TRAPS: Never badmouth your previous industry, company, board, boss, staff, employees or customers. This rule is inviolable: never be negative. Any mud you hurl will only soil your suit.
Especially avoid words like “personality clash”, “didn’t get along”, or others which cast a shadow on your competence, integrity, or temperament.
BEST ANSWER:
(If you have a job presently)
If you’re not yet 100% committed to leaving your present post, don’t be afraid to say so. Since you have a job, you are in a stronger position than someone who does not. But don’t be coy either. State honestly what you’d be hoping to find in a new spot. Of course, as stated often before, you answer will all the stronger if you have already uncovered what this position is all about and you match your desires to it.
(If you do not presently have a job.)
Never lie about having been fired. It’s unethical – and too easily checked. But do try to deflect the reason from you personally. If your firing was the result of a takeover, merger, division wide layoff, etc., so much the better.
But you should also do something totally unnatural that will demonstrate consummate professionalism. Even if it hurts , describe your own firing – candidly, succinctly and without a trace of bitterness – from the company’s point-of-view, indicating that you could understand why it happened and you might have made the same decision yourself.
Your stature will rise immensely and, most important of all, you will show you are healed from the wounds inflicted by the firing. You will enhance your image as first-class management material and stand head and shoulders above the legions of firing victims who, at the slightest provocation, zip open their shirts to expose their battle scars and decry the unfairness of it all.
For all prior positions:
Make sure you’ve prepared a brief reason for leaving. Best reasons: more money, opportunity, responsibility or growth.
Saturday, July 23, 2011
Friday, July 22, 2011
Question 4 Tell me about something you did – or failed to do – that you now feel a little ashamed of.
TRAPS: There are some questions your interviewer has no business asking, and this is one. But while you may feel like answering, “none of your business,” naturally you can’t. Some interviewers ask this question on the chance you admit to something, but if not, at least they’ll see how you think on your feet.
Some unprepared candidates, flustered by this question, unburden themselves of guilt from their personal life or career, perhaps expressing regrets regarding a parent, spouse, child, etc. All such answers can be disastrous.
BEST ANSWER: As with faults and weaknesses, never confess a regret. But don’t seem as if you’re stonewalling either.
Best strategy: Say you harbor no regrets, then add a principle or habit you practice regularly for healthy human relations.
Example: Pause for reflection, as if the question never occurred to you. Then say, “You know, I really can’t think of anything.” (Pause again, then add): “I would add that as a general management principle, I’ve found that the best way to avoid regrets is to avoid causing them in the first place. I practice one habit that helps me a great deal in this regard. At the end of each day, I mentally review the day’s events and conversations to take a second look at the people and developments I’m involved with and do a doublecheck of what they’re likely to be feeling. Sometimes I’ll see things that do need more follow-up, whether a pat on the back, or maybe a five minute chat in someone’s office to make sure we’re clear on things…whatever.”
“I also like to make each person feel like a member of an elite team, like the Boston Celtics or LA Lakers in their prime. I’ve found that if you let each team member know you expect excellence in their performance…if you work hard to set an example yourself…and if you let people know you appreciate and respect their feelings, you wind up with a highly motivated group, a team that’s having fun at work because they’re striving for excellence rather than brooding over slights or regrets.”
Some unprepared candidates, flustered by this question, unburden themselves of guilt from their personal life or career, perhaps expressing regrets regarding a parent, spouse, child, etc. All such answers can be disastrous.
BEST ANSWER: As with faults and weaknesses, never confess a regret. But don’t seem as if you’re stonewalling either.
Best strategy: Say you harbor no regrets, then add a principle or habit you practice regularly for healthy human relations.
Example: Pause for reflection, as if the question never occurred to you. Then say, “You know, I really can’t think of anything.” (Pause again, then add): “I would add that as a general management principle, I’ve found that the best way to avoid regrets is to avoid causing them in the first place. I practice one habit that helps me a great deal in this regard. At the end of each day, I mentally review the day’s events and conversations to take a second look at the people and developments I’m involved with and do a doublecheck of what they’re likely to be feeling. Sometimes I’ll see things that do need more follow-up, whether a pat on the back, or maybe a five minute chat in someone’s office to make sure we’re clear on things…whatever.”
“I also like to make each person feel like a member of an elite team, like the Boston Celtics or LA Lakers in their prime. I’ve found that if you let each team member know you expect excellence in their performance…if you work hard to set an example yourself…and if you let people know you appreciate and respect their feelings, you wind up with a highly motivated group, a team that’s having fun at work because they’re striving for excellence rather than brooding over slights or regrets.”
Question 3 What are your greatest weaknesses?
TRAPS: Beware - this is an eliminator question, designed to shorten the candidate list. Any admission of a weakness or fault will earn you an “A” for honesty, but an “F” for the interview.
PASSABLE ANSWER: Disguise a strength as a weakness.
Example: “I sometimes push my people too hard. I like to work with a sense of urgency and everyone is not always on the same wavelength.”
Drawback: This strategy is better than admitting a flaw, but it's so widely used, it is transparent to any experienced interviewer.
BEST ANSWER: (and another reason it's so important to get a thorough description of your interviewer's needs before you answer questions): Assure the interviewer that you can think of nothing that would stand in the way of your performing in this position with excellence. Then, quickly review you strongest qualifications.
Example: “Nobody's perfect, but based on what you've told me about this position, I believe I' d make an outstanding match. I know that when I hire people, I look for two things most of all. Do they have the qualifications to do the job well, and the motivation to do it well? Everything in my background shows I have both the qualifications and a strong desire to achieve excellence in whatever I take on. So I can say in all honesty that I see nothing that would cause you even a small concern about my ability or my strong desire to perform this job with excellence.”
Alternate strategy (if you don't yet know enough about the position to talk about such a perfect fit):
Instead of confessing a weakness, describe what you like most and like least, making sure that what you like most matches up with the most important qualification for success in the position, and what you like least is not essential.
Example: Let's say you're applying for a teaching position. “If given a choice, I like to spend as much time as possible in front of my prospects selling, as opposed to shuffling paperwork back at the office. Of course, I long ago learned the importance of filing paperwork properly, and I do it conscientiously. But what I really love to do is sell (if your interviewer were a sales manager, this should be music to his ears.)
PASSABLE ANSWER: Disguise a strength as a weakness.
Example: “I sometimes push my people too hard. I like to work with a sense of urgency and everyone is not always on the same wavelength.”
Drawback: This strategy is better than admitting a flaw, but it's so widely used, it is transparent to any experienced interviewer.
BEST ANSWER: (and another reason it's so important to get a thorough description of your interviewer's needs before you answer questions): Assure the interviewer that you can think of nothing that would stand in the way of your performing in this position with excellence. Then, quickly review you strongest qualifications.
Example: “Nobody's perfect, but based on what you've told me about this position, I believe I' d make an outstanding match. I know that when I hire people, I look for two things most of all. Do they have the qualifications to do the job well, and the motivation to do it well? Everything in my background shows I have both the qualifications and a strong desire to achieve excellence in whatever I take on. So I can say in all honesty that I see nothing that would cause you even a small concern about my ability or my strong desire to perform this job with excellence.”
Alternate strategy (if you don't yet know enough about the position to talk about such a perfect fit):
Instead of confessing a weakness, describe what you like most and like least, making sure that what you like most matches up with the most important qualification for success in the position, and what you like least is not essential.
Example: Let's say you're applying for a teaching position. “If given a choice, I like to spend as much time as possible in front of my prospects selling, as opposed to shuffling paperwork back at the office. Of course, I long ago learned the importance of filing paperwork properly, and I do it conscientiously. But what I really love to do is sell (if your interviewer were a sales manager, this should be music to his ears.)
Question 2 What are your greatest strengths?
TRAPS: This question seems like a softball lob, but be prepared. You don't want to come across as egotistical or arrogant. Neither is this a time to be humble.
BEST ANSWER: You know that your key strategy is to first uncover your interviewer's greatest wants and needs before you answer questions. And from Question 1, you know how to do this.
Prior to any interview, you should have a list mentally prepared of your greatest strengths. You should also have, a specific example or two, which illustrates each strength, an example chosen from your most recent and most impressive achievements.
You should, have this list of your greatest strengths and corresponding examples from your achievements so well committed to memory that you can recite them cold after being shaken awake at 2:30AM.
Then, once you uncover your interviewer's greatest wants and needs, you can choose those achievements from your list that best match up.
As a general guideline, the 10 most desirable traits that all employers love to see in their employees are:
1. A proven track record as an achiever...especially if your achievements match up with the employer's greatest wants and needs.
2. Intelligence...management "savvy".
3. Honesty...integrity...a decent human being.
4. Good fit with corporate culture...someone to feel comfortable with...a team player who meshes well with interviewer's team.
5. Likeability...positive attitude...sense of humor.
6. Good communication skills.
7. Dedication...willingness to walk the extra mile to achieve excellence.
8. Definiteness of purpose...clear goals.
9. Enthusiasm...high level of motivation.
10. Confident...healthy...a leader.
BEST ANSWER: You know that your key strategy is to first uncover your interviewer's greatest wants and needs before you answer questions. And from Question 1, you know how to do this.
Prior to any interview, you should have a list mentally prepared of your greatest strengths. You should also have, a specific example or two, which illustrates each strength, an example chosen from your most recent and most impressive achievements.
You should, have this list of your greatest strengths and corresponding examples from your achievements so well committed to memory that you can recite them cold after being shaken awake at 2:30AM.
Then, once you uncover your interviewer's greatest wants and needs, you can choose those achievements from your list that best match up.
As a general guideline, the 10 most desirable traits that all employers love to see in their employees are:
1. A proven track record as an achiever...especially if your achievements match up with the employer's greatest wants and needs.
2. Intelligence...management "savvy".
3. Honesty...integrity...a decent human being.
4. Good fit with corporate culture...someone to feel comfortable with...a team player who meshes well with interviewer's team.
5. Likeability...positive attitude...sense of humor.
6. Good communication skills.
7. Dedication...willingness to walk the extra mile to achieve excellence.
8. Definiteness of purpose...clear goals.
9. Enthusiasm...high level of motivation.
10. Confident...healthy...a leader.
Question 1 Tell me about yourself.
TRAPS: Beware, about 80% of all interviews begin with this “innocent” question. Many candidates, unprepared for the question, skewer themselves by rambling, recapping their life story, delving into ancient work history or personal matters.
BEST ANSWER: Start with the present and tell why you are well qualified for the position. Remember that the key to all successful interviewing is to match your qualifications to what the interviewer is looking for. In other words you must sell what the buyer is buying. This is the single most important strategy in job hunting.
