Business Today | August 28, 2016

GST: FIVE THINGS THAT NEED TO BE DONEwww.businesstoday.in August 28, 2016 `60MISSIONIMPOSSIBLE?Suresh Prabhu hastaken up the challengeto make Indian Railwaysfast, efficient and profitable.But he faces extraordinaryodds in his quest





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From the Editor http://www.businesstoday.inThe Clean-up Season Editor-in-Chief: Aroon PurieOn August 3, a Wednesday, the Rajya Sabha finally passed the Goods & Group Chief Executive Officer: Ashish Bagga Services Tax Constitutional Amendment Bill, clearing the path to implement the most ambitious tax reform in the country. GST has been Group Editorial Director: Raj Chengappatalked about since 2006, and was introduced as a bill in the Lok Sabha in I2011, but it was stalled by the opposition parties. Even after the Modi govern- Editor: Prosenjit Dattament came to power in 2014, it has taken over two years of negotiations forthe GST Constitutional Bill to clear both Houses of Parliament. Managing Editor: Rajeev Dubey If it works exactly as it is envisaged, it will bring in enormous tax trans- Deputy Editors: Alokesh Bhattacharyya, Venkatesha Babu,parency, cut out the plethora of tax rates, bring down tax disputes dra- Anand Adhikarimatically and, in the long run, make a host of goods cheaper because the Ioverall tax burden is expected to come down. In theory, it will also cut offtax arbitrage, and turn the country into a common market with every CORRESPONDENTSproduct and every service taxed uniformly whether you are in Kashmir orin Kerala. The Union government hopes that it can be implemented by Senior Editors: P.B. Jayakumar, Nevin John, Goutam Das,April 1, 2017. Mahesh Nayak, Ajita Shashidhar Senior Associate Editor: Joe C. Mathew Meeting that target will be a tall order because of the number of steps Associate Editors: E. Kumar Sharma, Dipak Mondal,involved before GST can be implemented across the country. The Bill will Manu Kaushik, Anilesh Mahajan, Sarika Malhotra, Chanchal Pal Chauhan, Sumant Banerji also have to be ratified by at least 50 per cent of Senior Assistant Editor: Nidhi Singal state assemblies, which the government hopes will Principal Correspondent: Sonal Khetarpal happen before the end of the month. After that, the President needs to give his assent, and then I different states need to present their own bills to the respective assemblies, the IT backbone needs RESEARCH to be developed in both the Centre and the states, and a number of other details tied up, including Principal Research Analysts: Niti Kiran, Avneet Kaur training of officers on the new tax system, before it is rolled out. Even the tax rates for different I goods and services will need to be worked out in detail, though some work has already gone into COPY DESKit. All the states will also have to work out their own GSTs, within the ambitof the overall GST. Ideally, all states should adopt uniform GST rates for Senior Editors: Rishi Joshi, Mahesh Jagotasimilar goods, but that is by no means certain. And if the rates are not Associate Editor: Samarpan Duttauniform, some degree of tax arbitration will happen. Still, in the long run, Chief Copy Editors: Gadadhar Padhy, Sapna Nair Purohitit is a far better system than what we follow currently. It represents a mas- Satyam Sharmasive clean-up and restructuring of the tax system to make it more efficient Senior Sub Editor: Devika Singhand broad-based. In our GST package, we give you the basics of how GST Iworks and what is needed to be done now. We will continue giving youupdates as and when the Centre and the states take the next steps. PHOTOGRAPHY Talking of clean-up and efficiency, Railway Minister Suresh Prabhu hastaken on the task of doing that at the Indian Railways. It is a gargantuan Photo Editor: Vivan Mehratask, given how big the organisation is and how inefficient it is currently. Deputy Chief Photographer: Shekhar GhoshPrabhu is one of the most efficient ministers in the government and he has Principal Photographers: Rachit Goswami, Nilotpal Baruahmade commendable progress. But even by his estimates, the task may take Senior Photo Researcher: Nikhil Vermawell over 10 years. So far, much of the changes he has initiated have notreally started making too much difference to the overall project execution Iand finances of Indian Railways. In our cover story this issue, Associate Editor Anilesh S. Mahajan takes ARTa look at the tasks before Prabhu and what he has managed so far. Assistant Creative Editor: Safia Zahid [email protected] Associate Art Directors: Amit Sharma, Ajay Thakuri @ProsaicView Assistant Art Director: Rajkumar Wahi Chief Designers: Vikas Gupta, Raj Verma Senior Designers: Devender Singh Rawat, Mohammed Shahid I PRODUCTION Chief of Production: Harish Aggarwal Senior Production Coordinators: Narendra Singh, Rajesh Verma I LIBRARY Assistant Librarian: Satbir Singh I Publishing Director: Manoj Sharma Associate Publisher (Impact): Anil Fernandes I IMPACT TEAM Senior General Manager: Jitendra Lad (West) General Managers: Upendra Singh (Bangalore), Velu Balasubramaniam (Chennai) Deputy General Manager: Kaushiky Chakraborty (East) I Marketing: Vipul Hoon, General Manager; Reynold Robert, Brand Manager I Newsstand Sales: D.V.S. 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Re: Letters to the EditorAjay Piramal – sions and commercial responses giving full details such as taxes paidthe Trendsetter show intuitive intelligence in action. now, and what they will be afterThis refers to your cover story on His professional teams consist of do- the Act is passed. It is in the na-Piramal Enterprises (The Contrarian, main experts who have contributed tion’s interest to fix GST rate at notAugust 14). It was an interesting immensely in transforming this more than 10 per cent. It shouldstudy of the history of the Piramal group and taking it to greater be guaranteed that rates shall notGroup under the leadership of Ajay heights. Piramal Group is a stark ex- be increased for at least 10 years.Piramal. In the present complex ample of professionalism. Swati Also, small business houses shouldbusiness environment – making it Piramal is on the Board of Overseers be exempted from it. The basicdifficult for entrepreneurs to flourish of Harvard University. She has been exemption should be linked to– Ajay Piramal has become a trend- elected in recognition of her busi- inflationary index.setter. His reading of the ground sit- ness acumen. And the family mem-uation is perfect and he doesn’t have bers have also proved their mettle in M. Kumar, New Delhia herd mentality. Piramal’s contrar- the diverse operations of the group.ian strategies have yielded rich divi- No doubt, Piramal is contrarian but The Digital Avatardends and he has hit pay dirt in his he has demonstrated that he knows This refers to your feature onvarious business ventures. His focus when to enter and exit businesses. blockchain technology (Chain ofon financial services once again He has an uncanny sense of timing. Transparency, August 14). The au-shows his business acumen. The No wonder then that many have thor has well analysed the virtualcreation of a resurgent fund is compared him to Warren Buffett. currency transaction. Bitcoin,timely and the stressed asset market which is used to buy things elec-has potential. The formation of an B. Rajasekaran, Bangalore tronically, may be a new conceptinformation management board is a for India, but it has been quite pop-unique initiative to manage their Curbing Black Money ular in Western countries for anbusiness activities judiciously. This refers to your article on black easy, transparent, and hassle-freeIndeed, Piramal has demonstrated money (Lessons Learnt, August 14). monetary transaction.to others how to manage risks and The Supreme Court-appointed SITmanoeuvre unforeseeable forces wants a ban on cash transactions B.S. Acharya, Berhampurcomfortably. His management deci- above `3 lakh and a cap on cash holdings at `15 lakh to curb black Concrete Efforts a Must money. Both these suggestions will to Revive the Ailing AI do more harm than good to the This refers to your article on avia- economy. The idea also goes tion (Not There Yet, July 17). The against a citizen’s right to deal in range of new initiatives aimed at cash, and is impractical to monitor. making the Indian civil aviation Banking has its own set of prob- sector competitive is fine, but con- lems. The best way to curb black crete efforts were also expected money is to abolish income tax. from the government to revive the ailing national carrier, which has Mahesh Kapasi, New Delhi become worse after the merger of Indian Airlines with itself. Tax Implications Whether the decision was good This refers to your article on GST or bad is a matter of long debate, (Missing Pieces, August 14). There but the fact is that Air India re- is much hype that GST will relieve quires the top attention of the business houses from various taxes government. and lead to simplification of taxes, too. A chart of the tax implications S. Umashankar, Nagpur must be issued in the public interest Send all your comments to: [email protected] HOW TO WRITE TO: FOR SUBSCRIPTION ASSISTANCE WRITE TO: BT SCRAPBOOKCONTACT The Editor, Business Today, India Today Mediaplex, FC- Customer Care, India Today Group, A-61, 8, Sector 16/A, Film City, Noida-201301. Sector-57, Noida (U.P.) — 201 301 React to articles in BTBT Email: [email protected]/[email protected] Suggest story ideas Website: www.businesstoday.in Phone: (0120) 2479900 from Share your experience as consumer or SME Unsolicited articles will not be returned Delhi & Faridabad; (0120) 2479900 See what others have to say on our stories or acknowledged. (Monday-Friday; 10 am-6 pm) from Rest of India; Toll free no. 1800 1800 100 on scrapbook at www.businesstoday.in Business Today reserves the right to edit letters (from BSNL/ MTNL lines); Fax: (0120) 4078080 for brevity and clarity before publication. E-mail: [email protected] BUSINESS TODAY August 28 2016



