read: Another tech bubble could be about to burst
Author: Rana Foroohar
Source: FT (
In his article, Rana Foroohar beautifully captures the downside of massive growth in the number of venture-capital-backed unicorns. She starts the article by highlighting the over-optimism shown by new tech companies which is in sharp contrast to what market expects from the technology sector this year.
According to Rana, many big IPO’s are going to hit the market this year not only to beat the expected recession in the economy but also to encash the lofty valuation of their investee company – “The coming spate of initial public offerings in particular looks shaky. Uber’s chief executive Dara Khosrowshahi was all over Davos, talking up the company’s forthcoming initial public offering. But the talk had a whiff of desperation. Uber, along with Lyft and a host of other large, still-private tech companies such as Slack and Airbnb, are likely to try to go public sooner rather than later — not only because of worries about a coming recession and volatile markets, but because they have grown so fat on private funding, it is unclear whether the market will be able to sustain their valuations. (Uber’s, for example, is pegged at $100bn.) They want to get their money while the getting is good.”
Rana discusses how the new generation of entrepreneurs and VC funds are focussing on delivering unicorns at the shortest span of time and often at the expense of sustainable & profitable business model – “Over the past five or so years, there’s been a massive growth in the number of venture-capital-backed unicorns. Companies such as Uber, Lyft, Spotify, and Dropbox can lose money hand over fist, and yet still continue to grow in valuation. Indeed, it is all part of the new business dynamic.
Low barriers to entry result in many competitors and a race to spend as much as possible to grab market share. Not only do the private companies that emerge from this unproductive cycle become bloated, so too do the venture funds themselves. Billion-dollar venture funds, once unheard of, are now commonplace. Last year, Sequoia raised an $8bn seed fund, and SoftBank a whopping $100bn fund.”
Rana ends the article on a cautious note and highlights University of California academic notes which says “unicorns are mythical beasts” – “this may be good for some of the VCs who can use the inflated values of unicorns on their books to raise more money and charge more management fees. But I can’t see how it is good for economic value overall. Massive debt financing of unprofitable firms to create monopolies might benefit some entrepreneurs and investors, but it distorts capital and labour markets and is anti-competitive.

As long as investors are willing to accept growth as a metric for value, the music can keep playing. But as the University of California academics note, “unicorns are mythical beasts”. This year, their financial reality, as well as the sustainability of the current funding model, will be subject to some much-needed testing.
Some of the new crop of hyped-up companies may eventually turn into Cheshire cats, disappearing and leaving behind only the grins of those who got out before the bubble burst.”

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