So, before you answer this or any question it's imperative that you try to uncover your interviewer's greatest need, want, problem or goal.
To do so, make you take these two steps:
1. Do all the homework you can before the interview to uncover this person's wants and needs (not the generalized needs of the industry or company)
2. As early as you can in the interview, ask for a more complete description of what the position entails. You might say: “I have a number of accomplishments I'd like to tell you about, but I want to make the best use of our time together and talk directly to your needs. To help me do, that, could you tell me more about the most important priorities of this position? All I know is what I (heard from the recruiter, read in the classified ad, etc.)”
Then, ALWAYS follow-up with a second and possibly, third question, to draw out his needs even more. Surprisingly, it's usually this second or third question that unearths what the interviewer is most looking for.
You might ask simply, "And in addition to that?..." or, "Is there anything else you see as essential to success in this position?:
This process will not feel easy or natural at first, because it is easier simply to answer questions, but only if you uncover the employer's wants and needs will your answers make the most sense. Practice asking these key questions before giving your answers, the process will feel more natural and you will be light years ahead of the other job candidates you're competing with.
After uncovering what the employer is looking for, describe why the needs of this job bear striking parallels to tasks you've succeeded at before. Be sure to illustrate with specific examples of your responsibilities and especially your achievements, all of which are geared to present yourself as a perfect match for the needs he has just described.
BEST ANSWER: Start with the present and tell why you are well qualified for the position. Remember that the key to all successful interviewing is to match your qualifications to what the interviewer is looking for. In other words you must sell what the buyer is buying. This is the single most important strategy in job hunting.
So, before you answer this or any question it's imperative that you try to uncover your interviewer's greatest need, want, problem or goal.
To do so, make you take these two steps:
1. Do all the homework you can before the interview to uncover this person's wants and needs (not the generalized needs of the industry or company)
2. As early as you can in the interview, ask for a more complete description of what the position entails. You might say: “I have a number of accomplishments I'd like to tell you about, but I want to make the best use of our time together and talk directly to your needs. To help me do, that, could you tell me more about the most important priorities of this position? All I know is what I (heard from the recruiter, read in the classified ad, etc.)”
Then, ALWAYS follow-up with a second and possibly, third question, to draw out his needs even more. Surprisingly, it's usually this second or third question that unearths what the interviewer is most looking for.
You might ask simply, "And in addition to that?..." or, "Is there anything else you see as essential to success in this position?:
This process will not feel easy or natural at first, because it is easier simply to answer questions, but only if you uncover the employer's wants and needs will your answers make the most sense. Practice asking these key questions before giving your answers, the process will feel more natural and you will be light years ahead of the other job candidates you're competing with.
After uncovering what the employer is looking for, describe why the needs of this job bear striking parallels to tasks you've succeeded at before. Be sure to illustrate with specific examples of your responsibilities and especially your achievements, all of which are geared to present yourself as a perfect match for the needs he has just described.
General Guidelines in Answering Interview Questions
Everyone is nervous on interviews. If you simply allow yourself to feel nervous, you'll do much better. Remember also that it's difficult for the interviewer as well.
In general, be upbeat and positive. Never be negative.
Rehearse your answers and time them. Never talk for more than 2 minutes straight.
Don't try to memorize answers word for word. Use the answers shown here as a guide only, and don't be afraid to include your own thoughts and words. To help you remember key concepts, jot down and review a few key words for each answer. Rehearse your answers frequently, and they will come to you naturally in interviews.
As you will read in the accompanying report, the single most important strategy in interviewing, as in all phases of your job search, is what we call: "The Greatest Executive Job Finding Secret." And that is...
Find out what people want, than show them how you can help them get it.
Find out what an employer wants most in his or her ideal candidate, then show how you meet those qualifications.
In other words, you must match your abilities, with the needs of the employer. You must sell what the buyer is buying. To do that, before you know what to emphasize in your answers, you must find out what the buyer is buying... what he is looking for. And the best way to do that is to ask a few questions yourself.
You will see how to bring this off skillfully as you read the first two questions of this report. But regardless of how you accomplish it, you must remember this strategy above all: before blurting out your qualifications, you must get some idea of what the employer wants most. Once you know what he wants, you can then present your qualifications as the perfect “key” that fits the “lock” of that position.
• Other important interview strategies:
• Turn weaknesses into strengths (You'll see how to do this in a few moments.)
• Think before you answer. A pause to collect your thoughts is a hallmark of a thoughtful person.
As a daily exercise, practice being more optimistic. For example, try putting a positive spin on events and situations you would normally regard as negative. This is not meant to turn you into a Pollyanna, but to sharpen your selling skills. The best salespeople, as well as the best liked interview candidates, come off as being naturally optimistic, "can do" people. You will dramatically raise your level of attractiveness by daily practicing to be more optimistic.
Be honest...never lie.
Keep an interview diary. Right after each interview note what you did right, what could have gone a little better, and what steps you should take next with this contact. Then take those steps. Don't be like the 95% of humanity who say they will follow up on something, but never do.
About the 64 questions...
You might feel that the answers to the following questions are “canned”, and that they will seldom match up with the exact way you are asked the questions in actual interviews. The questions and answers are designed to be as specific and realistic as possible. But no preparation can anticipate thousands of possible variations on these questions. What's important is that you thoroughly familiarize yourself with the main strategies behind each answer. And it will be invaluable to you if you commit to memory a few key words that let you instantly call to mind your best answer to the various questions. If you do this, and follow the principles of successful interviewing presented here, you're going to do very well.
Good luck...and good job-hunting!
In general, be upbeat and positive. Never be negative.
Rehearse your answers and time them. Never talk for more than 2 minutes straight.
Don't try to memorize answers word for word. Use the answers shown here as a guide only, and don't be afraid to include your own thoughts and words. To help you remember key concepts, jot down and review a few key words for each answer. Rehearse your answers frequently, and they will come to you naturally in interviews.
As you will read in the accompanying report, the single most important strategy in interviewing, as in all phases of your job search, is what we call: "The Greatest Executive Job Finding Secret." And that is...
Find out what people want, than show them how you can help them get it.
Find out what an employer wants most in his or her ideal candidate, then show how you meet those qualifications.
In other words, you must match your abilities, with the needs of the employer. You must sell what the buyer is buying. To do that, before you know what to emphasize in your answers, you must find out what the buyer is buying... what he is looking for. And the best way to do that is to ask a few questions yourself.
You will see how to bring this off skillfully as you read the first two questions of this report. But regardless of how you accomplish it, you must remember this strategy above all: before blurting out your qualifications, you must get some idea of what the employer wants most. Once you know what he wants, you can then present your qualifications as the perfect “key” that fits the “lock” of that position.
• Other important interview strategies:
• Turn weaknesses into strengths (You'll see how to do this in a few moments.)
• Think before you answer. A pause to collect your thoughts is a hallmark of a thoughtful person.
As a daily exercise, practice being more optimistic. For example, try putting a positive spin on events and situations you would normally regard as negative. This is not meant to turn you into a Pollyanna, but to sharpen your selling skills. The best salespeople, as well as the best liked interview candidates, come off as being naturally optimistic, "can do" people. You will dramatically raise your level of attractiveness by daily practicing to be more optimistic.
Be honest...never lie.
Keep an interview diary. Right after each interview note what you did right, what could have gone a little better, and what steps you should take next with this contact. Then take those steps. Don't be like the 95% of humanity who say they will follow up on something, but never do.
About the 64 questions...
You might feel that the answers to the following questions are “canned”, and that they will seldom match up with the exact way you are asked the questions in actual interviews. The questions and answers are designed to be as specific and realistic as possible. But no preparation can anticipate thousands of possible variations on these questions. What's important is that you thoroughly familiarize yourself with the main strategies behind each answer. And it will be invaluable to you if you commit to memory a few key words that let you instantly call to mind your best answer to the various questions. If you do this, and follow the principles of successful interviewing presented here, you're going to do very well.
Good luck...and good job-hunting!
How to Answer The 64 Toughest Interview Questions
THIS BOOK IS DESIGNED TO PROVIDE ACCURATE INFORMATION ON THE SUBJECTS COVERED. HOWEVER, IT IS DONE WITH THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING OR PROFESSIONAL SERVICES. IF LEGAL ADVICE OR OTHER PROFESSIONAL ASSSTANCE IS REQUIRED, THE SERVICES OF A COMPETENT, PROFESSIONAL PERSON SHOUID BE SOUGHT. ANY NAMES USED IN THE TEXT ARE FICTITIOUS AND FOR ILLUSTRATIVE PURPOSES ONLY. ANY RESEMBLANCE TO ACTUAL PERSONS OR COMPANIES IS PURELY COINCIDENTAL AND UNINTENTIONAL.
Dedication:
This report is dedicated to courage and knowledge,
the two qualities most needed
to succeed in any human challenge,
especially a job search.