CONTENTS AUGUST/28/2016 COVER PHOTOGRAPH BY BANDEEP SINGH VOLUME 25/NUMBER 17 PHOTO MONTAGE BY AMARJEET SINGH NAGI42 COVER STORYMISSION IMPOSSIBLE?Suresh Prabhu is on a mission to make the IndianRailways fast, efficient and profitable. But he facesextraordinary odds in his quest54 Interview: “Organisational restructuring will be the key to transformation”56 Column/ Lalu Prasad and Sudhir Kumar “Railways slipping into a financial morass and terminal debt trap”VIVAN MEHRA

UPFRONT FEATURES 14 I Quick takes 32 I Picture Perfect on major events Brands are now using image-sharing platforms to woo consumers FOCUS 34 I Tax Trap18 Even as the government pushes for a more ‘predictable’ tax regime, corporate 18 I The Final Frontier tax disputes continue to rise The GST Bill may have passed the Rajya Sabha test, but it has to get past many 38 I Shanghai Surprise big hurdles before it can be implemented A little-known Chinese pharma company 24 I Graphiti: The Mother buys an equally less-known Indian firm for of All Tax Reforms an astronomical valuation, and causes a 26 I Caught in the Crosshairs stir in the industry. Why exactly did the Anandiben Patel may have paid the price deal happen? for Gujarat’s poor social development record under Narendra Modi INTERVIEW 27 I A Call for Reform It is imperative to change policy 58 I “We are seeing interest from discourse from food security to companies across the board” nutrition security Atanu Chakraborty, Director General of Hydrocarbons 28 I It’s a Tsunami A funding crunch has triggered a spate 62 I Self Goal of M&As among India’s consumer The ugly spat between McDonald’s and Internet companies this year Vikram Bakshi, its franchise partner, is 30 I Final Recall taking a toll on the brand’s fortunes in Under the new proposals, the Centre India with competition fast catching up could even order manufacturers to recall vehicles if customers complain 68 I Struggling Unicorn of a safety defect InMobi, India’s first billion-dollar-valuation start-up, is finding it difficult to raise funds and survive independently Naveen Tewari, CEO & C0-founder, InMobi 74 I Racing Ahead UVs are fast becoming the most popular category in passenger vehicles. What attracts customers to them? 78 I Spammed! The thriving business of sending promotional SMSes and mails means the menace is unlikely to vanish 84 I Home (Not So) Alone True to its name, Health Care at Home brings hospital care, ranging from injection to chemotherapy, to your doorstep HBR Exclusive 90 I Knowing When to Reinvent Detecting marketplace “fault lines” is the key to building the case for pre-emptive change August 28 2016 BUSINESS TODAY 11

