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Inditrade Capital Ltd.

BSE: 532745 | NSE: | Series: NA | ISIN: INE347H01012 | SECTOR: Finance - General

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Annual Report

For Year :
2019 2018 2017 2016 2015 2014 2013 2012 2011

Chairman's Speech

Dear Shareholders, YOUR COMPANY HAS HAD A TOUGH YEAR AND THE CLOUDS WILL TAKE SOME TIME TO DISSIPATE. WHILE IT CHIPPED AWAY AT MAKING OPERATIONAL IMPROVEMENTS, DRIVING PRODUCTIVITY AND IMPROVING RISK MANAGEMENT, THE BUSINESS ENVIRONMENT FOR YOUR COMPANY CONTINUED TO DETERIORATE. THE PROFIT NUMBERS DETERIORATED AS YOUR BUSINESS HAS A FAIRLY SIGNIFICANT FIXED COST STRUCTURE, WHILE A VARIABLE REVENUE PROFILE IS DEPENDENT UPON MARKET CONDITIONS. Your Company possesses the infrastructure and resources to handle around six times the throughput with negligible incremental costs, and given our long-term orientation, we do not wish to diminish our muscle while harshly relooking at every cost ground up. Before I go into the various initiatives undertaken by your management in combating adverse market conditions, I want to devote a large part of my communication to you based on the environment, which is structurally biased against the retail investor (and our primary customer), and what can be done to improve it. The external environment Your Company''s markets remained comprehensively negative ever since the last capital market meltdown, triggered by the overleverage American sub-prime and Lehman Brothers crisis. The retail customer for financial products including equity (your Company''s primary offering) and insurance continued to stay moribund. All market uptakes were largely driven by foreign capital routed via FIIs, and selloffs ably controlled, underpinned by our domestic insurance companies. The volumes left over in the retail market segment are increasingly concentrated in the hands of a few speculators and market makers who favour the low brokerage yielding future and options markets. In one of the world''s fastest-growing economies with an equity culture and institutions existing for over a century, one has to wonder why that is the case. The prima facie observation suggests that we have one of the most efficient capital markets in the world, with predominantly dematerialised paper, highly regulated intermediaries, high standards of disclosure, and free information flow and an almost negligible settlement risk. But go beyond the cursory and it''s easy to observe why the retail investor abandons the market whole scale with no signs of returning, if only to bolster your Company''s prospects. The reality is that there is a structural bias against the retail investor with everyone paying lip service, but no one sincerely ready to protect him. The issue is a deviation from the basic bedrock of limited companies with distributed ownership and separate management, which is in the nature of a fiduciary relationship between a promoter and his silent partner (the minority investor), who provides resources to further his ambitions. The problem starts when promoters start to treat minority investors, at best, as completely gullible, and at worst, a nuisance to be taken advantage of. This mindset and attitude is what plagues the capital market at every level and erodes the very basis of capitalism and the underlying implicit fiduciary relationship. Allow me to highlight important deficiencies and issues with the present market scenario. Structural Issues Formation and construct of governance standards Since inception, governance around the manner of enacting governance standards was curious. Various committees were set up under prominent and highly respected persons to enact codes that are now enshrined in listing agreements and corporate codes. What was curious was that none of these committees contained a single representative from retail or for that matter even institutional shareholders! You want to set up a committee to set standards for protecting little Red Riding Hood from the big bad wolves, but do not have any spokesperson for little Red Riding Hood in those committees. These resulted in incredible packaging and a veneer of governance without a shred of substance. At the heart of this new regime is the so-called Independent Director. Who elects him on to the Board? The majority shareholders. Who removes him from the Board? The majority shareholder. So can this person (however upright) protect the Company from the wrongs of the majority shareholder? Even more strangely, he loses his independence if he has shareholding (like any other retail investor) and thereby is probably more aligned to the good of the Company! What was even worse was that we aped the governance mechanisms of the west without understanding the comprehensively different nature of governance issues in India. The chronic abuse in India is not of management teams not having accountability to shareholders and running business for their own gains (as is the issue in the US), but more of the promoter-shareholder capturing a disproportionate share of the Company''s economics. For boards and companies to function properly, there must be a clear control of the Board by majority shareholders, and those they have faith in to galvanise the Company, but equally important is a mechanism of stringent external regulatory oversight on all related party transactions. By creating this very dependent independent director category, an excuse has been found to remove whatever little regulatory oversight there might