Table of Contents
General Guidelines in Answering Interview Questions 3
Q1 Tell me about yourself. 5
Q2 What are your greatest strengths? 6
Q3 What are your greatest weaknesses? 6
Q4 Tell me about something you did – or failed to do – that you now feel a little ashamed of. 7
Q5 Why are you leaving (or did you leave) this position? 8
Q6 The “Silent Treatment” 9
Q7 Why should I hire you? 9
Q8 Aren’t you overqualified for this position? 10
Q9 Where do you see yourself five years from now? 11
Q10 Describe your ideal company, location and job. 12
Q11 Why do you want to work at our company? 12
Q12 What are your career options right now? 12
Q13 Why have you been out of work so long? 13
Q14 Tell me honestly about the strong points and weak points of your boss (company, management team, etc.)… 13
Q15 What good books have you read lately? 14
Q16 Tell me about a situation when your work was criticized. 14
Q17 What are your outside interest? 15
Q18 The “Fatal Flaw” question 15
Q19 How do you feel about reporting to a younger person (minority, woman, etc)? 16
Q20 On confidential matters… 16
Q21 Would you lie for the company? 17
Q22 Looking back, what would you do differently in your life? 17
Q23 Could you have done better in your last job? 18
Q24 Can you work under pressure? 18
Q25 What makes you angry? 18
Q26 Why aren’t you earning more money at this stage of your career? 19
Q27 Who has inspired you in your life and why? 19
Q28 What was the toughest decision you ever had to make? 20
Q29 Tell me about the most boring job you’ve ever had. 20
Q30 Have you been absent from work more than a few days in any previous position? 20
Q31 What changes would you make if you came on board? 21
Q32 I’m concerned that you don’t have as much experience as we’d like in… 21
Q33 How do you feel about working nights and weekends? 22
Q34 Are you willing to relocate or travel? 23
Q35 Do you have the stomach to fire people? Have you had experience firing many people? 23
Q36 Why have you had so many jobs? 24
Q37 What do you see as the proper role/mission of… …a good (job title you’re seeking); …a good manager; …an executive in serving the community; …a leading company in our industry; etc. 25
Q38 What would you say to your boss if he’s crazy about an idea, but you think it stinks? 25
Q39 How could you have improved your career progress? 26
Q40 What would you do if a fellow executive on your own corporate level wasn’t pulling his/her weight…and this was hurting your department? 26
Q41 You’ve been with your firm a long time. Won’t it be hard switching to a new company? 27
Q42 May I contact your present employer for a reference? 27
Q43 Give me an example of your creativity (analytical skill…managing ability, etc.) 28
Q44 Where could you use some improvement? 28
Q45 What do you worry about? 28
Q46 How many hours a week do you normally work? 28
Q47 What’s the most difficult part of being a (job title)? 29
Q48 The “Hypothetical Problem” 29
Q49 What was the toughest challenge you’ve ever faced? 29
Q50 Have you consider starting your own business? 30
Q51 What are your goals? 31
Q52 What do you for when you hire people? 31
Q53 Sell me this stapler…(this pencil…this clock…or some other object on interviewer’s desk). 31
Q54 “The Salary Question” – How much money do you want? 33
Q55 The Illegal Question 33
Q56 The “Secret” Illegal Question 34
Q57 What was the toughest part of your last job? 35
Q58 How do you define success…and how do you measure up to your own definition?. 35
Q59 “The Opinion Question” – What do you think about …Abortion…The President…The Death Penalty…(or any other controversial subject)? 36
Q60 If you won $10 million lottery, would you still work? 36
Q61 Looking back on your last position, have you done your best work? 37
Q62 Why should I hire you from the outside when I could promote someone from within? 37
Q63 Tell me something negative you’ve heard about our company… 38
Q64 On a scale of one to ten, rate me as an interviewer. 38
Dedication:
This report is dedicated to courage and knowledge,
the two qualities most needed
to succeed in any human challenge,
especially a job search.
Table of Contents
General Guidelines in Answering Interview Questions 3
Q1 Tell me about yourself. 5
Q2 What are your greatest strengths? 6
Q3 What are your greatest weaknesses? 6
Q4 Tell me about something you did – or failed to do – that you now feel a little ashamed of. 7
Q5 Why are you leaving (or did you leave) this position? 8
Q6 The “Silent Treatment” 9
Q7 Why should I hire you? 9
Q8 Aren’t you overqualified for this position? 10
Q9 Where do you see yourself five years from now? 11
Q10 Describe your ideal company, location and job. 12
Q11 Why do you want to work at our company? 12
Q12 What are your career options right now? 12
Q13 Why have you been out of work so long? 13
Q14 Tell me honestly about the strong points and weak points of your boss (company, management team, etc.)… 13
Q15 What good books have you read lately? 14
Q16 Tell me about a situation when your work was criticized. 14
Q17 What are your outside interest? 15
Q18 The “Fatal Flaw” question 15
Q19 How do you feel about reporting to a younger person (minority, woman, etc)? 16
Q20 On confidential matters… 16
Q21 Would you lie for the company? 17
Q22 Looking back, what would you do differently in your life? 17
Q23 Could you have done better in your last job? 18
Q24 Can you work under pressure? 18
Q25 What makes you angry? 18
Q26 Why aren’t you earning more money at this stage of your career? 19
Q27 Who has inspired you in your life and why? 19
Q28 What was the toughest decision you ever had to make? 20
Q29 Tell me about the most boring job you’ve ever had. 20
Q30 Have you been absent from work more than a few days in any previous position? 20
Q31 What changes would you make if you came on board? 21
Q32 I’m concerned that you don’t have as much experience as we’d like in… 21
Q33 How do you feel about working nights and weekends? 22
Q34 Are you willing to relocate or travel? 23
Q35 Do you have the stomach to fire people? Have you had experience firing many people? 23
Q36 Why have you had so many jobs? 24
Q37 What do you see as the proper role/mission of… …a good (job title you’re seeking); …a good manager; …an executive in serving the community; …a leading company in our industry; etc. 25
Q38 What would you say to your boss if he’s crazy about an idea, but you think it stinks? 25
Q39 How could you have improved your career progress? 26
Q40 What would you do if a fellow executive on your own corporate level wasn’t pulling his/her weight…and this was hurting your department? 26
Q41 You’ve been with your firm a long time. Won’t it be hard switching to a new company? 27
Q42 May I contact your present employer for a reference? 27
Q43 Give me an example of your creativity (analytical skill…managing ability, etc.) 28
Q44 Where could you use some improvement? 28
Q45 What do you worry about? 28
Q46 How many hours a week do you normally work? 28
Q47 What’s the most difficult part of being a (job title)? 29
Q48 The “Hypothetical Problem” 29
Q49 What was the toughest challenge you’ve ever faced? 29
Q50 Have you consider starting your own business? 30
Q51 What are your goals? 31
Q52 What do you for when you hire people? 31
Q53 Sell me this stapler…(this pencil…this clock…or some other object on interviewer’s desk). 31
Q54 “The Salary Question” – How much money do you want? 33
Q55 The Illegal Question 33
Q56 The “Secret” Illegal Question 34
Q57 What was the toughest part of your last job? 35
Q58 How do you define success…and how do you measure up to your own definition?. 35
Q59 “The Opinion Question” – What do you think about …Abortion…The President…The Death Penalty…(or any other controversial subject)? 36
Q60 If you won $10 million lottery, would you still work? 36
Q61 Looking back on your last position, have you done your best work? 37
Q62 Why should I hire you from the outside when I could promote someone from within? 37
Q63 Tell me something negative you’ve heard about our company… 38
Q64 On a scale of one to ten, rate me as an interviewer. 38
5.6 Market Manipulation
The 1990s have seen a number of episodes of alleged market manipulation in the equities
market. Shah and Thomas (2001) identify eight significant episodes of alleged market
manipulation during the 1990s in the Indian stock markets. There can be some difference of
opinion on how many major market manipulation episodes have taken place because there is
a tendency among Indian policy makers to regard a large price swing as market manipulation
even if it is only a speculative bubble or even if it is justified by fundamentals. Nevertheless,
there is no denying that many of the episodes enumerated by Shah and Thomas do provide
cause for concern.
In my view, the single most important culprit for the frequency and severity of such episodes
is the strong restrictions on short selling that exist in India. All institutions (including banks,
financial institutions, mutual funds and foreign institutional investors) are prohibited from
short selling in the Indian capital market. This restriction has been in place for a long time,
but the restriction has become more serious with the progressive institutionalisation of the
capital market in the 1990s. Over a period of time, therefore, an increasingly large and
important segment of the market has been precluded from short selling. Moreover, at various
critical junctures (most recently in March 2001), the regulators have moved to impose a total
ban on short selling by all investors.
To understand why short selling restrictions are so important, we must first note that almost
all the episodes enumerated by Shah and Thomas involve alleged attempts by the companies
and their promoters to rig up the share prices of their own companies. In a free market, the
most powerful weapon against such attempts would be aggressive short selling by rational
investors. In the presence of short sale restrictions, however, the best that rational investors
can do is to sell all their holdings. Once they have done so, they make no further contribution
to price discovery. Market prices are then determined by the alleged manipulators and less
rational investors (momentum investors and passive /indexed investors). It now becomes
evident that short sale restrictions constitute an open invitation to promoters and© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
19
managements to rig up the share prices of their own companies. Perhaps inadvertently, the
regulatory regime has come to fulfil the fondest dream of these market manipulators.
Even if it were argued that some of these episodes are non-manipulative market crashes, short
sale restrictions would be an important explanation for their number and severity. Recent
studies in the United States (Hong and Stein, 2001) argue that short sale restrictions in that
country are responsible for the high frequency of market crashes there. The mechanism is the
same as that described above – short sale restrictions prevent rational bearish investors from
contributing to price discovery in the build up to the crash. These studies are all the more
important because part of the justification for short sale restrictions in India is derived from
the fact that the United States has similar restrictions. It is often forgotten that the United
States introduced these restrictions as a misguided knee jerk reaction to the great depression,
and has merely persisted with that mistake. More importantly, if our markets are more
susceptible to market manipulations than the US market, we should move more aggressively
to remove these restrictions and pro-actively facilitate short selling.
In the United States itself, the scandals surrounding the bankruptcy of Enron have tarnished
the reputations of the Securities and Exchange Commission (SEC), the Financial Accounting
Standards Board (FASB), the auditors, the rating agencies, the analysts, the boards, the
financial press and almost every other element of the regulatory regime. The one group that
has come out with flying colours is the lowly short seller who kept pointing at the skeletons
in Enron’s cupboard when everybody else was intent on turning the other way. It is now
apparent that even the United States would therefore benefit from relying on the market
forces represented by the short sellers to police its markets.
Another important factor is the unwillingness of the stock exchanges and the regulators to
embrace modern software tools for market surveillance and investigation. Despite a longstanding effort to implement stock watch systems, the stock exchanges have yet to make
these systems fully effective. Most of the investigations into alleged market irregularities also
fail to embrace the tools of information technology. There is a large pool of software talent in
the country that could develop modern neural network and artificial intelligence tools that
could leapfrog the best in the world. This has not happened.
There has been a tendency to imitate the US model of market surveillance without
recognising that within the US itself, there is considerable disquiet about the model. This was
true even before the Enron scandal. As Oesterle (2000) points out in an incisive analysis:
“Although the U.S. securities markets are the world’s largest and most liquid, it does not
follow that the regulatory system has been an unqualified success. Strong economic
fundamentals have created and sustained financial markets, not NYSE policing of its
floor traders. … A fairer assessment is that the SRO regime has proved to be barely
adequate at best. … During quiet periods, the SEC largely relies on SROs to police
trading floors, and it routinely approves SRO rules and disciplinary decisions. In other
words, the SEC during such periods tends to be lazy and complacent. When a scandal
breaks in a trading market, there is embarrassment and handwringing over why the
exchange involved was not more vigilant in disciplining its members. The exchange
contritely proposes minor rule modifications, often at the SEC’s insistence, leaving the
exchange’s functions and membership largely intact. The SEC approves the changes and,© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
20
with some fanfare, the regulators and the regulated hail the virtues of the SRO system—
until the next scandal. In recent years the SEC has not been able to resist the temptation
to tinker too much with the rules of the exchanges. But the illusion that the SEC is
guaranteeing the integrity of exchanges removes an incentive for the exchanges
themselves to exercise diligence, lest they lose their customers. And customers are lulled
into a false sense of security, believing the SEC is closely policing the day-to-day
activities of the exchanges.”