CONTENTS businesstoday.inPERSONAL TECH STAY CONNECTED WITH US ON www.facebook.com/BusinessToday100 I Track ’em DownA range of Bluetooth tags @BT_Indiaand GPS-enabled devicesis making it impossible to PERSPECTIVESlose things such aswallets, keys and Top-up Your Plan to Increaseluggage. Read on to Health Insurance Coverknow how to use them The top-up health plan is a regular indemnity policy that covers admissible expenses afterEX-LIBRIS the threshold limit is breached104 I The Great Derangement, Climate businesstoday.in/healthinsurance-topupChange and the Unthinkable: Wake-up Call Road to Cyrus Mistry’s 2025 Target The Tata Group chief wants substantive 112 I PEOPLEBUSINESS ARUN JAITLEY leadership and workforce at the company’s Finance Minister businesses like steel, motors, power,112 chemicals, tea, and hotelLEADERSPEAK businesstoday.in/tatagroup-mistry114 I Julia Stiglitz Myntra’s Jabong Buy Might Reduce the Discount FrenzyVP, Coursera With this acquisition, Myntra will be a strong competitor in the fashion and An Feature Page: 100-101 lifestyle category, and can also save cost from the aggressive marketing and From time to Find the Right Job on Page: 108-111 advertising campaignstime, you will see pages Jobs Today businesstoday.in/myntra-jabong titled “An Impact Feature” or Get Lucky. Get Active on Monster. Why Yahoo Could Actually Do Better Under Verizon “Advertorial” in Better Access Better Connections Verizon had acquired AOL last year, and Business Today. This is Better Jobs with Yahoo, the telecom company could, no different from an indeed, become the third large force in advertisement and the Powered by: the online advertising marketmagazine’s editorial staff is not involved in its ® businesstoday.in/yahoo-verizon creation in any way. Find Better. ™ NEWS GST Bill: Should You Delay Your Car-buying Plan? Once GST comes into force, the taxation on cars will see a drastic reduction businesstoday.in/gst-car Modi Govt Picks Up Speed on Infrastructure Out of 1,076 ongoing projects, 330 show time overrun, 241 show cost overrun, and 70 show both time and cost overruns businesstoday.in/nda-infrastructure COLUMN Five Reasons for the Ongoing Rise in Indian Equity Market But the investors should stick to frontline stocks which are generating positive cash flows rather than getting trapped in penny stocks, says Mahesh Nayak businesstoday.in /stockmarket-newhigh



UPFRONT 3.6 billion is the number of Internet users, globally, as of June 2016, according to a report by internetworldstats.com. That's more than 49 per cent of the world population. QUOTE AJAY THAKURI BEZOS PASSESAJAY THAKURI “People in BUFFETT villages are chanting a new Amazon slogan: Arhar founder and Modi, Arhar CEO Jeff Bezos Modi, Arhar emerged as the Modi” third-richest person in the world – Congress Vice-President Rahul with an estimated wealth of Gandhi took a break from his $65.3 billion, going past Warren power naps to attack PM Buffett’s $64.9 billion. Narendra Modi on rising prices of pulses in Lok Sabha. A PLACE IN THE SUN “In June 2014 CPI The Centre aims to create 10 was 6.77 and WPI solar zones, each covering was 5.66. Did FM 10,000 hectares of uncultivable, add the two fallow or wasteland, by 2021, to numbers? Voodoo realise the 100,000 MW solar statistics!” power target by 2022. The ministry of renewable energy – Congress leader P. Chidambaram will extend financial assistance tweeted, rejecting Arun Jaitley’s of `44 crore for the projects. contention in Lok Sabha that the UPA government left behind double ADRENALINE RUSH digit inflation. Seventeen days, 10,500 athletes, SBI LOSES WEIGHT, FAST 33 venues and 450,000 condoms sum up the Rio Olympics. The State Bank of India is considering relocating camisinhas, or little shirts in or shutting down 30 per cent of its 24,000 Brazilian, are being supplied by branches to remain competitive, as advised the International Olympics by global management consultant Committee for the 2016 Summer McKinsey. Games. That’s 42 condoms per athlete, which, even by Olympic 14 BUSINESS TODAY August 28 2016 standards, is record-shattering.



CALENDAR10 10 11 12 13KNOW YOUR LEADING CHANGE SPICE IT UPRIGHTS WHAT: National Leadership WHAT: 9th InternationalWHAT: Roundtable on Conference 2016 FAD 2016 SummitImplementation ofNational IPR Policy WHEN: 10-11 August, WHEN: 12-13 August, Kolkata AhmedabadWHEN: 10 August, Kochi WHAT TO LOOK FOR: Leading WHAT TO LOOK FOR: TheWHAT TO LOOK FOR: The and managing change summit will have nationalobjective of the event has emerged as the and internationalby CII will be to discuss biggest challenge for stakeholders,the highlights of the new-generation representatives from theNational IP Policy 2016 and businesses. The CII event will Union and statechart a road map for effective help leaders visualise a governments, investors,implementation by response strategy and to industry leaders, tradediscussing it with all think fast and think different bodies and experts to sharestakeholders and in this volatile, uncertain, their knowledge in foodunderstanding their complex and ambiguous processing, agriculture andexpectations. (VUCA) world. dairy business.16 17 BANKING ON DISRUPTIONS 01 WHAT: FIBAC 2016: New Horizons In Indian Banking TOOLS TO ACHIEVE GOALSWHEN: 16-17 August, Mumbai WHAT: 2nd NASSCOMWHAT TO LOOK FOR: Federation of Indian Chambers of Commerce and MarTech ConfluenceIndustry and Indian Banks' Association will host the 15th edition ofthe FIBAC to discuss inclusive growth and disruptive innovations that WHEN: 1 September, Mumbaiwould help chart the roadmap for the future of the banking industry.RBI Governor Raghuram Rajan, and deputy governors R. Gandhi and WHAT TO LOOK FOR: TheS.S. Mundra will be the main speakers at the two-day event. confluence organised by NASSCOM aims to guide and inspire businesses to use technology in marketing to drive deeper brand visibility among the target market.WATER WORLD 28 02WHAT: 2016 World Water WeekWHEN: 28 August- 2 September, StockholmWHAT TO LOOK FOR: The event organised by SIWI and WorldBank will have experts, practitioners, decision-makers,business innovators and young professionals from across theglobe to foster new thinking and develop solutions to themost pressing water-related challenges of the day.16 BUSINESS TODAY August 28 2016

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RAJ VERMA 28 It’s a TsunamiFOCUS30FinalRecall The Final Frontier The GST Bill may have passed the Rajya Sabha test but it has to get past many big hurdles before it can be implemented. By DIPAK MONDAL