have existed. This must be corrected. Apparatus for prosecution under IPC section 405 for fiduciary criminal breach of trust especially for high visibility cases is a must. Today, there is no one to police, and small retail investors do not have the expertise or resources to protect themselves. Creating appropriate regulatory frameworks for independent financial detectives and lawyers to uncover and prosecute deviant promoter groups is a neat way to solve the issue without additional expense. These groups can be rewarded through fines collected, which will be three times the amount of damage caused to the companies. Of course, enhancing prosecution for perjury and making the overall contract enforcement mechanisms more efficient will also significantly enhance corporate governance in India. Driving responsibility and accountability of key players like investment banks and accounting firms is a must to enable markets to flow efficiently. Attitudinal Issues Indian government-owned companies Why do government-controlled companies struggle so much to meet their already low standards of governance? Why can these companies not even manage to staff their boards with truly independent directors who will bring independent diverse perspectives to the boards? Why are they sinecures for retired bureaucrats who will essentially bring forth the same perspective that the government nominees have? Why do board members forget their fiduciary obligations to minority retail investors and not vote down economically destructive actions being undertaken by so many PSUs? Why would an oil PSU buy a hydrocarbon at price X and sell it at a fraction without explicit subsidy at the time of action? Why is it okay for the government to treat these companies as their private piggy banks and treat them almost whimsically by loading costs on to them? (Would it be okay for a private promoter to load his personal costs on to the Company? No, it is not, though it probably does happen all the time) Can the managements of these companies predict their cash flows across their investment horizons? If not, how do they make investment decisions? How can this shocking state of affairs persist from the very government which is expected to set an example? Would this not chronically undermine the public sector companies'' ability to compete and also retain committed motivated management teams? Is this not a lose-lose scenario? State government owned companies How can state government companies appropriate 26% of profits for social causes? How can the majority shareholder decide to do benevolence from a retail investor''s due? If the state government wants to devote a portion of the profits of the firm to social causes, then it must do so from its share of the dividends received from the Company and not from misappropriating minority retail investor dues. MNC listed Indian companies Why is it that whenever you come across instances of purchases by an Indian Company from its parent it is at the highest price that the parent sells to anyone? And why is it that when the parent is buying from its listed Indian subsidiary it is at the lowest price it buys from anyone? Why can we not pass a law insisting upon the opposite and hold the nominees of the parent responsible and charge the board of the parent company to commit explicitly to such an undertaking? Why can retail investors not be protected by a most favoured nation''s clause if the morality of discharging the fiduciary relationship is inadequate? Why is every Indian subsidiary required to increasingly pay royalties for use of brands and trademarks that the Indian company using shareholder money has built up? If they have to pay for building a brand in India (which happens to be the same as the parent), why should it have to incur the cost twice? The government used to tightly control this leakage but in the false pretext of liberalisation, has opened this up in a way that directors appointed by the parent decide how much the parent should get paid on this score. Why has SEBI not pulled up the multinationals indulging in these forms of loot from small retail investors'' pockets? Are they waiting for these small investors to take on the might of MNC lawyers? Indian promoter controlled listed companies The Indian entrepreneur is well regarded and well feted all around the world and rightly so. He has clearly demonstrated his ability to compete and excel on every stage. There are many whose vision stands out and brilliant execution abilities are manifest. They treat their minority retail investors in the true spirit of a silent partner for who they are managing as a fiduciary. Narayana Murthy, Azim Premji, Harsh Mariwala, the Dani and Choksey families at Asian Paints, Ramachandran at Jyothy labs, Rahul Bajaj and Suresh Krishnan all jump to mind as being the prominent ones in this category. But alas! The vast majority still continue to treat their small investor-partners as the most gullible and unprotected class of investors. Consider the following: Of all the public issues done since January 2008, less than twenty percent delivered an absolute positive return to minority investors. Out of the balance eighty percent, more than half have lost half or more of their original capital by trusting the issuers and their promoters. SEBI does insist on extraordinary disclosures from companies but clearly the predominance is one of form over substance. How about asking all merchant banks and investment banks handling these issues to disclose in the offering