There is a need to rethink the entire dirigiste model of regulatory surveillance and rely more
on countervailing power in the market place. Abolition of short sale restrictions is one way of
bringing countervailing power to bear. Another important step is greater transparency and
disclosure. Using modern artificial intelligence methods it should be possible for the trading
system to automatically generate alerts about suspicious trading patterns and price/volume
trends. Rather than feed these alerts to a set of error-prone human surveillance officials (with
potentially perverse incentives), these alerts should be publicly disseminated. By doing so,
the information is placed in the hands of those who have every incentive to take corrective
actions. If an automated surveillance alert indicates possible bear manipulation, the bulls are
immediately forewarned to protect their own interests. These forewarned investors become a
countervailing power to the power of the would-be manipulators. Such an approach would
reduce the role of human discretion and replace this discretion by the impersonal logic of
computing systems and free markets. This approach would also reduce the agency costs
associated with the regulatory approach. I would argue that India with its abundant software
talent is uniquely positioned to lead the world in such a process of development.
market. Shah and Thomas (2001) identify eight significant episodes of alleged market
manipulation during the 1990s in the Indian stock markets. There can be some difference of
opinion on how many major market manipulation episodes have taken place because there is
a tendency among Indian policy makers to regard a large price swing as market manipulation
even if it is only a speculative bubble or even if it is justified by fundamentals. Nevertheless,
there is no denying that many of the episodes enumerated by Shah and Thomas do provide
cause for concern.
In my view, the single most important culprit for the frequency and severity of such episodes
is the strong restrictions on short selling that exist in India. All institutions (including banks,
financial institutions, mutual funds and foreign institutional investors) are prohibited from
short selling in the Indian capital market. This restriction has been in place for a long time,
but the restriction has become more serious with the progressive institutionalisation of the
capital market in the 1990s. Over a period of time, therefore, an increasingly large and
important segment of the market has been precluded from short selling. Moreover, at various
critical junctures (most recently in March 2001), the regulators have moved to impose a total
ban on short selling by all investors.
To understand why short selling restrictions are so important, we must first note that almost
all the episodes enumerated by Shah and Thomas involve alleged attempts by the companies
and their promoters to rig up the share prices of their own companies. In a free market, the
most powerful weapon against such attempts would be aggressive short selling by rational
investors. In the presence of short sale restrictions, however, the best that rational investors
can do is to sell all their holdings. Once they have done so, they make no further contribution
to price discovery. Market prices are then determined by the alleged manipulators and less
rational investors (momentum investors and passive /indexed investors). It now becomes
evident that short sale restrictions constitute an open invitation to promoters and© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
19
managements to rig up the share prices of their own companies. Perhaps inadvertently, the
regulatory regime has come to fulfil the fondest dream of these market manipulators.
Even if it were argued that some of these episodes are non-manipulative market crashes, short
sale restrictions would be an important explanation for their number and severity. Recent
studies in the United States (Hong and Stein, 2001) argue that short sale restrictions in that
country are responsible for the high frequency of market crashes there. The mechanism is the
same as that described above – short sale restrictions prevent rational bearish investors from
contributing to price discovery in the build up to the crash. These studies are all the more
important because part of the justification for short sale restrictions in India is derived from
the fact that the United States has similar restrictions. It is often forgotten that the United
States introduced these restrictions as a misguided knee jerk reaction to the great depression,
and has merely persisted with that mistake. More importantly, if our markets are more
susceptible to market manipulations than the US market, we should move more aggressively
to remove these restrictions and pro-actively facilitate short selling.
In the United States itself, the scandals surrounding the bankruptcy of Enron have tarnished
the reputations of the Securities and Exchange Commission (SEC), the Financial Accounting
Standards Board (FASB), the auditors, the rating agencies, the analysts, the boards, the
financial press and almost every other element of the regulatory regime. The one group that
has come out with flying colours is the lowly short seller who kept pointing at the skeletons
in Enron’s cupboard when everybody else was intent on turning the other way. It is now
apparent that even the United States would therefore benefit from relying on the market
forces represented by the short sellers to police its markets.
Another important factor is the unwillingness of the stock exchanges and the regulators to
embrace modern software tools for market surveillance and investigation. Despite a longstanding effort to implement stock watch systems, the stock exchanges have yet to make
these systems fully effective. Most of the investigations into alleged market irregularities also
fail to embrace the tools of information technology. There is a large pool of software talent in
the country that could develop modern neural network and artificial intelligence tools that
could leapfrog the best in the world. This has not happened.
There has been a tendency to imitate the US model of market surveillance without
recognising that within the US itself, there is considerable disquiet about the model. This was
true even before the Enron scandal. As Oesterle (2000) points out in an incisive analysis:
“Although the U.S. securities markets are the world’s largest and most liquid, it does not
follow that the regulatory system has been an unqualified success. Strong economic
fundamentals have created and sustained financial markets, not NYSE policing of its
floor traders. … A fairer assessment is that the SRO regime has proved to be barely
adequate at best. … During quiet periods, the SEC largely relies on SROs to police
trading floors, and it routinely approves SRO rules and disciplinary decisions. In other
words, the SEC during such periods tends to be lazy and complacent. When a scandal
breaks in a trading market, there is embarrassment and handwringing over why the
exchange involved was not more vigilant in disciplining its members. The exchange
contritely proposes minor rule modifications, often at the SEC’s insistence, leaving the
exchange’s functions and membership largely intact. The SEC approves the changes and,© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
20
with some fanfare, the regulators and the regulated hail the virtues of the SRO system—
until the next scandal. In recent years the SEC has not been able to resist the temptation
to tinker too much with the rules of the exchanges. But the illusion that the SEC is
guaranteeing the integrity of exchanges removes an incentive for the exchanges
themselves to exercise diligence, lest they lose their customers. And customers are lulled
into a false sense of security, believing the SEC is closely policing the day-to-day
activities of the exchanges.”
There is a need to rethink the entire dirigiste model of regulatory surveillance and rely more
on countervailing power in the market place. Abolition of short sale restrictions is one way of
bringing countervailing power to bear. Another important step is greater transparency and
disclosure. Using modern artificial intelligence methods it should be possible for the trading
system to automatically generate alerts about suspicious trading patterns and price/volume
trends. Rather than feed these alerts to a set of error-prone human surveillance officials (with
potentially perverse incentives), these alerts should be publicly disseminated. By doing so,
the information is placed in the hands of those who have every incentive to take corrective
actions. If an automated surveillance alert indicates possible bear manipulation, the bulls are
immediately forewarned to protect their own interests. These forewarned investors become a
countervailing power to the power of the would-be manipulators. Such an approach would
reduce the role of human discretion and replace this discretion by the impersonal logic of
computing systems and free markets. This approach would also reduce the agency costs
associated with the regulatory approach. I would argue that India with its abundant software
talent is uniquely positioned to lead the world in such a process of development.
5.5.4 The Problems of Unit Trust of India
The biggest problem however was in the case of the largest and oldest mutual fund, the Unit
Trust of India. The oldest of its schemes, US64, had over a period of time developed into a
queer animal. It was an open-end scheme, but did not link its repurchase and resale prices to
Net Asset Values (NAV). In fact, it did not report NAVs at all. For several years, repurchase
and resale prices had been held fairly steady while the fund paid out attractive annual
dividends. By the early 1990s, many institutional and retail investors had come to perceive
US64 as an attractive fixed income investment though the majority of its investments were
actually in equities. Because of its liquid secondary market, many even regarded it as a
money market instrument. This was fine as long as US64’s NAV was significantly above its
repurchase and resale value. This excess provided a safety cushion to absorb market
fluctuations.
2
The SEBI Annual Report 1999-2000, Table 2.39 provides details of these funds and their
schemes.© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
17
In the mid-1990s, however, it became clear to careful observers that this safety cushion was
being eroded and that the scheme was exposed to a high degree of market risk. It was only in
1998 that UTI itself announced that it had a large deficit in US64; not only was the NAV
below the resale price, it was below even par value. A run on the fund appeared likely as
investors prepared to exit before the resale price was lowered to bring it in line with NAV. At
this stage, the government undertook a bail out in which it paid UTI Rs 33 billion (the book
value) for securities that had a market value of only Rs 15 billion. It was also decided to
make the scheme NAV based over three years.
In mid 2001, a sharp drop in the Indian market pushed US64 into a large deficit again, but the
government now indicated its unwillingness to bail out the institution. The fund then took the
drastic step of suspending repurchase and resale of units under the scheme. At the same time,
it opened a special liquidity package allowing any investor to redeem up to 3000 units at
fixed pre-announced rates starting at Rs 10 for August 2001 and going up to Rs 12 in May
2003. In January 2002, the scheme reopened for fresh subscription as an NAV based scheme
where both purchases and sales are at NAV linked prices. At the same time for old investors,
the government offered some relief. First, the facility of redemption at pre-announced rates
ranging from Rs 10 to Rs 12 was extended from 3000 units to 5000 units. Second and more
important, for holdings above 5000 units, UTI assured a repurchase price of Rs. 10 per unit,
or NAV, whichever is higher on May 31, 2003. This assurance was backed by the
Government which agreed that in the event of NAV in May 2003 being lower than the
guaranteed repurchase price, it would compensate UTI for the difference. Thus after six
months of vacillation, the UTI was bailed out by the taxpayer for the second time in four
years.
The distinguishing feature of the Unit Trust of India is that it is not government owned. The
government controls the organisation without owning it. The initial capital of UTI consisted
of Rs 50 million of subscription by government institutions to US64 in 1964. This initial
capital is not a separate share capital but is merely a part of US64 and even in early years, it
was only a small part of US64. Thus the government was just the first of the millions of
investors in US64. All the fixed assets
3
including the land and buildings of UTI have been
bought out of the funds of US64 and are shown as assets of US64. In this sense, the true
owners of UTI are the US64 unitholders and the government controls the organisation only
by virtue of the UTI Act and not by virtue of ownership.
The logical solution to the problems that UTI found itself in would therefore have been for
the government to withdraw from the scene by returning UTI to its rightful and legitimate
owners – the holders of US64. These owners would then have had the right to decide for
themselves how their funds should be managed. The simplest way to achieve this
demutualisation would have been for UTI to transfer all its buildings and other asset
management related assets from US64 to a new company and to spin this company off to the
US64 unit holders. The new company would have become the Asset Management Company
(AMC) for all UTI schemes. The UTI Act could then have been repealed and UTI could have
been brought under the SEBI Mutual Fund Regulations.