T he Goods and Services Tax (GST) NEXT law and draft rules for Central GST, may be a reality by next year with BIG HURDLES Integrated GST and State GST. The rules the Rajya Sabha passing the GST for the first two will be mentioned in theConstitution Amendment Bill on August GST Bill. The Congress and some other3. Though this is a big development parties want a debate and voting in bothconsidering that the country’s biggest The law-making process houses of Parliament, and want the GSTtax reform till date was in the works for (ratification by states, Bill to be tabled as a finance Bill and notclose to a decade, the nod to the framing of rules and a money Bill. A money Bill cannot beConstitution Amendment Bill is just the building consensus on stalled in the Rajya Sabha, where thefirst step and several big challenges government is in a minority and so can CGST and SGST)await the Central government – finalisa- be tripped. The government wants thesetion and passage of the GST Bill (the processes to be over by the winter ses-Amendment Bill just changes the sion of Parliament.Constitution to empower the Centre and Ironing out flaws in Model Law Flawsstates to levy GST; the actual implemen- the Model GST Law:tation will require the passage of the GST (dual administration, The GST implementation will require theBill), ratification of the Amendment Bill increased compliance government to build a consensus on theby two-thirds majority by half the state Model GST Law. However, the Model burden, etc)assemblies, ironing out of flaws in the Law, which will be the basis of the futureModel GST law released a few months GST law, has been poorly drafted and hasago and rollout of the IT infrastructure Calculation of a lot of ambiguities.that will process billions of documents compensation to states It also increases the compliance bur-and bits of information that businesses den. Take, for instance, services compa-will upload every month under the new nies, such as in banking and telecomsystem. sectors. Since states, too, will get to taxThe deadline of April 1, 2017 the services under GST, these companies willgovernment has set itself for the final Finalising the GST have to get themselves registered inrollout is ambitious, to say the least. rate structure every state where they pay tax. A com-Law Making pany with operations across the country will have to get itself registered at 31The government will have to go through places (29 for SGST, one for CGST and onethe grind of Parliamentary processes Deciding the list of for IGST). A State Bank of India reportagain to get the Constitution exempted goods and says the number of returns the bank willAmendment Bill passed in the Lok have to file will increase from three to servicesSabha. This will require two-thirds ma- 1,296. This can be inflationary as ser-jority but will not be difficult given that vices account for 57 per cent of thethe ruling National Democratic Alliance country’s gross domestic product. Therehas 336 seats as against the 362 votes Training of tax officers are four types of returns that most GSTthat it will need. Getting it ratified by 50 and preparedness taxpayers will have to file — return forper cent (at least 15) assemblies won’t be of industry supplies, return for purchases, threedifficult either as 14 out of 29 states are monthly returns and one annual return.ruled by the Bharatiya Janata Party, or Another flaw that Rajeev Dimri,BJP, or its allies. Partner, BMR & Associates LLP, points “This can be done without difficulty Getting the IT out is that supplies without considera-as 12 states are ruled by the BJP and infrastructure ready tion will be taxed. “This could meanroughly two-third of India’s 29 states supply of goods and services between, on timeare consumption-intensive and so will say, two branches of one entity would begain from GST,” says an HSBC Global Research report. taxable. The government needs to clarify on this,” heThe next step will be formation of the GST Council, says.which will have Union finance minister and state fi- The model law also says that input credit will benance ministers as members. It will decide the GST rate available only on a matching concept basis, “meaningas well as all the different exemptions and thresholds. It that inward supply should be matched with outwardwill also finalise the GST Bill. supply and tax payments made before tax credits areThe tasks listed so far are the easier ones. The real applied for. This means that while you will pay the taxchallenge will be building a consensus on the model GST immediately, the credit will be available with a lag, August 28 2016 BUSINESS TODAY 19

FOCUS GSTTHE ROAD TO GST creating cash flow issues for companies,” says Nidhi Goyal, Managing Director,2003 TAX Taxation, Protiviti, a risk, business consult- ing and internal audit firm.Kelkar Task Force on 2006indirect taxes suggests Experts also say that having to deal witha comprehensive Goods > Finance Minister P. Chidambaram proposes two authorities, the states and the Centre,and Services Tax (GST) introduction of GST from April 1, 2010, in Budget will defeat the main aim of GST, which is tobased on VAT principle speech for 2006/07 simplify the system. The Rajya Sabha also debated this with some members demand- > Phasing out of Central Sales Tax (CST) begins with ing that the turnover threshold for compli- reduction in the rate from 4 per cent to 3 per cent ance be kept at `1.5-5 crore. This would have meant that an entity with turnover 2008 2007 below this would be regulated by state tax authorities. > EC finalises views on broad GST Empowered Committee ofTAX structure – agreement on dual GST State Finance Ministers “If we are going to have two authorities, (EC) entrusted with the what is the use of GST, which is supposed to (Central and State GST), separate responsibility of preparing a be a uniform tax? No business would want legislation, levy and administration design and road map for GST the law in its current form,” says M.S. Mani, > CST rate reduced further from 3 Senior Director, Deloitte Haskin & Sells LLP. per cent to 2 per cent The GST Model Law is open for public2009 2011 TAX discussion and suggestions. It will then go to the GST Council.> Joint working group of Constitution (115th Amendment) officers from Central and state Bill introduced in the Lok Finalising the Rate governments constituted Sabha. Referred to the Standing Committee on Finance The biggest bone of contention is expected> EC releases first discussion paper to be the peak rate. It will be decided by the> 13th Finance Commission releases GST Council. The GST Committee, headed by Chief Economic Advisor Arvind report on GST Subramanian, has suggested a rate of 17- 19 per cent. Finance Minister Arun Jaitley 2013 2012 said in his speech in the Rajya Sabha that state finance ministers differed with the > Parliamentary Standing Committee submits Committee on GST calculation of the GST Committee.TAX report to the Lok Sabha Design, comprising officials of Central/ “They (states) sought a slightly higher > Most recommendations of the EC and the state governments and rate as they wanted a cushion. The first fac- Standing Committee accepted the EC, formed tor is that the report does not take into consideration – it is based on the 2013/14 > EC rejects Central government's proposal to figures – cesses that have been levied subse- include petroleum products under GST quent to that. The second factor it did not take into consideration was the compensa-2014 2015 tion the Centre would have to pay to the states. If you take it (the committee’s recom-> Some of EC's recommendations incorporated > Bill is passed by the Lok Sabha mendation) as a band of 17-19 per cent, in the Draft Constitution Amendment Bill > Bill referred to the Select and add these two factors, it will move slightly up,” he said.> 115th Constitutional (Amendment) Bill, 2011, Committee of the Rajya lapses with dissolution of the 15th Lok Sabha Sabha after opposition from The states will bargain hard over the Congress; select committee rates. Most have their financial constraints> Draft Constitution Amendment Bill sent to the submits report on July 22 and revenue loss fears. The states have two- EC after approval of the new government third voting rights in the GST Council. There are talks about giving states the flexibilityTAX 2016 to choose from a band of rates. However, most industry players and experts believe > Model draft law released in public domain that any rate above 20 per cent will defeat > Rajya Sabha passes the GST Constitution Amendment Bill the purpose of GST, will be inflationary, and will not be good for the country.20 BUSINESS TODAY August 28 2016