memorandum the performance of the issues they have handled?! Yes, the governance is visibly better in the larger, more visible companies but consider the following analysis done by my highly numerate, analytical colleague Chandan Kumar: The average CEO salary of the fifty largest corporate (non-public sector) being run by non-family member professionals was 0.11% of sales and 1.31% of PAT. The corresponding figures for promoter family CEO''s (of course fully ratified by unbiased fair independent directors constituting the compensation committee) are 0.46% of sales and 5.37% of profits. If this is for the largest fifty Indian corporates with high visibility, what is the state of the rest of the companies? What will show up once we counted the compensation of all promoter family members as a percentage of profits? Again, there used to be tight regulations to check such abuse, but under the cloak of economic reform this has been done away with. It will be great to know how many times our regulators investigated this abuse and the outcomes thereof. Also, related party transactions transferring profits is and has been standard. Which arm of our administration investigates and oversees this and prosecuted this blatant violation, and how many violators are behind bars? Indian private companies treatment of retail investors Again, a situation of rampant abuse prevails and there is no agency for protection of small investors and the so-called appeal forums processes are completely weighed against the small investors who essentially marshal meagre resources. The culture of mistreatment of minority retail investors gets embedded right here, this has to be addressed for efficient capital allocation within the economy. Though regulatory reform is a necessary condition for these structural biases to be removed, the cultural inculcation of accepting the responsibility of trusteeship in accepting third party capital is key and our Ministry of Company Affairs and the media can play an active role in getting our industry captains to shoulder such responsibility. Incentivising and applauding compliance and dis-incentivising and socially ostracising the deviant is key not only in retrieving retail endorsements and participation in capital markets, but also in ensuring that after politicians, businessmen do not become new Bollywood villains. Societies respect earned power and wealth but look for chances to strike back at unearned or stolen wealth. We do not want to import the sentiment expressed by a teenage looter in the UK recently, If bankers and businessmen can loot millions and the government looks the other way, then why does it have a problem if I loot a pair of sneakers? Will this change? After all, the retail investor has no voice and no one to lobby his cause. Yes, I believe it will. Distribution of risk capital and evolving a system where there is alignment of the risk capital provider and due return is the necessary bedrock on which capital factor mobility is based. If this an alignment of risk capital and its returns is broken, the efficiency of capital allocation will be severely impacted. No government will allow this, and my hypothesis is that the seeming conspiracy against small retail investors is actually just a series of coincidental actions with advocacy for different stakeholders and absence of a voice for minority investors. I hope that after this provocative note, the powers that be now fully known, why retail investors have been deserting the capital markets, and in so knowing I hope they will be galvanised into action by the words of Akbar, the Great, Although knowledge in itself is regarded as the summit of perfection, yet, unless displayed in action, it bears not the impress of worth; indeed, it may be considered worse than ignorance! Yes I do believe that things will change and give your Company a strong fillip of operational leverage, but maybe a lot slower than we may like. In the meantime, let''s focus on the initiatives within the Company. The initiatives within While urging the powers to correct the deeply stilted bias against minority investors and hence, send them rushing back to avail our services, we have to do whatever we can to be ready for them when they return. In the last few years, similar initiatives have been taken, but with the customer environment continuously slipping, we had to keep raising the bar on internal productivity activities. With that perspective, the most important accomplishment your Company had was to attract the deeply talented, insightful and circumspect Anand Tandon with over two decades of experience in the Indian capital markets and a recognised investment expert to take over the reins as Chairman of the Management Committee of your Company. Anand quickly diagnosed the malaise of the absence of the retail investor as a structural issue and while prioritising customer acquisition decided to use this time and resources to strengthen the risk management, processes and technology, the customer service and value proposition in our equity broking platforms and have been making steady progress on all fronts. Given that internationally retail financial services has become an extremely technology-intensive play, software with source code has been acquired and the process of building a core in- house software team has been undertaken. Anand also roped in the effusive Makarand Chaurey (an IIT, IIM alumnus with over twenty years exposure to sales and marketing in India) as a special advisor to help streamline our customer