3
These fixed assets have a book value of Rs 8.5 billion (Malegam, 2001).© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
18
The US64 holders should have been allowed to do what they pleased with the shares that they
would have received in the newly created AMC. They could sell them to anybody they
choose or they could hold on to them. It was possible that a large domestic or foreign
financial institution would have launched a tender offer for these shares to take control of the
new AMC. They should be have been allowed to do so with no restrictions other than that
imposed by the SEBI Takeover Regulations.
As a rule of thumb, an AMC is valued at 2-3% of assets under management. This would
suggest that the new AMC would have been worth about Rs 10-15 billion. The large
distribution network, valuable real estate and other fixed assets would probably have added
several billion more to the valuation. Thus the shares in the AMC would have gone some way
to compensating the US64 holders for the losses that they have suffered under government
management. It would also have established the principle that the owners have the right to
replace any management that performs badly even if that management is the government
itself. Had this solution been adopted in mid 2001 (or even better immediately after the 1998
bailout), it would have avoided using taxpayer money to bail out the investors of US 64 in
2002/2003.
Trust of India. The oldest of its schemes, US64, had over a period of time developed into a
queer animal. It was an open-end scheme, but did not link its repurchase and resale prices to
Net Asset Values (NAV). In fact, it did not report NAVs at all. For several years, repurchase
and resale prices had been held fairly steady while the fund paid out attractive annual
dividends. By the early 1990s, many institutional and retail investors had come to perceive
US64 as an attractive fixed income investment though the majority of its investments were
actually in equities. Because of its liquid secondary market, many even regarded it as a
money market instrument. This was fine as long as US64’s NAV was significantly above its
repurchase and resale value. This excess provided a safety cushion to absorb market
fluctuations.
2
The SEBI Annual Report 1999-2000, Table 2.39 provides details of these funds and their
schemes.© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
17
In the mid-1990s, however, it became clear to careful observers that this safety cushion was
being eroded and that the scheme was exposed to a high degree of market risk. It was only in
1998 that UTI itself announced that it had a large deficit in US64; not only was the NAV
below the resale price, it was below even par value. A run on the fund appeared likely as
investors prepared to exit before the resale price was lowered to bring it in line with NAV. At
this stage, the government undertook a bail out in which it paid UTI Rs 33 billion (the book
value) for securities that had a market value of only Rs 15 billion. It was also decided to
make the scheme NAV based over three years.
In mid 2001, a sharp drop in the Indian market pushed US64 into a large deficit again, but the
government now indicated its unwillingness to bail out the institution. The fund then took the
drastic step of suspending repurchase and resale of units under the scheme. At the same time,
it opened a special liquidity package allowing any investor to redeem up to 3000 units at
fixed pre-announced rates starting at Rs 10 for August 2001 and going up to Rs 12 in May
2003. In January 2002, the scheme reopened for fresh subscription as an NAV based scheme
where both purchases and sales are at NAV linked prices. At the same time for old investors,
the government offered some relief. First, the facility of redemption at pre-announced rates
ranging from Rs 10 to Rs 12 was extended from 3000 units to 5000 units. Second and more
important, for holdings above 5000 units, UTI assured a repurchase price of Rs. 10 per unit,
or NAV, whichever is higher on May 31, 2003. This assurance was backed by the
Government which agreed that in the event of NAV in May 2003 being lower than the
guaranteed repurchase price, it would compensate UTI for the difference. Thus after six
months of vacillation, the UTI was bailed out by the taxpayer for the second time in four
years.
The distinguishing feature of the Unit Trust of India is that it is not government owned. The
government controls the organisation without owning it. The initial capital of UTI consisted
of Rs 50 million of subscription by government institutions to US64 in 1964. This initial
capital is not a separate share capital but is merely a part of US64 and even in early years, it
was only a small part of US64. Thus the government was just the first of the millions of
investors in US64. All the fixed assets
3
including the land and buildings of UTI have been
bought out of the funds of US64 and are shown as assets of US64. In this sense, the true
owners of UTI are the US64 unitholders and the government controls the organisation only
by virtue of the UTI Act and not by virtue of ownership.
The logical solution to the problems that UTI found itself in would therefore have been for
the government to withdraw from the scene by returning UTI to its rightful and legitimate
owners – the holders of US64. These owners would then have had the right to decide for
themselves how their funds should be managed. The simplest way to achieve this
demutualisation would have been for UTI to transfer all its buildings and other asset
management related assets from US64 to a new company and to spin this company off to the
US64 unit holders. The new company would have become the Asset Management Company
(AMC) for all UTI schemes. The UTI Act could then have been repealed and UTI could have
been brought under the SEBI Mutual Fund Regulations.
3
These fixed assets have a book value of Rs 8.5 billion (Malegam, 2001).© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
18
The US64 holders should have been allowed to do what they pleased with the shares that they
would have received in the newly created AMC. They could sell them to anybody they
choose or they could hold on to them. It was possible that a large domestic or foreign
financial institution would have launched a tender offer for these shares to take control of the
new AMC. They should be have been allowed to do so with no restrictions other than that
imposed by the SEBI Takeover Regulations.
As a rule of thumb, an AMC is valued at 2-3% of assets under management. This would
suggest that the new AMC would have been worth about Rs 10-15 billion. The large
distribution network, valuable real estate and other fixed assets would probably have added
several billion more to the valuation. Thus the shares in the AMC would have gone some way
to compensating the US64 holders for the losses that they have suffered under government
management. It would also have established the principle that the owners have the right to
replace any management that performs badly even if that management is the government
itself. Had this solution been adopted in mid 2001 (or even better immediately after the 1998
bailout), it would have avoided using taxpayer money to bail out the investors of US 64 in
2002/2003.
5.5.3 Assured Return Schemes and Mutual Fund Solvency
A mutual fund is one of the institutions that, in theory, requires almost no risk capital (Merton
and Perold, 1993). However, in India many mutual funds, particularly in the public sector
operated schemes that guaranteed a minimum return. These were like bank deposits
sweetened with a call option on the stock market, but many mutual funds failed to recognise
the risks involved in these products. When the portfolios of these schemes did badly (partly
due to poor management and partly due to the lacklustre performance of the market itself),
the mutual funds had great difficulty in fulfilling their return guarantees. Under pressure from
SEBI, the public sector banks and insurance companies that had sponsored these mutual
funds provided financial support of nearly Rs 20 billion to the mutual funds to allow them to
honour the guarantees. Of these seven mutual funds, one needed a support of Rs 12 billion,
three needed about Rs 2 billion each, and three needed relatively small amounts
and Perold, 1993). However, in India many mutual funds, particularly in the public sector
operated schemes that guaranteed a minimum return. These were like bank deposits
sweetened with a call option on the stock market, but many mutual funds failed to recognise
the risks involved in these products. When the portfolios of these schemes did badly (partly
due to poor management and partly due to the lacklustre performance of the market itself),
the mutual funds had great difficulty in fulfilling their return guarantees. Under pressure from
SEBI, the public sector banks and insurance companies that had sponsored these mutual
funds provided financial support of nearly Rs 20 billion to the mutual funds to allow them to
honour the guarantees. Of these seven mutual funds, one needed a support of Rs 12 billion,
three needed about Rs 2 billion each, and three needed relatively small amounts
5.5.2 Institutional Contribution in Market Development
The contribution of institutional investors to the development and modernisation of our
capital markets has been significant, but it has not been as great as one would have expected:
• The institutional investors have played a major role in the professionalisation of the
capital markets in India. Their demand for high quality analysis and information has
helped spur the growth of these services in India. As little as 10 years ago, beta was
unheard of outside academic circles, P/E ratios were regarded as esoteric tools, the
financial press was very limited in circulation, and there were no earnings forecasts or
other equity analysis. Today, the country boasts of a very vibrant financial press, a very
active community of financial analysts, and a high degree of professionalisation of all
capital market intermediaries. Much of this has been greatly helped by the growth of
institutions that value quality of service more than personal relationships and trust.
• However, the institutions have failed to provide a major impetus to capital market
reforms. Both domestic and foreign institutions in India have resisted reforms as
vigorously as other market participants. Reforms in India have been pushed forward by
academics, by the financial press and by the policy makers (not necessarily in that order).
Many of these reforms have had to be pushed through by regulatory fiat even where they
were in the long run interests of the institutions themselves. In this sense, institutions have
been as myopic in their response to capital market reforms as anybody else. Three
exam
ples would illustrate this phenomenon:
Before India set up its first depository, institutions were most vociferous in their
complaints about the risks and costs of the paper based settlement system. But when© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
16
the depository started operations, they were most reluctant to start availing of its
services until SEBI mandated that a minimum percentage of their holdings must be
dematerialised. SEBI had to then go on to mandate that institutions could trade only in
dematerialised form. (Later SEBI extended this fiat to all investors trading in stock
ex
changes).
Institutions have also generally agreed that a shift from account period settlement to
rolling settlement is desirable. However, they did not embrace the optional rolling
settlement facility that was available for a long period before SEBI made rolling
set
tlement mandatory.
The institutions have long complained about the lack of hedging mechanisms in India.
However, after the derivatives markets were set up, institutions have been reluctant to
trade in it. Most observers believe that the success of the market would depend on its
first attracting enough retail interest to entice the institutions into it.
capital markets has been significant, but it has not been as great as one would have expected:
• The institutional investors have played a major role in the professionalisation of the
capital markets in India. Their demand for high quality analysis and information has
helped spur the growth of these services in India. As little as 10 years ago, beta was
unheard of outside academic circles, P/E ratios were regarded as esoteric tools, the
financial press was very limited in circulation, and there were no earnings forecasts or
other equity analysis. Today, the country boasts of a very vibrant financial press, a very
active community of financial analysts, and a high degree of professionalisation of all
capital market intermediaries. Much of this has been greatly helped by the growth of
institutions that value quality of service more than personal relationships and trust.
• However, the institutions have failed to provide a major impetus to capital market
reforms. Both domestic and foreign institutions in India have resisted reforms as
vigorously as other market participants. Reforms in India have been pushed forward by
academics, by the financial press and by the policy makers (not necessarily in that order).
Many of these reforms have had to be pushed through by regulatory fiat even where they
were in the long run interests of the institutions themselves. In this sense, institutions have
been as myopic in their response to capital market reforms as anybody else. Three
exam
ples would illustrate this phenomenon:
Before India set up its first depository, institutions were most vociferous in their
complaints about the risks and costs of the paper based settlement system. But when© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
16
the depository started operations, they were most reluctant to start availing of its
services until SEBI mandated that a minimum percentage of their holdings must be
dematerialised. SEBI had to then go on to mandate that institutions could trade only in
dematerialised form. (Later SEBI extended this fiat to all investors trading in stock
ex
changes).