FOCUS GSTWHAT COMPANIES NEED TO DO easier said than done in a country as diverse as India.> Evaluate impact on various aspects of the business “In VAT, most goods suffer a very low> Initiate analysis and upgrade of present IT/ERP systems for rate. There is a huge number of exemptions. compliance If you suddenly jack it up to 23 or 24 per cent, it will be inflationary. And a high rate> On framing of GST laws, finalise the tax positions, pricing of goods/ will lead to tax evasion,” former finance services and, if needed, amend processes minister and now Rajya Sabha MP P. Chidambaram said while warning against> Evaluate the efficiency of procurement process and supply chain, a high GST rate. Deciding the exemption list eliminate redundancies could, therefore, become another issue be- tween states and the Centre.> Start discussions with suppliers/vendors to ensure free flow of GST benefits The Crisil report says though imposing GST on essential goods that are at present ex-> Initiate new registrations for compliance empted from either excise or VAT or both will increase their prices, more exemptions will> Educate stakeholders on impact; undertake training for employees in mean a high standard rate. all verticals of the organisation Training of OfficersWHAT STATES NEED TO DO This is one area that has not got sufficient> Approval of the GST Bill by more than 50 per cent states; at least 15 attention. Without proper training, tax of- assemblies should pass the Bill with two-thirds majority. ficers will raise unnecessary tax claims, leading to disputes. Also, state tax officers,> Initiate discussions with the Empowered Committee and the GST who have no experience of taxing services, Council on matters related to the GST rate may find themselves at sea if not trained properly. According to a recent presentation> Undertake drafting of the SGST laws in line with the CGST laws by Revenue Secretary Hasmukh Adhia, the government is planning to train 60,000> Pass SGST legislation in assemblies Central and state officials. It hopes to com- plete the training by December this year.> Restructure/overhaul IT systems for easier tax payments, filing of returns, grant of credits/ refunds, etc. Ensure seamless integration IT Network with the GSTN (the IT backbone) system The government claims that the IT infra-> Undertake training of tax officers structure — front-end and back-end — will be ready by March 2017. However, unless> Evaluate the incentive schemes and enable continuation of the the Central and state GST laws and rules are guaranteed benefits under the GST regime ready, it cannot be finalised. Tax officials of several states had told Business Today some- Source: BMR Advisors time ago that they would take at least six months after the GST rules were finalised to MANY EXPERTS Compensation Calculation fix the back-end. Even if the rules are final- SAY EVEN IF ised and passed by December this year as per The Centre will compensate the states for the government’s schedule, the states will THE LAWS AND any loss due to GST for the first five years. take another six months to finish the IT back-SYSTEMS ARE NOT Manufacturing states such as Tamil Nadu, end work. It is unlikely that the IT networkREADY BY APRIL 1, Maharashtra and Gujarat have resisted GST will be up and running by April 1, 2017. in the past due to fears over revenue loss as 2017, THERE IS it involves a shift from origin-based taxation Lastly, while a lot of focus has been on NO HARM IN to consumption-based taxation. This means the April 1 deadline, many experts say even the state where goods and services are con- if the laws and systems are not ready byIMPLEMENTING THE sumed has the right to tax them. Already, then, there is no harm in implementing theTAX A QUARTER OR many states have started giving loss figures. regime a quarter or so later. They say there Tamil Nadu is claiming that it will lose are several precedents of GST being imple- SO LATER `9,270 crore, while Maharashtra and mented from the middle of a financial year.~ Gujarat are claiming losses of `14,000 crore and `11,000 crore, respectively, every year. @Dipak_Journo The Centre will have to come up with its own estimate before decide the compensation. This could lead to Centre-state disputes and strain the former’s finances. Exemption list A Crisil report says that around 300 items are exempted from central excise duty and around 90 items from value-added tax, or VAT, in the current system. The government will have to decide a final list. Mani of Deloitte says it will have to ensure a uni- form list to avoid complexity. He says this is22 BUSINESS TODAY August 28 2016



FOCUS GraphitiTHE MOTHER OFALL TAX REFORMSTHE RAJYA SABHA HAS PASSED THE GST BILL,PAVING THE WAY FOR TURNING INDIA INTO ACOMMON MARKET. WE TELL YOU HOW THE NEWSYSTEM WILL IMPACT COMPANIES AS WELL ASINDIVIDUALSGraphic by: Tanmoy ChakrabortyResearch by: BMR Advisors and Avneet KaurTHE UMBRELLA TAXThe implementation of the GST will mark a drasticreduction in the number of taxes and leviesTO BE SUBSUMED INTO GSTCENTRAL LEVIES STATE LEVIES PEAK RATES Excise duties, VAT, including HUNGARY 27including the purchase tax DENMARK 25additional excise SWEDEN 25duties Entry tax, octroi, CROATIA 25 local body tax FINLAND 24 Additional duties ROMANIA 24of customs Entertainment tax (unless levied Central sales tax by local bodies)(levied by Centreand collected by Taxes on lottery,states) betting and gambling Service tax Surcharges and Cesses and cesses levied bysurcharges levied statesby the Centre NOT TO BE SUBSUMED INTO GST Customs duty, stamp duty andelectricity duty Taxes on liquor (for humanconsumption) Taxes on petroleum products to besubsumed in the near future on therecommendation of the GST CouncilSource: BMR Advisors in %; Source: EY; SBI Research

