Ranbaxy sale - innovate or perish

Just when Indians were rejoicing the takeover of iconic British brands Ford and Range Rover by the Tatas, Daiichi Sankyo spoiled the euphoric mood.

In what has been the biggest takeover of a listed firm in India's history the Japanese major paid $4.6 billion in cash for Ranbaxy.

This is not just another takeover. It holds valuable lessons for corporate India as well as the government regarding India's emergence as a global player.

For many years Ranbaxy was held as an example of an Indian multinational that bravely went where few Indian companies had gone before.

In the world of drugs, Ranbaxy was betting big. It was trying to move beyond the generic space where Indian firms can reverse engineer off patent drugs.

It had also benefited in its early days from lax patent protection. This allowed the firm to grow in size by profiting from volumes of scale.

The change came when Ranbaxy set itself a target of developing original drug compounds through proprietary research route.

Alas, the strategy proved to be its undoing as an independent firm. India's economy still lacks firms with the wherewithal to make path-breaking discoveries.

Over the last three years this painful weakness of corporate India was becoming all the more obvious. Ranbaxy was unable to come up with even a single original blockbuster drug discovery. The rights India signed away in the WTO deal were coming home to roost.

With a patent regime loaded in favour of the West, developing new drugs was proving prohibitively expensive. Drug after drug developed by Ranbaxy ran into American and European patent regimes.

On the generic front too there was competition from smaller, more nimble firms. Few know that Ranbaxy was not even in the top five generic drug developers worldwide.

Unable to make patent breakthroughs Ranbaxy was at a stage where it may have discovered that it could reach just so far on its own and no further.

The sale by itself is not bad news for the promoters. After all, the firm was established in 1962 with an investment of Rs 2.5 lakh and gave a return of Rs 10,000 crore to the investors.

It is in the genius of the capitalist system that it provides for several exit routes to entrepreneurs. So everyone, the promoters of Ranbaxy, its shareholders and the Japanese firm gained by getting the correct combination at the right price.

However, for corporate India the deal comes as both a shock and a loss. This deal exposes the fact that across industries Indians are still incapable of being thought leaders.

Soul-searching has already begun in the Indian corporate world. Several firms across industries could be potential take-over targets since their growth formula depends on incremental volumes and cost arbitrage unlike global leaders that are innovative thinkers and have proprietary research in their portfolios.

Particularly vulnerable are firms in the IT, textile and pharma sectors. Even top firms like Wipro make less than 4 per cent of their turnover from products and patents.

A very large percentage of second-rung IT firms are nothing but glorified code developers. India Inc needs to take a long hard look at its current globalising strategy. Instead of the easy way out where you fill in the gaps in the international trading system based solely on cost advantage, corporate India must invest in research and development.

This is a longer, costlier route to becoming world-class companies but it is also a surer way of ensuring sustainable success.

On the government's part, it would do well to use the proposed $2 billion sovereign fund to buy the right technology which can later be auctioned to Indian firms so as to provide them a firm footing in the exclusive club of original ideas.

Ranbaxy's takeover has a stark message for corporate India. Innovate and prosper or the big fish will gobble you up.

indian stock market anchors need transperancy

Media needs to be more transparent
Switch on any business channel on television and you have the same picture. An anchor sits in a plush studio with two “experts” gleefully telling the viewers which stock to buy, and which to dump. By the way of exposure you have a half a second clip which tell you that the said “expert “ holds stock in the very company he is pontificating about. This has clearly irritated the country’s stock exchange watchdog the securities and exchange board of India. Its out going chairman Mr. Damodaran made this much plain in a recent interview to the Indian Express. When a regulator held in wide esteem as a sensible overseer takes notice of the media it raises several questions.
In the United States, especially post Enron, there are specific provisions that channels have to follow including a detailed discourse of number of stocks and likely investment positions in the futures markets before they come on television and speak on a particular stock. None of this alas is in existence in the Indian media.
The lack of such disclosure has the potential to create a herd mentality in bull runs. It can also hurt the retail investor given the fact that some of the large business houses hold a significant percentage as ownerships in business channels. Thus if an industrialist has a major stake in a media house that owned a television channel and comes up with an IPO it can be a case of conflict of interest for him to manipulate a stock.
The real concern is that although SEBI has made two attempts to work out a self-regulating code of conduct for the media there has been no response from the media. This arrogance may cost the media some of its dearly loved freedom. When self-regulation is absent, inevitably governments find ways to impose their will.The media needs to heed this wake up call and line up a code of conduct that makes their manner more transparent. Such a move will help them, their viewers and the retail investors. Not so doing could cost the media its credibility and some of its freedom.

