Towards Uniform Accounting…Can India Catch Up?

The WSJ reported, on June 21st, that the SEC unanimously voted to propose allowing non-U.S.-based companies to file financials using international financial reporting standards (IFRS) as set by the International Accounting Standards Board without reconciling the differences to U.S. generally accepted accounting principles (GAAP). This move is yet another indication from the SEC that it has duly noted the “flight of capital” from America’s markets to foreign exchanges, particularly London and Asia. The proposal is now open for public comment for 75 days at which point the SEC will deliberate the adoption once more and reach a final decision.

What this means for Indian based companies and India’s policymakers is, act now: 1) companies should voluntarily adopt IFRS as a routine method of reporting 2) the federal government should nationally adopt IFRS as the preferred method of reporting in addition to reforms in other areas of corporate governance with an aim towards making India’s markets more inviting.

With respect to some of India’s larger companies such as Infosys and HDFC Bank, the cause for urgency is less pronounced given that they have voluntarily adopted improved standards of accounting and corporate governance. In fact, the Asian Corporate Governance Association (ACGA) noted in its “country snapshot” that India is the only country in the region where the business sector, rather than the government, initiated corporate governance reform in an effort to attract foreign direct investments and increase the companies’ competitiveness, visibility and level of respect. However, the ACGA emphasized significant weaknesses in India’s regulatory infrastructure which fell into three categories: 1) lack of emphasis on enforcement and oversight 2) weak or non-existent protection of shareholders’ rights 3) a general pattern of corruption and aversion to inter-agency cooperation that characterizes Indian governance.

A leading expert on corporate governance and a professor of Finance and Control at the Indian Institute of Management (IIM), Mr. R. Narayanaswamy, echoed these concerns in an interview with The Hindu’s “Business Line“.  One natural consequence arising from a lack of cooperation is what he noted as a multiplicity of accounting standards arising from several competing bodies such as the Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI) and the Institute of Chartered Accountants of India (ICAI), to name a few. Narayanaswamy is a strong proponent of adopting uniform international standards, strengthening domestic regulatory agencies such as SEBI and the Ministry of Company Affairs (MCA), and streamling their enforcement and oversight functions.

“‘I doubt if anyone is monitoring compliance. Both the SEBI and the MCA do not have the kind of technical staff they need.’”

In addition to its weak regulatory structure, India’s laws protecting shareholders’ rights are notably weaker than their American or even Asian counterparts. For example, as it stands now, shareholders are unable to sue their company’s management derivatively, on their company’s behalf for reckless management practices. Strengthening this area of the law is also critical to ensuring growth in India’s capital markets. Narayanaswamy cites the SEC of the U.S. as a strong model to emulate although he worries that future abuses by companies may jeopardize trust in the capital markets and lead to “horrible rule-based accounting standards.” In the States, Sarbanes-Oxley is viewed by many as exactly what Narayanaswamy fears may befall Indian companies.

For its part, the SEC is exploring ways for U.S. companies to report under international accounting standards by giving them a choice between U.S. GAAP and the IFRS. Critics worry this may provoke companies to cherry-pick the kind of reporting that casts their business in the most favorable light but proponents maintain that this will be a necessary step towards a convergence of global accounting standards. Whatever course the SEC may chart, prudence counsels Indian companies to heavily invest in tightening up their reporting mechanisms in accordance with IFRS regardless of whether Indian law requires it. Prudence also counsels New Delhi to take this latest move by the SEC as a signal to invigorate its own efforts towards reform. Promulgating stronger, across-the-board standards with effective oversight and enforcement will not only make India’s markets attractive for foreign investors but will increase faith in Indian-based companies (big and small) overseas, thereby making it easier for them to list in foreign exchanges for additional capital generation.

India’s Prized Right, at What Cost?