HARDLY PRICING IMPACT PRICING IMPACTINFLATIONARY ON GOODS ON SERVICESInflation usually falls afterGST implementation CURRENT REGIME CURRENT REGIMEPRE-GST | POST-GST Manufacturer's selling 1,000 Price (inclusive of non- 1,000 priceAUSTRALIA creditable taxes against Excise duty at 12.5% 125 service tax liability). Tax of2 |3 `20 included in the priceCANADA VAT at 14% 158 Service tax @15% 1502.2 | 1.5 Cost to retailer 1,125 Price paid by the 1,150 consumerNEW Add profit margin 113ZEALAND @10% GST REGIME12.1 | 7.3 (on manufacturer's selling Price price and excise duty) CGST and SGST @18%SINGAPORE Price paid by the Sale price to customer 1,238 consumer 9802.9 | 1 176 VAT at 14% 173 1,156in %; Source: SBI Research Price paid by the 1,411 consumer GST REGIME Figures in `; Source: BMR Advisors Manufacturer's selling 1,000 50% price CGST and SGST @18% 180 Cost to retailer 1,000 Add profit margin @10% 100 OF STATE ASSEMBLIES HAVE TO RATIFY THE (on manufacturer's selling GST CONSTITUTION price and excise duty) AMENDMENT BILL Sale price to customer 1,100 CGST and SGST @18% 198 Price paid by the 1,298 consumer COMMODITIES COMMODITIES WITH NO GST WITH GST IMPACT WEIGH IMPACT WEIGH 68.3% IN CPI 31.7% IN CPI Housing Non-alcoholic Health beverages Education Personal care Prepared meals Transport and communication Clothing and Paan, tobacco and footwear intoxicants Housing Source: SBI Research Fuel and light Household goods and services Transport and communication Recreation and amusement

FOCUS Policy Caught In The Crosshairs Anandiben Patel may have paid the price for Gujarat's poor social development record under Narendra Modi. By JOE C. MATHEW A s Anandiben Patel read- 2004/05 prices), the average ies to vacate the Gujarat daily wages of male casual Chief Minister’s post, one workers in rural areas of of the major complaints against Gujarat was `116, far below her is that she was unable to the national average of `149 sustain the pace of the much for the same category of work- publicised “Gujarat Model” of ers. The overall health indica- development practised by her tors of Gujarat vis-a-vis na- predecessor and current Prime Anandiben Patel: tional average showed that the Minister, Narendra Modi. Bowing out State ranked 11th among the 19 big States in birth rate, Patel did not limit herself to the exact policy priorities of her ninth in infant mortality ratio predecessor after she took charge two years and sixth in maternal mortality ratio. The ago. While she continued to patronise mega State was 12th in total fertility rate. The latest shows like Vibrant Gujarat and Modi’s other Swachhta Status Report 2016 indicates that pet programmes for industrial development, 48.1 per cent of households in rural Gujarat she also looked at areas getting less attention defecate in the open. Thus, Gujarat must have in the earlier regime. been leading in terms of industrialisation, but Patel set aside more funds in the budget it was way below when it came to rural for tackling the state’s poor social develop- wages, skill development, and several other ment track record. The contradiction that social development indices. Patel’s diagnosis existed while she took over was glaring. While was correct. There was a social unrest in the the per capita Net State Domestic Product of making that was not her creation. Gujarat at `57,447 was much higher than The CAG Report on Gujarat, tabled on the national average (the per capita Net March 31, 2016, is critical of the state gov- Domestic Product of India was `37,643 at ernment’s achievements on many of the so- cial development indicators. On healthcare, the report notes that while Gujarat’s position LAGGING BEHIND is better than the national average, it is not Gujarat trails other states in average wages of among the front ranking states of the country. male casual labourers* in rural areas In terms of skill development, CAG finds that STATES DAILY RANK AMONG 28 even after adding 97 new industrial training WAGES (IN INDIAN STATES institutes between 2010 and 2015, the aver- RUPEES) age number of students passing out remained Kerala 345.14 1 almost static. It also found that only 37 per- Punjab 202.35 9 cent of the 1.63 lakh candidates that were enrolled for practical training could pass the Tamil Nadu 196.65 11 apprenticeship exam during the period. Bihar 129.01 23 There could be dozens of political or stra- Gujarat 115.77 26 tegic reasons for Anandiben Patel quitting her job. But the fact remains that the “Gujarat Madhya Pradesh 107.63 27 Model” needs lots of patchwork. Perhaps Chhattisgarh 89.53 28 Congress leader Rahul Gandhi was right in India average 149.32 assessing that Patel was a victim of the poli- cies adopted by her predecessor for 12 years.~ *Aged 15 - 59 years and engaged in works other than public works in @joecmathew 2011/12; Source: Employment and Unemployment Situation in India, NSS 68th round, July 2011 – June 201226 BUSINESS TODAY August 28 2016

FOCUS Food SecurityA Call for ReformIt is imperative to change the policy discourse from foodsecurity to nutrition security. By SARIKA MALHOTRA SHEKHAR GHOSH India, despite making good progress in reduc- ing hunger. Says Prabhu Pingali, Professor,T hese may well be alarming statistics for Cornell University, and Founding Director of a country with one of the youngest Tata-Cornell Agriculture and Nutrition populations in the world. According to Initiative: “Much of the food policy is focuseda National Family Health Survey, anaemia on staples and reducing hunger, and that’samong children between six and 35 months the way it has been since the 1940s. India hashad gone up from 74 per cent in 1998/99 to made good progress in reducing hunger.79 per cent in 2005/06. The increase in the However, it has made little progress on reduc-percentage from 20 per cent to 23 per cent ing malnutrition. We still have problems ofduring the same period of children under hidden hunger, micro-nutrients deficiencies,three years with ‘wasting’ (low weight for iron deficiencies, vitamin deficiencies. Theseheight) was also damning. have long-term consequences. For children, it can lead to stunting and anaemia. For The situation is particularly alarming in adults, it can lead to poor nutrition outcomesBihar, Madhya Pradesh, Uttar Pradesh, – anaemia and low BMI for women.”Haryana, Chhattisgarh, Andhra Pradesh,Karnataka and Jharkhand where more than Pingali argues that food security requires70 per cent of the children in the age group of a very balanced food system. “Vegetables,six to 59 months are anaemic. pulses and lentils, which are so important for overall nutritional security, don't get the same Experts say malnutrition is a big worry for attention as the staples.” Instead, nutrition should be India’s number one priority. AFIGHT AGAINST MALNUTRITION country with a growing young populationIndia is one of the worst performers in South Asia should ensure healthy and productive people. “Even now when we talk about policies, we 48 48 47 45 take a commodity-specific approach. If it’s not 40 rice and wheat, its pulses, but we do not think about the overall systems,” he adds. 33 But to do so, the government is required 19 to put in a system where farmers can respond to the demands of the market and enhanceBangladesh Nepal India Maldives Pakistan Sri Lanka Bhutan the productivity of the entire food system, in- stead of reacting to a crisis. We have to think% of undernourished children; Source: Administrative Committee on about the long-term demand across all foodCoordination/Subcommittee on Nutrition, United Nations (2004) commodities, and how we fulfil that. We should have broader sets of projections into the future and then look at the big gaps and develop policies around it, says Pingali. Given our staple-focused mindset, consid- erable investment will have to be made in building awareness, making behavioural changes, and improving access to nutrition- rich food in order to feed a healthy productive population that can sustain economic growth over the long term. ~ @sarikamalhotra2 August 28 2016 BUSINESS TODAY 27