Institutions have also generally agreed that a shift from account period settlement to
rolling settlement is desirable. However, they did not embrace the optional rolling
settlement facility that was available for a long period before SEBI made rolling
set
tlement mandatory.
The institutions have long complained about the lack of hedging mechanisms in India.
However, after the derivatives markets were set up, institutions have been reluctant to
trade in it. Most observers believe that the success of the market would depend on its
first attracting enough retail interest to entice the institutions into it.
5.5 Institutionalisation (5.5.1 Extent of Institutionalisation)
The post reform period has seen the emergence of a large number and variety of institutions
in the capital market
• Foreign Institutions: Foreign Institutional Investors (FIIs) registered with SEBI enjoy a
high degree of capital account convertibility in an otherwise closed capital account. FIIs
are allowed to buy and sell shares in the stock exchange and repatriate the proceeds freely
to their home countries. FIIs, as the name suggests, are institutions like mutual funds,
pension funds, banks and insurance companies. However, there is a provision for a
corporate or high net worth individual to also avail of the same benefits by coming in as a
registered sub account of a registered FII. There are restrictions on the aggregate holding
of FIIs in any company. As on December 31, 2001, FIIs had in the aggregate invested
$14.5 billion in the Indian market. This would represent about 15% of the market
capitalisation, but it must be noted that the figure of $14.5 billion is the cumulative
amount of money brought into India and not the current market value of their portfolio.
No estimates are available of this portfolio value. However, since the market index has
fallen sharply in dollar terms since the early 1990s, there is reason to believe that the FII
equity holding would be less than 10% of the market capitalisation.
• Mutual Funds: In the late 1980s, the mutual fund industry (which till then consisted only
of the public sector Unit Trust of India) was thrown open to the public sector banks and
financial institutions. In the mid-1990s, private sector mutual funds were permitted. As of
September 30, 2001, the mutual fund industry had assets under management of Rs 1.02
trillion. This represents about 20% of the market capitalisation, but since 70% of the
mutual fund assets are in schemes that are predominantly debt oriented, and another 17%
are in balanced funds, the actual equity holding of the mutual funds probably amounts to
only about 5-7% of the market capitalisation. In terms of the competitive structure of the
industry, UTI accounted for 50% of assets under management, the private sector funds for
42% and the public sector funds for 8%. In the last couple of years, private sector players
have rapidly gained market share from other players.
• Development Financial Institutions: In the pre-reform era, development financial
institutions and public sector insurance companies provided a major component of long© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
15
term finance for industry. Along with extending loans, these institutions often subscribed
to the equity as well. In many cases, the loans were at subsidised rates of interest, but
provided for conversion into equity at highly favourable rates. As a result, financial
institutions have a significant shareholding in many large Indian companies. Given the
historical background of these holdings, the financial institutions have often behaved like
strategic investors rather than portfolio investors. There have been repeated suggestions
for restructuring of these holdings including secondary market sales, auctions to strategic
bidders, and transfer to mutual funds or other special purpose vehicles. There have also
been suggestions that they should simply start behaving like portfolio investors. As
discussed earlier in this paper, there is a need for a radical restructuring, downsizing and
eventual privatisation of these institutions themselves.
• Venture Capital Funds: SEBI has recently liberalised the regulations for venture capital
funds and has also permitted foreign venture capital funds to operate in India. They will
have the freedom to invest in unlisted companies with the full freedom to repatriate sale
proceeds. These new regulations have been notified only recently and it will be some time
before these investors start playing a major role in the capital markets.
• Insurance Companies and Pension Funds: Private sector insurance companies have
started operations only recently. The regulatory framework for pension funds is still under
discussion. These institutions have therefore yet to make a impact on the capital market.
in the capital market
• Foreign Institutions: Foreign Institutional Investors (FIIs) registered with SEBI enjoy a
high degree of capital account convertibility in an otherwise closed capital account. FIIs
are allowed to buy and sell shares in the stock exchange and repatriate the proceeds freely
to their home countries. FIIs, as the name suggests, are institutions like mutual funds,
pension funds, banks and insurance companies. However, there is a provision for a
corporate or high net worth individual to also avail of the same benefits by coming in as a
registered sub account of a registered FII. There are restrictions on the aggregate holding
of FIIs in any company. As on December 31, 2001, FIIs had in the aggregate invested
$14.5 billion in the Indian market. This would represent about 15% of the market
capitalisation, but it must be noted that the figure of $14.5 billion is the cumulative
amount of money brought into India and not the current market value of their portfolio.
No estimates are available of this portfolio value. However, since the market index has
fallen sharply in dollar terms since the early 1990s, there is reason to believe that the FII
equity holding would be less than 10% of the market capitalisation.
• Mutual Funds: In the late 1980s, the mutual fund industry (which till then consisted only
of the public sector Unit Trust of India) was thrown open to the public sector banks and
financial institutions. In the mid-1990s, private sector mutual funds were permitted. As of
September 30, 2001, the mutual fund industry had assets under management of Rs 1.02
trillion. This represents about 20% of the market capitalisation, but since 70% of the
mutual fund assets are in schemes that are predominantly debt oriented, and another 17%
are in balanced funds, the actual equity holding of the mutual funds probably amounts to
only about 5-7% of the market capitalisation. In terms of the competitive structure of the
industry, UTI accounted for 50% of assets under management, the private sector funds for
42% and the public sector funds for 8%. In the last couple of years, private sector players
have rapidly gained market share from other players.
• Development Financial Institutions: In the pre-reform era, development financial
institutions and public sector insurance companies provided a major component of long© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
15
term finance for industry. Along with extending loans, these institutions often subscribed
to the equity as well. In many cases, the loans were at subsidised rates of interest, but
provided for conversion into equity at highly favourable rates. As a result, financial
institutions have a significant shareholding in many large Indian companies. Given the
historical background of these holdings, the financial institutions have often behaved like
strategic investors rather than portfolio investors. There have been repeated suggestions
for restructuring of these holdings including secondary market sales, auctions to strategic
bidders, and transfer to mutual funds or other special purpose vehicles. There have also
been suggestions that they should simply start behaving like portfolio investors. As
discussed earlier in this paper, there is a need for a radical restructuring, downsizing and
eventual privatisation of these institutions themselves.
• Venture Capital Funds: SEBI has recently liberalised the regulations for venture capital
funds and has also permitted foreign venture capital funds to operate in India. They will
have the freedom to invest in unlisted companies with the full freedom to repatriate sale
proceeds. These new regulations have been notified only recently and it will be some time
before these investors start playing a major role in the capital markets.
• Insurance Companies and Pension Funds: Private sector insurance companies have
started operations only recently. The regulatory framework for pension funds is still under
discussion. These institutions have therefore yet to make a impact on the capital market.
5.4 Takeovers
The SEBI regulations on takeover have brought about a transparent regulatory framework for
takeovers. However, there have been only a handful of hostile takeover bids in the last
several years and most of these hostile bids have been defeated. That this should be so in a
period of rising investor dissatisfaction with the governance and performance of the Indian
corporate sector is both surprising and distressing. More than the deficiencies in the take over
code itself, it is the major weaknesses in the financial sector that have led to this
unsatisfactory state of affairs. In particular, the limited availability of leveraged financing in
India, the regulatory bias against innovative financial instruments, and the general climate of
political hostility to corporate raiders are to blame.
takeovers. However, there have been only a handful of hostile takeover bids in the last
several years and most of these hostile bids have been defeated. That this should be so in a
period of rising investor dissatisfaction with the governance and performance of the Indian
corporate sector is both surprising and distressing. More than the deficiencies in the take over
code itself, it is the major weaknesses in the financial sector that have led to this
unsatisfactory state of affairs. In particular, the limited availability of leveraged financing in
India, the regulatory bias against innovative financial instruments, and the general climate of
political hostility to corporate raiders are to blame.
5.3 Disclosure Standards
Disclosure standards in the primary market have seen a gradual but steady improvement.
However, the full benefits of this have not been realised because only a small fraction of
investors receive the full prospectus. The current regulations require companies to provide an
abridged prospectus to all investors, while the full prospectus is available on demand. In
practice the on-demand availability of the full prospectus is geographically limited and is
often restricted to the larger more sophisticated investors. Regulators have sought to deal with
this problem by requiring more information to be reproduced in the abridged offer document,
but this leads to information being crammed in fine print on one huge sheet of paper. It
appears that the abridged prospectus has its origins in the era of price controls when issues
were often oversubscribed a hundred or even a thousand times. At that time, it could be
legitimately argued that it would be prohibitively expensive to provide every applicant with
an unabridged prospectus. In today’s vastly altered scenario, it should be possible for market
intermediaries to ensure that every applicant has received a copy of the complete prospectus
accompanied by a complete set of financial statements. It is necessary to move in this
direction. One possibility would be a regulation that gives any applicant who has not received
the full prospectus the right to withdraw his application at any time before allotment. This
would incentives the issuer to ensure delivery of the full prospectus to every applicant.
Even more than in the offer document, it is in the area of continuing disclosures that the
greatest progress has been made. Five key accounting standards, which have become
effective from April 1, 2001, redress the most glaring inadequacies that existed previously in
Indian accounting practices. These include the critical areas of consolidation of accounts of
subsidiaries, deferred tax accounting and related party disclosures. There are still a number of
areas where Indian accounting standards lag behind international best practices, but these are
less important than the ones that have been redressed. Moreover, there is reason to hope that
these deficiencies will also be removed over a period of time. At the same time, the
accounting scandals surrounding the bankruptcy of Enron Corp in the United States have
heightened the sense of urgency of adopting global best practices in accounting standards.
There has also been some progress in requiring companies to make disclosures to the stock
exchanges in respect of any material developments like mergers, acquisitions, corporate
actions, strategic decisions and other events that have a significant impact on the share price.
However, both the content and the timeliness of these disclosures leave much to be desired.