The U.S.-India civil nuclear partnership is in the throes of what one can characterize as labor pangs. The Hindu reported that officials from the two states are at an impasse regarding India’s right to reprocess spent nuclear fuel. The Hyde Act (discussed below), now being deliberated in Congress, is the enabling legislation for the nuclear partnership. In this bill, the U.S. would prefer to restrict India’s ability to reprocess spent uranium. A byproduct arising from this process is weapons-grade material. India argues that it has a right to reprocess fuel and has offered to place such a facility under “international safeguards”.  It further argues that the July 2005 joint-statement declaring the partnership contemplated such a right and that the U.S. now seeks to dilute it significantly. One way the Hyde Act attempts this is by requiring U.S. presidential certification for reprocessing a plant’s fuel. Not at all bashful, several high-level nuclear scientists in India have dug their heels in the ground and demonstrated a troubling fervor with which they’re willing to defend this right. One scientist quoted in the Hindu expressed his frustration with the Hyde Act and its implications:

“Here is another example that the U.S. remains bound by its terms and intends to invoke them to bludgeon India into agreeing [to the Act's terms]“.

Although India agreed to maintain a moratorium on weapons-testing, officials seem to want a stockpile of weapons-grade material as a safety net.

Pakistan Who?

In related news, the Guardian and several other news agencies reported that Pakistan is building a third plutonium reactor according to satellite images of Khushab, a town 100 miles south of Islamabad. Plutonium weapons pack a greater explosive charge than their uranium counterparts and are delivered in a relatively compact vessel. In a report authored by the Washington-based Institute of Science and International Security, David Albright, a former U.N. inspector, warned that this development should be viewed as an indication of Pakistan’s intent to accelerate its weapons proliferation and usher in a generation of enhanced nuclear strike capability. New Delhi shrugged off the report as another attempt by the partisan non-proliferation camp to stir up more controversey around the Indian nuclear partnership with Washington. A former director of India’s Institute of Defence Studies and Analysis (IDSA), K. Santhanam, was quoted in the Hindustan Times as saying,

“[The civil nuclear partnership] and suggestions of an arms race is a complete non-sequitur,–There is no connection with this and the Indo-US civil nuclear deal. This is part of the non-proliferation, ayatollah brigade jargon.”

 For its part, Pakistan maintains that it is pursuing this program for peaceful purposes according to an official who spoke to the Guardian on the condition of anonymity. In short, we can expect more of the same from both of these regional rivals who exhibited strikingly similar behavior while on the road to nuclear-weaponhood. Also present for this chapter is the United States and a flabbergasted Western world that can’t seem to squelch its hunger for money even when faced with the most perilious of circumstances. A word of advice to Washington- back away slowly or demand that all of India’s spent fuel, past and present must come under complete IAEA safeguards in order for the deal to go forward.

What the Point System will mean for India

The most contentious part of the immigration bill, now before Congress, is the point-system devised to evaluate the potential benefit of allowing an immigrant to settle in the United States. With its heavy emphasis on the level of education, specialized skill and proficiency in English, supporters of the bill argue that it will cultivate an influx of immigrants that contribute substantially to the American economy. The NYTimes, citing the Migration Policy Institute’s analysis of Census Bureau data, noted that immigrants from Asian countries, especially India, would fare well under this point system given that more than three-fourths of its immigrants have at least a bachelor’s degree and are fluent in English. If the hope is in fact to attract such highly educated individuals, other economic patterns prevalent in India and other Asian countries may dilute Congress’ intended effect.

Growth in Services Sector

The services sector in India which includes financial, professional and personal services such as education, health care and real estate services, accounted for close to 55% of the value added to the national GDP in 2006. As reported by the World Bank, the sector grew approximately 10.3% between 2004/05-2005/06.  However, the proportion of India’s population benefited by this growth is just about 10%, with 90% of its work-force still toiling in low-productivity “informal sector jobs”. What does this mean for the Immigration Bill’s point system? If the current trend continues and growth in the services sector outpaces all other industries, skilled workers in India need look no farther than their local newspapers for employment opportunities. Similarly, China’s service sector is growing on pace with India (10.1% as of 2005) and raises the same question. At a time when higher education directly influences economic well-being of a country, the point-system will hardly give America an edge. Academic competition in Asian countries is extremely intense and Darwinian in its method of selection. Those fortunate few Asians who receive higher education will most likely be absorbed into the skilled service sector jobs in their domestic economies  while the many left behind will be forced to reckon with the point-system’s unforgiving hurdles should they seek a better life here in the States.