FOCUS M&A It's a Tsunami A funding crunch has triggered a spate of M&As among India's consumer Internet companies this year. By GOUTAM DAS RAJ VERMA first half of 2016 compared to $3.5 billion in the corresponding period last year. Barring The numbers point to a Tsunami of Snapdeal and ShopClues, none of the coun- mergers and acquisitions. In the first try’s other unicorns (Flipkart, Paytm, Ola, seven months of 2016, 123 M&A deals Quikr, Zomato, InMobi and MuSigma) or were closed in India worth more than half a those with valuations of over a billion dollars billion dollars. M&A activity was the highest raised any significant money in 2016 thus far. in July when 36 such deals were cracked, Easy money has dried up. By December last shows data from Xeler8, a deal sourcing and year, when the foodtech sector imploded, it start-up research platform. Flipkart’s acquisi- was clear that 2016 would be the year for a tion of Jabong may be the latest big-ticket reality check. Indeed, it is more of a bloodbath. purchase, but this heavy shopping bag also includes Quikr devouring CommonFloor in The top 10 per cent of the companies who January, Snapdeal acquiring a stake in were the biggest beneficiaries of irrational Gojavas in March, Future Group buying valuations in 2015 or earlier, are seeing a FabFurnish in April, Titan Industries acquir- correction. Angel rounds continue to happen ing CaratLane in May, and ShopClues pick- but raising Series A, B, and C are tougher. ing up Momoe in July. Seed and angel rounds are based on future promise but the following rounds are mostly Look at another set of numbers and it is about showing investors the numbers, the easy to join the dots. There is a drought — in fundamentals, the market share, the money. the world of funding. The funding tap has tightened because many start-ups have little to demonstrate on these A presentation prepared by product indus- parameters. Investors now look for firms with try think tank iSpirt states that only $2.1 better unit economics, “islands of profitability” billion was raised by Indian start-ups in the and prefer sectors where there is “sanity”. The funding crunch is precisely the driv- ing force behind the Tsunami of acquisitions. No one wants to admit but when you run out of money, a larger home for the team you may have built is a saving grace. It works for inves- tors, too. When a distressed start-up gets ac- quired, the VC’S track record remains intact. So, what can we expect for the rest of the year? There will be more defensive buys – Flipkart’s aggression in the Jabong deal may have to do with denying Amazon and Snapdeal market share in fashion, a high margin category. Two, most of the M&A deals, going ahead, will likely be stock deals. Start- ups would want to save cash for operations in this climate. Third, one should be prepared for a longer bear run. No giants of e-commerce have fallen yet. Even if one does, it could trig- ger a Lehman moment for the Indian start-up ecosystem.~ @goutam2028 BUSINESS TODAY August 28 2016



FOCUS Automobile Final Recall Under the new proposals the Centre could even order manufacturers to recall vehicles if customers complain of a safety defect. By CHANCHAL PAL CHAUHAN F our years after the Indian automotive India, and a whopping 60 million globally – industry initiated a voluntary recall prompted the government to chart an all- code on vehicles, the government has encompassing policy to look at a broad frame- finally woken up to the threat from manufac- work on safety and technical failures. Experts turing defects. Now, a comprehensive recall say with a draft notification in place, they are policy is in the works to deal with errant au- geared up to meet the challenges with effec- tomobile companies that do not recall vehicles tive implementation. “There weren’t any despite having clear evidence of technical technical facilities to evaluate vehicles defects. The new proposals also talk about against any alleged safety defect. The only setting up of a nodal agency to monitor the capability was for the ‘homologation certifi- recalls process, audit records to detect lapses, cation’ that made vehicles road-worthy in and even penalise auto manufacturers for conformity to the motoring regulations. Now lapses. The draft rules, however, do not the Road Transport and Safety Bill 2015 will specify details of penal actions against errant give enough teeth to deal with safety issues. companies. Come October, the policy is ex- Also, the National Automotive Board will act pected to come into effect. as a nodal agency and oversee technical fa- cilities coming up in five locations under the In 2012, the Society of Indian Automo- National Automotive Testing and R&D bile Manufacturers (Siam) had adopted a Infrastructure Project to oversee and imple- voluntary code on recalls. Rising customer ment a comprehensive recalls process,” a awareness over global recalls – the past four senior government official said. Companies years witnessed over 2.5 million car recalls in are also planning to move away from the voluntary bait, and are tuning up their sup-MAJOR RECALLS IN INDIA SINCE 2012… plier and vendor base to improve quality of components, which, in turn, will translateCompany No of vehicles Safety issues into better cars with zero defects. This will Airbag defects minimise recalls that attract huge negativeHonda Cars 704,346 Emission scandal publicity for automobile companies. Crack in rear twist beamVolkswagen 402,007 Fuel leakages* Adopting the best practices along the lines Emission scandal of the National Highway Traffic SafetyFord India 370,054 Administration of the US, consumers will also be empowered under the policy. They will beMaruti Suzuki 282,875 able to confirm recalls directly through a ve- hicle identification number on the company’sGeneral Motors 256,597 websites, and access the recall databases of major vehicle manufacturers directly. “It* Also related to other technical issues; Source: Department of Heavy Industries would allow consumer participation and will mutually benefit all, helping brands build quality standards,” says Rakesh Srivastava, Senior Vice-President, Sales and Marketing, Hyundai Motor India. The company had the lowest recalls among all automakers in India. As more people get killed every year in road accidents, one hopes the new policy will help curb such incidents. ~ @sablaik30 BUSINESS TODAY August 28 2016