There have been some initiatives to make effective use of information technology in the
collection and dissemination of corporate disclosures (Securities and Exchange Board of
India, 2000) on the lines of the EDGAR system in the United States. However, these have yet
to move beyond the stage of conceptualisation.© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
However, the full benefits of this have not been realised because only a small fraction of
investors receive the full prospectus. The current regulations require companies to provide an
abridged prospectus to all investors, while the full prospectus is available on demand. In
practice the on-demand availability of the full prospectus is geographically limited and is
often restricted to the larger more sophisticated investors. Regulators have sought to deal with
this problem by requiring more information to be reproduced in the abridged offer document,
but this leads to information being crammed in fine print on one huge sheet of paper. It
appears that the abridged prospectus has its origins in the era of price controls when issues
were often oversubscribed a hundred or even a thousand times. At that time, it could be
legitimately argued that it would be prohibitively expensive to provide every applicant with
an unabridged prospectus. In today’s vastly altered scenario, it should be possible for market
intermediaries to ensure that every applicant has received a copy of the complete prospectus
accompanied by a complete set of financial statements. It is necessary to move in this
direction. One possibility would be a regulation that gives any applicant who has not received
the full prospectus the right to withdraw his application at any time before allotment. This
would incentives the issuer to ensure delivery of the full prospectus to every applicant.
Even more than in the offer document, it is in the area of continuing disclosures that the
greatest progress has been made. Five key accounting standards, which have become
effective from April 1, 2001, redress the most glaring inadequacies that existed previously in
Indian accounting practices. These include the critical areas of consolidation of accounts of
subsidiaries, deferred tax accounting and related party disclosures. There are still a number of
areas where Indian accounting standards lag behind international best practices, but these are
less important than the ones that have been redressed. Moreover, there is reason to hope that
these deficiencies will also be removed over a period of time. At the same time, the
accounting scandals surrounding the bankruptcy of Enron Corp in the United States have
heightened the sense of urgency of adopting global best practices in accounting standards.
There has also been some progress in requiring companies to make disclosures to the stock
exchanges in respect of any material developments like mergers, acquisitions, corporate
actions, strategic decisions and other events that have a significant impact on the share price.
However, both the content and the timeliness of these disclosures leave much to be desired.
There have been some initiatives to make effective use of information technology in the
collection and dissemination of corporate disclosures (Securities and Exchange Board of
India, 2000) on the lines of the EDGAR system in the United States. However, these have yet
to move beyond the stage of conceptualisation.© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
5.2 Primary Market
As already mentioned, the first big bang reform in the capital market was the abolition of
capital issue controls and the introduction of free pricing. Some elements of merit based
regulation still survived in terms of track record requirements (entry norms) and an invidious
distinction between premium and par issues. Over time, however, these have also been
whittled down and the capital market regulator has moved almost completely to a disclosure
based regime of regulation.
The introduction of the book-building route has led to greater efficiencies in the capital
raising process and has contributed to improved price discovery. At the same time vast© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
13
improvements in the disclosure regime discussed later in this paper have laid the foundation
for a more transparent primary market.
There is still an element of dirigisme in the attitude of SEBI towards new financial
instruments. It was only recently that SEBI allowed non investment grade bonds to be issued
and it even now frowns on instruments like equity index linked bonds.
capital issue controls and the introduction of free pricing. Some elements of merit based
regulation still survived in terms of track record requirements (entry norms) and an invidious
distinction between premium and par issues. Over time, however, these have also been
whittled down and the capital market regulator has moved almost completely to a disclosure
based regime of regulation.
The introduction of the book-building route has led to greater efficiencies in the capital
raising process and has contributed to improved price discovery. At the same time vast© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
13
improvements in the disclosure regime discussed later in this paper have laid the foundation
for a more transparent primary market.
There is still an element of dirigisme in the attitude of SEBI towards new financial
instruments. It was only recently that SEBI allowed non investment grade bonds to be issued
and it even now frowns on instruments like equity index linked bonds.
5.1 Secondary Market Reforms
The secondary markets for stocks witnessed more change and reform than most other
components of the financial sector:
• Online trading (the electronic order book) was introduced by the newly set up National
Stock Exchange in 1994 and was quickly copied by the other exchanges. The capital
market was previously confined to Mumbai (where the largest stock exchange was
located) and to a few other centres where smaller exchanges provided poorer execution
quality. Within a few years, this gave way to a national market based on satellite
communications that abolished geographical barriers. Amongst the benefits were superior
liquidity, greater transparency and lower costs.
• The settlement of securities became electronic in the late 1990s. Compulsory
dematerialisation was introduced for deliveries in the stock market for institutional
investors in 1998 and for retail investors in 1999. Today, practically all the securities© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
components of the financial sector:
• Online trading (the electronic order book) was introduced by the newly set up National
Stock Exchange in 1994 and was quickly copied by the other exchanges. The capital
market was previously confined to Mumbai (where the largest stock exchange was
located) and to a few other centres where smaller exchanges provided poorer execution
quality. Within a few years, this gave way to a national market based on satellite
communications that abolished geographical barriers. Amongst the benefits were superior
liquidity, greater transparency and lower costs.
• The settlement of securities became electronic in the late 1990s. Compulsory
dematerialisation was introduced for deliveries in the stock market for institutional
investors in 1998 and for retail investors in 1999. Today, practically all the securities© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
5 Capital Markets
The initial burst of economic reforms included a major reform in the capital market – the
abolition of capital issues control and the introduction of free pricing of equity issues in 1992.
Simultaneously the Securities and Exchange Board of India (SEBI) was set up as the apex
regulator of the Indian capital markets.
The last decade has seen several significant reforms in the capital markets. The secondary
market in particular was completely transformed by technology and competition.
Paradoxically, however, after a decade of reforms, the capital market is less important in the
financial system than it was at the beginning of the 1990s. It bears an eerie resemblance to a
spanking new shopping mall with the best facilities and infrastructure, but no shoppers in
sight. In some ways, the problems are with the real economy. As long as there is vibrancy in
the real economy, there is life in the capital markets, but when the real economy itself
descends into a spiral of diminishing expectations, it becomes difficult to sustain the vitality
of the capital markets. These issues are discussed below
abolition of capital issues control and the introduction of free pricing of equity issues in 1992.
Simultaneously the Securities and Exchange Board of India (SEBI) was set up as the apex
regulator of the Indian capital markets.
The last decade has seen several significant reforms in the capital markets. The secondary
market in particular was completely transformed by technology and competition.
Paradoxically, however, after a decade of reforms, the capital market is less important in the
financial system than it was at the beginning of the 1990s. It bears an eerie resemblance to a
spanking new shopping mall with the best facilities and infrastructure, but no shoppers in
sight. In some ways, the problems are with the real economy. As long as there is vibrancy in
the real economy, there is life in the capital markets, but when the real economy itself
descends into a spiral of diminishing expectations, it becomes difficult to sustain the vitality
of the capital markets. These issues are discussed below
4.2 Financial Repression
For all practical purposes, financial repression is a thing of the past. One crude measure of
repression can be got by comparing the inter bank call market rate (which was more or less
free market determined even in the 1980s) with the short term bank deposit rate. From 1981-
82 to 1992-93, the call rate exceeded the one year bank deposit rate in every single year with
a median excess of 1.5%. From 1993-94 to 1999-00, the situation was reversed: the bank
deposit rate exceeded the call rate in 5 out of 7 years, and the median excess of the deposit© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
11
rate over call rate was 1.6%. This suggests that in the 1980s, the bank deposit rate was
repressed to the extent of about 3%.
When the prices of financial assets are determined by the free play of market forces, financial
markets are able to perform the important function of allocating resources efficiently to the
most productive sectors of the economy. To the extent that this has happened in India, this
must count as one of the most enduring and decisive successes of the financial reforms.
It must however be added that as discussed elsewhere in this paper, the regulators have a
tendency to use several indirect tools (including at times “moral suasion”) to influence the
direction of the market even after administrative controls have been removed. When this
happens, many of the benefits of free financial markets are lost.
repression can be got by comparing the inter bank call market rate (which was more or less
free market determined even in the 1980s) with the short term bank deposit rate. From 1981-
82 to 1992-93, the call rate exceeded the one year bank deposit rate in every single year with
a median excess of 1.5%. From 1993-94 to 1999-00, the situation was reversed: the bank
deposit rate exceeded the call rate in 5 out of 7 years, and the median excess of the deposit© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
11
rate over call rate was 1.6%. This suggests that in the 1980s, the bank deposit rate was
repressed to the extent of about 3%.
When the prices of financial assets are determined by the free play of market forces, financial
markets are able to perform the important function of allocating resources efficiently to the
most productive sectors of the economy. To the extent that this has happened in India, this
must count as one of the most enduring and decisive successes of the financial reforms.
It must however be added that as discussed elsewhere in this paper, the regulators have a
tendency to use several indirect tools (including at times “moral suasion”) to influence the
direction of the market even after administrative controls have been removed. When this
happens, many of the benefits of free financial markets are lost.
4 Interest rate deregulation and financial repression(Deregulation)
Perhaps the single most important element of the financial sector reforms has been the
deregulation of interest rates.
• Interest rates were freed on corporate bonds, most bank lending, and on all bank term
deposits.
• Introduction of auctions coupled with reduced pre-emption led to more market determined
interest rates for government securities.
• Administered interest rates in the banking system are now confined mainly to the rate on
savings account, and the concessional lending rates for certain sectors like exports and
small loans. The interest rates on small savings instruments offered by the government are
also administered, and in a sense provide a floor for bank deposit rates. The government is
in the process of linking these rates also to market interest rates and inflation rates.
deregulation of interest rates.
• Interest rates were freed on corporate bonds, most bank lending, and on all bank term
deposits.
• Introduction of auctions coupled with reduced pre-emption led to more market determined
interest rates for government securities.
• Administered interest rates in the banking system are now confined mainly to the rate on
savings account, and the concessional lending rates for certain sectors like exports and
small loans. The interest rates on small savings instruments offered by the government are
also administered, and in a sense provide a floor for bank deposit rates. The government is
in the process of linking these rates also to market interest rates and inflation rates.
Pro-Bank Tilt of Regulatory Policy
One of the distinctive elements of the financial sector policy is a powerful regulatory
protection extended to the banking system. Faced with a financially weak banking system,
the policy makers have been unwilling to bite the bullet and recapitalise the predominantly
state owned banks to restore their financial health. Instead the policy has been to provide a
cosy regulatory regime in which the dominant oligopolistic banks are insulated from
competition from new entrants as well as competition from non bank sources of capital. The
implicit hope has been that this protected environment will allow them to survive even if they
are financially weak.
• The nature and pace of banking sector reforms has been designed to reduce the ability of
new banks to take market share away from the incumbents by aggressive competition. I
would like to mention in particular the niggardly rate at which new bank licences have
been doled out, a licencing policy that effectively excluded most promoters with deep
pockets, the extreme restrictions on branch expansion and rationalisation, and ill
concealed regulatory hostility to innovation and aggressive marketing. All this meant that
the incumbent big banks faced very little threat from new entrants.
