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The Nutgraf : Yes. Yes. No.


It’s been an insane week. Not just in India, but even inside The Ken. Because we’re launching our Southeast Asia edition next week. Slack is abuzz. Red Bulls abound. Bugs are squashed. Drafts are filed. Copies are flowed. The air is filled with that excited, thrilling sense of anticipation that only comes with a product launch. Wish us luck. 

Meanwhile, India has been going nuts too. 

Let’s dive in.

Yes Bank goes raging against the dying of the light


Here’s the backstory. 

  • Yes Bank is India’s fourth largest private bank
  • It controls crucial parts of India’s digital payments infrastructure i.e Unified Payments Interface (UPI). It has nearly a 30% market share on UPI. 
  • Dozens of FinTech companies depend on Yes Bank as their ‘back-end’ for transactions. Most notably PhonePe—India’s largest and most valuable FinTech company, that’s valued at nearly $7 billion, and with over 200 million registered users. 
  • Of late, Yes Bank has been having some trouble. It lost money, accumulated debts, changed CEOs, and was struggling to recapitalise itself

Cool? Cool. 

Things went nuts after that. 

First, two days ago, India’s central bank and regulator Reserve Bank of India (RBI) finally swung into action by placing a moratorium on Yes Bank. It limited withdrawals by depositors, and placed heavy restrictions on loans to be given out by the bank. 

Then, reports emerged that the Government of India had approved a bailout plan led by the State of India, India’s largest bank and lender. 

Oh, and just to ensure that depositors couldn’t transfer out money in their accounts, Yes Bank shut down all their banking APIs—which, thanks to a series of cascade effects, brought down most of India’s digital payment system. 

Several prominent FinTech companies found themselves in a place where nothing was working. No transactions. No payments. Nothing. 

I told you. Things went nuts. 

Look, the biggest problem wasn’t that Yes Bank went down. It was that everyone knew for the longest time that Yes Bank was on life-support. Even old-time readers of this newsletter know about this. And when help finally came, it came too quickly, too badly, and too late. 

Andy Mukherjee, writing for Bloomberg says this best

Earlier during the day, Bloomberg News reported that the government had approved a bailout by a consortium led by State Bank of India. Why did it wake up so late? It was blindingly obvious even two months ago that the authorities needed to end this theater of the absurd and force SBI to get into the driver’s seat at Yes. It was the only way to stop a run on deposits that could easily become a contagion and knock the wind out of Indian finance.

Yet the authorities dragged their feet, allowing themselves to be fooled by stories of how large private investors were lining up to recapitalize Yes. In the end, nobody came—not Microsoft Corp., not the mysterious Canadian lumber tycoon plotting a takeover from his motel room, not New York-based Cerberus Capital Management LP. Nobody came except SBI, together perhaps with the Life Insurance Corp. of India. They’re only here because the country’s largest bank and biggest life insurer have no option except to do what the government asks of them. They’re the national team.

Meanwhile, PhonePe (which found itself inactive overnight) and Paytm locked themselves in a game on oneupmanship… on Twitter. 

What a mess.

There’s a lot of chaos right now, so I don’t have anything insightful to add at this point. 

But do spare a thought for The Economic Times, which is hosting a two-day Global Business Summit with the theme ‘New Metrics, New Narratives for sustainable growth in a fractured world’ with the lead sponsor as…Yes Bank. 

It even had Narendra Modi, India’s Prime Minister, as the keynote speaker. 

Yes Bank’s logo was strategically removed from the event’s website and posters later in the evening, just like from India’s payment system. 

The NCLT plays the Draw 4 card

If you’ve played the card game Uno, you know about the deadly Draw 4 card. 

Remember how it works? When you play the Draw 4 card, you get to choose the color that continues play AND the player to your right must pick four cards from the pile and lose their next turn. 

Perhaps you’re like Yes Bank and don’t have any friends, and so you have never played Uno. All you need to know is that playing the Draw 4 card in Uno is a formidable move that can at once cripple your opponent and let you decide the terms of play. It’s a deadly, much-feared card. 

In India, the National Company Law Tribunal (NCLT) plays this card often. 

The NCLT is an… unusual body. Formed in 2013 and comprised of mostly retired justices, the NCLT is a quasi-judicial body that largely decides on matters related to Indian companies. Its powers are broad, but it usually comes into play when companies are facing bankruptcy, mostly to resolve liquidation, who gets what, etc. There’s also an appellate body, the National Company Law Appellate Tribunal (NCLAT), which hears appeals arising from orders of the NCLT. 