eliminate caps on corporate pay

The recommendation to eliminate the 11%-of-profit salary cap for company directors that is currently enforced is sensible and long overdue. The JJ Irani Committee is right in pointing out that corporate compensation is best left to market forces. In the age of global deals and mega takeovers, directors' salaries cannot be held hostage to arbitrarily dictated caps by the government. In competitive times, the corporate sector needs flexibility in determining exactly how the finances are to be used in engaging resources to optimise operations and achieve the desired results, and this includes human resources. What value who brings to the business, and what it is worth in rupees, dollars or beach holidays, is a matter of internal knowledge. It may be a matter of disclosure and discussion between a company and its shareholders, but the government certainly has no locus standi here at all. The only external regulator should be the market, and the government's job is to ensure that there is sufficient competition. So, if a company mis-allots its funds, it will find itself edged out of business by firms that do a better job of it.

As for the charge that directors are 'overpaid', there is little evidence to show that any systemic imbalance has arisen out of high salaries in corporate India. In fact, there is reason to believe that companies are paying people only as much as needed to access their skills. And these vary vastly, as evident in dozens of other fields of human endeavour that get more media exposure. It is just that this variation is something that external observers are not necessarily equipped to appreciate in the corporate arena. Higher competition tends to activate the variation, resulting in divergences in pay. In such a scenario, any arbitrary cap can create an artificial imbalance that will eventually curtail corporate India's competitive advantage. This is not to argue that there is no such thing as an 'outrageous salary'; as some instances from the US have recently shown, scandals do occur, but it is the self-corrective mechanism of the market—shareholders protesting, for example—that adequately takes care of them. Corporate governance exists for a reason, and that reason is to make sure that the company serves the interests of its shareholders. Salary caps do nothing of the sort.

the volatility index

The decision by the Security and exchange board of India to introduce the volatility index will add depth to the futures and options market in the country. Such an index already exists on the NYSE as well as the LSE, where it is called VOX. With this index an investor can have data that helps him gauge future price movements on the basis of advanced computer based simulations that try and predict price instability.
While the index will not make risk disappear all together, and neither will volatility vanish, it will make indexing volatile changes in stock process that much easier. The index will lead to three major benefits for investors. In the first will be the information advantage that will come form a complex supercomputer based mechanism that will provide a road map for future pricing and thus introduce new and more transparent derivative products. The second gain form such an index will be in that it will allow for inventors to gauge implied volatility - that is by what measures are prices likely to move in the future based on current and historic trends. Lastly the retail investor who has been largely ambivalent about entering the futures and options market will be encouraged by more information that such an exchange will provide. Thus a larger base on investor will now be able to enter the futures and options mart.

The index is the perfect tool for the Indian markets. There are several factors likely to introduce future pricing uncertainty. These include the monsoons, the impact and depth of a recession in the US the rise of the rupee and policy changes in certain sectors such as telecom and retail. Not all of these will be covered by their index but a substantial measure of information driven decision-making can ome form the factors that are included in the index.
As for the actual adoption of the index, there are two principal options one is to adopt the VOXC which is already in use abroad, the second is to go in for the measure that, according to media reports, has been developed by the national institute of industrial engineering.With Indian stock market at record high and the expectations of growth continuing the added measure to gauge volatility will help investor confidence. A better-informed investor is always likely to take greater stakes in the market and thus the measure bodes well for the growth of the Indian investor community.