• At the same time, potential competition from outside the banking system was ruthlessly
destro
yed:
The development financial institutions that were financially very sound at the
beginning of the reform process were not allowed to transform themselves into
universal banks until their financial strength had been substantially eroded. This issue
is
described in more detail in 3.4 above
The non bank finance companies (NBFCs) that despite their higher cost of funds
competed intensely with the banks on the basis of speed, flexibility and innovation
were systematically destroyed in the second half of the nineties. In line with
international practices, the NBFCs’ access to retail funds was severely curtailed. At
the same time, the regulatory regime did not allow the NBFCs to fund themselves
eff
ectively in the wholesale markets as they do globally.
The very hesitant moves towards capital account convertibility described in 2.2 above
have meant that the banks have not had to face cross border competition on the scale
that might have been expected in the early 1990s. Moreover restrictions on foreign
banks operating in India have made them less of a competitive threat than they might
ot
herwise have been.
The regulatory regime for money market mutual funds has been designed to prevent
th
em from competing effectively with the banks.
The capital markets have been in a state of decline since the early/mid 1990s for a
variety of reasons as described in 5.9 below. However, one of the contributory factors
has been a regulatory bias towards the banks and against the capital markets. This has
taken several forms including limiting the amount of bank credit to the capital market,
unwillingness to allow exchange clearing houses and depositories direct access to the© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
protection extended to the banking system. Faced with a financially weak banking system,
the policy makers have been unwilling to bite the bullet and recapitalise the predominantly
state owned banks to restore their financial health. Instead the policy has been to provide a
cosy regulatory regime in which the dominant oligopolistic banks are insulated from
competition from new entrants as well as competition from non bank sources of capital. The
implicit hope has been that this protected environment will allow them to survive even if they
are financially weak.
• The nature and pace of banking sector reforms has been designed to reduce the ability of
new banks to take market share away from the incumbents by aggressive competition. I
would like to mention in particular the niggardly rate at which new bank licences have
been doled out, a licencing policy that effectively excluded most promoters with deep
pockets, the extreme restrictions on branch expansion and rationalisation, and ill
concealed regulatory hostility to innovation and aggressive marketing. All this meant that
the incumbent big banks faced very little threat from new entrants.
• At the same time, potential competition from outside the banking system was ruthlessly
destro
yed:
The development financial institutions that were financially very sound at the
beginning of the reform process were not allowed to transform themselves into
universal banks until their financial strength had been substantially eroded. This issue
is
described in more detail in 3.4 above
The non bank finance companies (NBFCs) that despite their higher cost of funds
competed intensely with the banks on the basis of speed, flexibility and innovation
were systematically destroyed in the second half of the nineties. In line with
international practices, the NBFCs’ access to retail funds was severely curtailed. At
the same time, the regulatory regime did not allow the NBFCs to fund themselves
eff
ectively in the wholesale markets as they do globally.
The very hesitant moves towards capital account convertibility described in 2.2 above
have meant that the banks have not had to face cross border competition on the scale
that might have been expected in the early 1990s. Moreover restrictions on foreign
banks operating in India have made them less of a competitive threat than they might
ot
herwise have been.
The regulatory regime for money market mutual funds has been designed to prevent
th
em from competing effectively with the banks.
The capital markets have been in a state of decline since the early/mid 1990s for a
variety of reasons as described in 5.9 below. However, one of the contributory factors
has been a regulatory bias towards the banks and against the capital markets. This has
taken several forms including limiting the amount of bank credit to the capital market,
unwillingness to allow exchange clearing houses and depositories direct access to the© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
Insurance 2 (Competition and Ef iciency)
Early in the reforms process, it was recognised that greater competition and innovation would
be required so that the public received better financial services. In its mid term review of the
reform process (Ministry of Finance, 1993), the government stated: “Our overall strategy for
broader financial sector reform is to make a wide choice of instruments accessible to the
public and to producers. ... This requires a regulatory framework which gives reasonable
protection to investors without smothering the market with regulations. ... It requires the
breaking up of monopolies and promotion of competition in the provision of services to the
public.”
Unfortunately, this is one area where actual progress has lagged far behind stated intent. It is
true that some steps have been taken to increase competition between financial intermediaries
both within and across categories. Banks and financial institutions have been allowed to enter
each other's territories. Fields like mutual funds, leasing, merchant banking have been thrown
open to the banks and their subsidiaries. The private sector has been allowed into fields like
banking and mutual funds. Nevertheless, major structural barriers remain:
• All major banks and financial institutions continue to be government owned and
government managed.
• The entire mechanism of directed credit and selective credit controls built up over the
years is still in place, and is being strengthened in certain areas.
• Financial intermediaries have often been compelled to set up separate arms’ length
subsidiaries while entering various segments of the financial services industry. This has
prevented them from benefiting from economies of scope.
• Competition has also been hindered by the undiminished power of cartels like the Indian
Banks Association (IBA). In fact, these cartels have been accorded the tacit support of the
regulators. These half hearted attempts at promoting competition raise fears about the
extent to which our regulators have succumbed to regulatory capture by the organizations
that they are supposed to regulate.
• On the technological front, progress has been slow in important areas. The payment
system continues to be primitive despite the central bank’s attempts to create an
Electronic Fund Transfer System (EFTS). Archaic elements of the telecom regulations
have prevented the financial services industry from benefiting from the confluence of
communications and computing technologies.
If we imagine a Rip Van Winkle going to sleep in the early 1990s and waking up today, he
would not see that much has changed at the grass roots level in the provision of banking
services. (The most visible change would be the much greater spread of credit cards – a
financial innovation that has little to do with regulatory action).
The extremely slow progress in this area means that the Indian consumer has not seen the
benefits of financial sector reforms in the form of better service, better products or better
prices. The efficiency gains of financial sector reforms have simply not happened.© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
be required so that the public received better financial services. In its mid term review of the
reform process (Ministry of Finance, 1993), the government stated: “Our overall strategy for
broader financial sector reform is to make a wide choice of instruments accessible to the
public and to producers. ... This requires a regulatory framework which gives reasonable
protection to investors without smothering the market with regulations. ... It requires the
breaking up of monopolies and promotion of competition in the provision of services to the
public.”
Unfortunately, this is one area where actual progress has lagged far behind stated intent. It is
true that some steps have been taken to increase competition between financial intermediaries
both within and across categories. Banks and financial institutions have been allowed to enter
each other's territories. Fields like mutual funds, leasing, merchant banking have been thrown
open to the banks and their subsidiaries. The private sector has been allowed into fields like
banking and mutual funds. Nevertheless, major structural barriers remain:
• All major banks and financial institutions continue to be government owned and
government managed.
• The entire mechanism of directed credit and selective credit controls built up over the
years is still in place, and is being strengthened in certain areas.
• Financial intermediaries have often been compelled to set up separate arms’ length
subsidiaries while entering various segments of the financial services industry. This has
prevented them from benefiting from economies of scope.
• Competition has also been hindered by the undiminished power of cartels like the Indian
Banks Association (IBA). In fact, these cartels have been accorded the tacit support of the
regulators. These half hearted attempts at promoting competition raise fears about the
extent to which our regulators have succumbed to regulatory capture by the organizations
that they are supposed to regulate.
• On the technological front, progress has been slow in important areas. The payment
system continues to be primitive despite the central bank’s attempts to create an
Electronic Fund Transfer System (EFTS). Archaic elements of the telecom regulations
have prevented the financial services industry from benefiting from the confluence of
communications and computing technologies.
If we imagine a Rip Van Winkle going to sleep in the early 1990s and waking up today, he
would not see that much has changed at the grass roots level in the provision of banking
services. (The most visible change would be the much greater spread of credit cards – a
financial innovation that has little to do with regulatory action).
The extremely slow progress in this area means that the Indian consumer has not seen the
benefits of financial sector reforms in the form of better service, better products or better
prices. The efficiency gains of financial sector reforms have simply not happened.© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
Insurance
Private sector insurance companies started operating in India in 2000, several years after the first proposal to allow their entry. The Insurance Regulatory and Development Authority (IRDA) has been set up as the apex regulator for this sector. It is still too early to assess the likely impact of the new players. In the first few months, however, the new entrants do appear to have injected greater competition and dynamism into India’s insurance industry. The IRDA has also embarked on a regulatory programme that encourages greater professionalization and modernization of this sector. It has taken commendable initiatives for training and certification of insurance agents and for encouraging the development of an actuarial profession. In the past, bright students who were attracted to the actuarial profession by its potential to apply mathematical concepts to real life problems discarded the idea because of the total lack of scope for actuaries in India’s nationalised insurance industry.
The major area where insurance reforms have not been sufficiently far reaching is in the area
of investment restrictions. Sections 27 and 27A of the Insurance Act place restrictions on
investments in shares and corporate bonds. Not only are the quantitative ceilings
unnecessarily restrictive, but the qualitative restrictions are not in tune with a modern capital
market. For example, the eligibility conditions for corporate debt do not involve the notion of
credit rating at all, but depend on quite meaningless backward looking notions of financial
soundness.
The key question that remains to be seen is how receptive the regulatory regime would be to
financial innovation. The IRDA could play a catalytic and facilitating role here though the
restrictive features of the Insurance Act would restrict its freedom.
Of particular importance would be the regulatory stance towards capital market linked
insurance products like variable life and universal life policies. The Life Insurance
Corporation has introduced a variable life policy called Bima Plus. Unlike in the United
States where such products are subject to regulation as mutual funds by the securities
regulator also, Bima Plus appears to be regulated only as an insurance product and not as a
mutual fund. Whether this would spur innovation or lead to regulatory arbitrage remains to be
seen.© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved
The major area where insurance reforms have not been sufficiently far reaching is in the area
of investment restrictions. Sections 27 and 27A of the Insurance Act place restrictions on
investments in shares and corporate bonds. Not only are the quantitative ceilings
unnecessarily restrictive, but the qualitative restrictions are not in tune with a modern capital
market. For example, the eligibility conditions for corporate debt do not involve the notion of
credit rating at all, but depend on quite meaningless backward looking notions of financial
soundness.
The key question that remains to be seen is how receptive the regulatory regime would be to
financial innovation. The IRDA could play a catalytic and facilitating role here though the
restrictive features of the Insurance Act would restrict its freedom.
Of particular importance would be the regulatory stance towards capital market linked
insurance products like variable life and universal life policies. The Life Insurance
Corporation has introduced a variable life policy called Bima Plus. Unlike in the United
States where such products are subject to regulation as mutual funds by the securities
regulator also, Bima Plus appears to be regulated only as an insurance product and not as a
mutual fund. Whether this would spur innovation or lead to regulatory arbitrage remains to be
seen.© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved
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