Of late, though, the NCLT and the NCLAT have been doing some interesting things. They have been issuing orders, reversing other ones, and sometimes… even overruling each other. 

A few months back, the NCLAT sent shockwaves across the Indian corporate industry when it did something unthinkable. It ordered Tata Sons, one of India’s largest and oldest conglomerates, to restore a CEO, Cyrus Mistry, that they ousted. Something that Cyrus Mistry didn’t even ask for. 

I could say more about how bewildering this is, but Tata Sons’ press statement says it all

“It is not clear how the NCLAT order seeks to overrule the decisions taken by shareholders of Tata Sons and listed Tata operating companies at validly constituted shareholder meetings. The NCLAT order even appears to go beyond the specific reliefs sought by appellant.”

This is corporate speak for ‘WTF NCLAT?’

Anyway, the Supreme Court of India stayed this order a couple of months ago.

Then last week, the NCLAT did something else. It ordered the Competition Commission of India (CCI) to reinitiate the probe against Flipkart for an alleged use of its dominant position. Something that the CCI had looked into earlier, and dismissed. 

Of course, since then, CCI started an investigation into Flipkart and Amazon for anti-competitive behaviour, which the High Court of Karnataka stayed for eight weeks thanks to a petition by the e-commerce majors. 

And now the NCLAT is asking the CCI to reopen the older investigation. 

Draw 4 Flipkart. Draw 4 Amazon. 

The colour is now red. 

Over to Rohin for the next couple of sections

Reinforcing Loops, Vicious Cycles, Incentives, and Animal Spirits

Reinforcing loops are one of the foundations of systems thinking, a concept we argued India needed more of, back in January. Put simply, these are interconnected sets of causes and effects (or actions and results), which feed off of each other.

An action triggers a result, which in turn triggers another action and so on. Till the original action itself is affected, setting in place another chain of events. Left to its own, the system self-reinforces the effects through successive cycles.

When the results are good, we call such loops “virtuous cycles”.

Unfortunately, India is getting caught up in the other kind. Vicious cycles.

Seemingly suddenly, India’s economy has taken ill. The official numbers are worrisome enough, showing that growth slowed in the second quarter of this fiscal year to just 4.5 percent, the worst for a long time. But the disaggregated data are even more distressing. The growth of consumer goods production has virtually ground to a halt; production of investment goods is falling. Indicators of exports, imports, and government revenues are all close to negative territory.

These indicators suggest the economy’s illness is severe, unusually so. In fact, if one compares the indicators for the first seven months of this year with two previous episodes, the current slowdown seems closer to the 1991 slowdown than the 2000-02 recession. Electricity generation figures suggest an even grimmer diagnosis: growth is feeble, worse than it was in 1991 or indeed at any other point in the past three decades. Clearly, this is not an ordinary slowdown. It is India’s Great Slowdown, where the economy seems headed for the intensive care unit.

This is from a December 2019 paper co-authored by Arvind Subramanian, a former chief economic advisor to the Indian government. He knows his stuff.

In such times of crisis, governments try really hard to unleash the “animal spirits” of entrepreneurs, consumers, and businesses. By creating the right incentives and then getting out of the way.

Sadly, India is doing the opposite. It is incentivising its tax officials to capture and defeat any animal spirits they come across.

The method in which a new tax dispute resolution scheme is being executed is the perfect example. Under the scheme, the government hopes that individuals and businesses will agree to settle and pay up 25% of the nearly Rs 8 trillion in disputed tax demands.

But if this scheme was meant to offer taxpayers a chance to settle amicably with the government, the opposite is happening.

“Assessees are facing the heat with calls from the tax officials. A New Delhi-based assessee said he had received at least five calls from the tax official to withdraw the case from Commissioner of Income Tax (Appeals) or Income Tax Appellate Tribunal (ITAT), and settle it through the scheme. Upon refusing to do so, the taxpayers are being asked to meet tax officials to explain as to why they are not participating.”

Because the incentives set up by the government aren’t just poor, they’re perverse.

“Income tax (I-T) officials have been directed to resolve all the tax dispute cases through the Vivad Se Vishwas scheme, and failure to do so will have direct bearing on their appraisals and promotions.

In an official communication, field officers have been informed that the performance assessment target under the scheme is 100 per cent of cases, which has given rise to fears of harassment of taxpayers.”

If an income tax official’s performance appraisal and promotion is going to be decided based on how efficiently she or he manages to convince taxpayers to pay up amounts they are legally challenging, what do you think will happen? “Tax terrorism.”