acquisition engine and drive effectiveness and productivity at the ground level and in our management processes. Anand also brought in Ajai Bhatnagar who has run a comprehensive diagnostic on all our business processes, and is implementing several automation- driven and productivity-enhancing processes. New leadership on the human resources and training fronts engendering several new initiatives has been brought on board by the effervescent, 60 year old, Dr. Manohar. Key initiatives to rationalise our franchise partnerships and programmes to enhance our engagement with associates and increasing our service levels and our training interventions have been undertaken. A centralised customer service centre is in the process of being executed. Enhancing our customer engagement over the internet and on mobile platforms is next. Branch expansion plans are also forever being examined and decisions will be taken depending on market conditions and availability of resources. Anand spotted the commodity value chain as a key opportunity area in the current environment and he is personally leading the charge along with our own in-house commodity expert Harish, in deepening your Company''s franchise in every aspect of this business. In the short to medium term, this is likely to be the biggest driver of value creation in your business. Forex markets are another opportunity which is being perused by up-skilling existing in-house teams and we are exploring whether to set up a corporate market-focussed team, in this area. Building out the NBFC retail lending book against equities is an activity which has gone slow as we are talent- constrained in the area and are working to enhance our team. Our desire to expand internationally has also been given lower priority in this era of uncertainty. Given Anand''s astute understanding of markets and risk, your Board encouraged him to take on proprietary positions whenever he feels appropriate but given the market uncertainties. Anand intentionally back-pedalled on this opportunity for now. In insurance distribution, we are retaining our foothold but are not taking aggressive steps as regulation, policy and the markets evolve. Real estate broking and property management is another initiative that your Company is exploring and has taken on its first mandate in Hyderabad, Andhra Pradesh. Your accounts, finance and compliance functions attained process maturity and are no longer an area of serious concern to me and the board. Kudos to the finance team and our auditors and our very able Audit Committee! Our erstwhile Chairman and Audit Committee head, Mr. Venkataraman wanted to retire pleading advancing years, but I have managed to persuade him to offer himself for reappointment for another term while lightening his load by shifting the load of the Audit Committee chairmanship to the brilliant Mr. P. Viswanathan. I am sorry to report that though the entire board tried its best in carrying along the representative of the earlier disposition and taking your Company forward, efforts have proved futile. Mr. Regi Jacob attends every board meeting with a predetermined agenda of making every attempt to stymie the functioning of your Company (including impeding an efficient branding strategy) and demoralising the management team (including restricting the Managing Director''s compensation to Rs. 30 lakhs per annum, which is significantly below market) in what is already an extraordinarily difficult market environment. Often a legally typed letter is pulled out post a meeting raising a multitude of objections to every business of the board. It is ironical that in the same note that I have waxed eloquent on suppression of the minority investors'' dues, I have to report the tyranny of the minority! It is sad that after being part of a group that has started competing businesses and still being treated with full respect due to a board member, no opportunity is lost in insulting fellow board members and leaving me with the task of forever apologising for the same to highly distinguished gentlemen on your board. The litigation indulged in by the erstwhile promoters continues too, but as the courts have had more time to go into the details and merits of the case, they have allowed us to continue our normal business relatively unhindered. We owe thanks to Gaurav Soni our Managing Director, Syam Kumar, our Company Secretary and Mr. Menon the legal luminary on our board for their diligence in protecting the Company. As a result, we are in a position to proceed with our fund raising plans (subject to the untiring efforts at creating obstacles by our erstwhile promoters whose board representative has not signed the SEBI document in spite of the honourable court giving direction allowing the Company to proceed) and thus, allow us to flesh out several of the initiatives described above more aggressively. Though we have been waylaid and delayed in our aspiration of building a customer-centric retail powerhouse with the right technology and execution skeleton and backbone, the dream persists and will bear fruit with the return of the retail investor to capital markets. I owe thanks to all your board members for their involved engagement and guidance, the management team for its initiative and commitment and enterprise, the employees for their dedication in adverse conditions, our customers for keeping us in business and last but not least all you patient shareholders who indulged us with your patience and trust in extraordinarily trying times. Rahul Bhasin Chairman