“The historical template of “collect now, correct later” lies at the core of most disputes. For years, tax officials were given unrealistic targets, not backed by good enough data. The result: Tax terrorism. The officer needed to simply collect for a good posting or promotion. Worse, a few years back, the CBDT [Central Board of Direct Taxes] introduced a 20 per cent charge on taxpayers who chose to appeal against any demand. It does not seem to have helped.”

Thousands of jewellers are getting notices asking them to turn over all of the money they made on a particular night three years ago when India decided to demonetise 85% of its currency.

“A tax official based in Kolkata, likened the exercise to “being asked to dig up a dead body after three years, find out how the person died and catch the killer.”

Two senior tax officials told Reuters the department has sent thousands of notices this year, including to jewelers, demanding an estimated 1.5-2 trillion rupees in taxes.”

A recent Business Standard editorial called it “License to Harass”

“The way the government is approaching the issue is flawed. It is important to understand why there are so many tax disputes in the first place. The government first sets overly ambitious targets for revenue mobilisation, forcing the tax department to raise questionable tax demands that are contested by taxpayers, resulting in litigation. The new performance assessment target will obviously lead to tax officials doing everything in their power to force taxpayers to pay the disputed amount. Many assessees are reported to be getting repeated calls from the tax department. What is worse is that even a mild success of the scheme would incentivise the government to do more of the same—raise unrealistic demands, increase litigation, and then offer settlement. This will inevitably result in higher cost and affect the ease of doing business. Further, this will go against the stated objective of the government to end “tax terrorism”.”

The reinforcing loop? 

A slowing economy -> lower taxes -> lower revenue -> higher tax demands -> tax officers career growth -> fear -> uncertainty -> a slowing economy.

Jio’s curious and quiet 5G u-turn

On 28 February, Asia’s richest man and the head of the Reliance Group, Mukesh Ambani met US President Donald Trump in Delhi during his state visit to India.

“When Trump asked, “You’re doing 4G. Are you going to do 5G too?,” Ambani said, “We’re going to do 5G. We’re the only network in the world that doesn’t have a single Chinese component.“”

And just three days later.  

“In a first by an Indian telco, Reliance Jio has sought permission from the government to undertake 5G trials based on technology and design developed by it. Sources familiar with the development said that if the 5G technology foray was successful, the design and technology for equipment could be outsourced for manufacturing to third-party players.

The move comes on the heels of Jio deciding to broaden its 5G trial runs with Chinese giant Huawei Technologies, Ericsson, and Nokia Networks—and not limit them to South Korean giant Samsung.”

What just happened here? Why is Reliance doing 5G trials with Huawei after touting to no less than the US President that its network had no Chinese components?

Even more interestingly, has Reliance Jio licensed the dozens, possibly hundreds, of patents that are usually precursors to making any serious 4G/5G gear?

I guess we can all expect some sort of a ‘Make in India’ mandate within telecom equipment soon.

 Subscription paywalls, Google, and loopholes

Most news publishers had a bittersweet relationship with Google. They craved the deluge of new visitors that Google sent them while also resenting the fact that Google uses their content freely to attract users to its own sites. And that it monetises user attention much better than them.

But because Google’s firehose of search traffic is so great, even the most prestigious of news brands go to great lengths to maintain their ranking in search results. Which means treating Google’s search spiders even better than human visitors.

Respected sites like Bloomberg, Harvard Business Review, The Wall Street Journal, The New Yorker, The Atlantic, The Washington Post and The New York Times all offer up the full content of most of their stories to Google’s spiders, while humans are shown the paywall.

Till a few years ago, the practice of showing different content to Google’s spiders versus human visitors used to be a loophole called “cloaking”, and was actively discouraged by Google.

But as more publishers started putting their stories behind paywalls, Google allowed them to cloak, but under a different name: structured data. It was, however, still a loophole.

Thus, leading news publishers could continue to have their cake in Google’s search results (by showing their full story content to Google spiders) and eat it too as subscription revenue (by putting up paywalls before humans).

A new plugin for Firefox browser breaks that cozy arrangement. “Magnolia1234” forces paywalled news sites to expose their content to anyone who has the plugin installed. Any site that does not have a “hard paywall” (that is, all users have to log in before they can read stories) are affected.

It’s possible that Magnolia1234 might get shut down, but more will appear. Loopholes, once exposed, are hard to shut down.

News publishers now have the option of either imposing hard(er) paywalls, and risk losing significant Google traffic. Or forego some subscription revenue as users pass through this loophole.

You can have your loophole cake and eat it too only for so long.

That’s about it from me.

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