SOCIAL UNIVERSE WHAT’S TRENDING RAJ VERMAPicture PerfectBrands are now usingimage sharing platformsto woo consumers.By DEVIKA SINGHWhen words fail, pictures speak. With the emergence of photo and video sharing social platforms such as Instagram and Snapchat, brands are increasingly harness-ing the power of pixels. If you are a food,fashion or lifestyle brand, these platformsare the best bet for audiences seekingyoung and creative audiences, unlikeFacebook and Twitter, which work well forbrands with mass appeal. In India, Instagram has a lead;Snapchat, however, still has fewer takers.Rajiv Dingra, Founder & CEO ofWATConsult, believes this could be be-cause it is a fairly new platform.“Snapchat is a ‘for-the-moment’ mediumand therefore has presence of brands thatare youth-centric,” he adds. Paper Boat, a non-carbonated drinksbrand from Hector Beverages, was one ofthe five launch partners of Instagram adsin India. The company wanted to showpeople newer ways to try its products.Knowing that its drinks were used as DIGITAL DASHBOARDThe Best Times to FACEBOOK INSTAGRAMPost on Social Media MondaySource: www.Bloguettes.com Thursday & Friday 3pm-4pm32 BUSINESS TODAY August 28 2016 1pm-3pm Did you know...this is Did you know...the closer mainly due to companies the weekend comes about posting during this time the more people check out and stirring interactions and check in to FB

mocktail mixers, Paper Boat created numbers are not great, but we be- LISTENING POSTa series of recipes using pictures on lieve it could be at an inflection point.Instagram. “It is a great platform for One can never tell if a platform will Post and Earnstorytelling. You are not confined by take off, but when it does, we want tocode and can be as creative as you make sure we are ahead.” Microblogging and socialwant,” says Parvesh Dubeka, networking websiteMarketing Head at Paper Boat. It has Apart from wanting to create Tumblr, in a blog post,over 14,000 followers on the net- awareness, companies are also using announced that it planswork acquired organically as well as these networks to drive app installs. to introduce ads so that peoplethrough ads. On-demand delivery service com- can start making money from their pany Grofers has seen an 8 per cent blogs. “Tumblr is a place where After opening up advertising for incremental reach in its core target brilliant, creative, funny, impossiblebusinesses around the world in audience after using Instagram. It people shape culture. Some of youSeptember 2015, Instagram claims has seen a 50 per cent reduction in have even turned your passions intoto have more than 200,000 global cost-per-install (CPI) on the platform. jobs: book deals, music careers,advertisers on its platform today. “In paid gigs with the Creatrs program.India, we are seeing significant mar- Of the 500 million monthly ac- Now, (soon!) that opportunity will beketer demand in areas like consumer tive users globally on Instagram, available to any eligible Tumblr poet,packaged goods, e-commerce, tech, more than 80 per cent are outside musician, fan artist, and misfit weir-telecom and auto,” the spokesperson the US. Snapchat, meanwhile, has do memelord alike,” the networkingfrom Instagram told Business Today. 100 million daily active users. site said in the blog post. Users whoNestle KitKat, Grofers, Sportskeeda, Instagram is popular among users in don’t wish to see advertisements onHaptik and Inshorts are some of the the ages of 18-29 years, and hence their page, can turn it off by chang-brands present on the platform also popular among marketers. ing the settings. To make moneyin India. Snapchat is a favourite among users on the site, users need to register, in the 13-21 age group – a preferred details of which will be provided by Snapchat as a marketing plat- medium for brands looking to engage the company shortly.form is still being mulled by brands in with them in real time.India. “Its user base in India is still Hackeratinot big; also, it is not very easy to The creative independence of-use,” says Hareesh Tibrewala, Joint fered by these networks makes them An Indian bug-bounty hunter AvinashCEO of Mirum India. much sought after by advertisers. was rewarded with $10,080 by Twitter However, since creativity is para- recently, after he discovered a loop- Lenovo was among the first few mount to get noticed, brands have to hole in its video sharing app Vine. Heto use Snapchat while launching the invest more time and human re- found a Docker image for Vine whileA6 1000 smartphone with a video sources to build content. That said, searching for vulnerabilities usingcampaign featuring actor Ranbir the return on investment on these censys.io. Censys is a public searchKapoor. The videos were later posted sites is still not as high as on engine that enables researchers toon Facebook and Twitter. Amit Facebook or Twitter. “Once they ask questions about the hosts thatDoshi, Head, Consumer and Digital grow bigger, more brands will put in compose the Internet, while DockerMarketing, Lenovo India, says that the effort,” says Dingra. ~ is a new open-source container thatSnapchat is great for engaging with contains everything needed to runconsumers in the moment. “The @dsingh_devika a software. Avinash found that the source code for Vine was stored as PINTEREST TWITTER part of a Docker image used to host the site. On downloading the image, Saturday Monday-Friday he found that he could see the entire 8pm-11pm 12pm-6pm source code of Vine, its API keys as well as third-party keys and secrets.Did you know...people Did you know...click The 23-year-old reported the issue tohave more time to sit through rates are higher Twitter on March 31, and the company back, relax and pin fixed the issue within five minutes. during week days and Apple, too, has announced that it work hours would pay bug bounties to research- ers who find and report vulnerabili- ties in specific Apple software. August 28 2016 BUSINESS TODAY 33

TAX RAJ VERMA TRAP34 BUSINESS TODAY August 28 2016

CORPORATE Tax DisputesEven as the government pushes for a more ‘predictable’tax regime, corporate tax disputes continue to rise.BY DIPAK MONDALOn March 30, 2016, two LOCKED IN Mumbai tax officers raised a demand of `10,000 crore, Authority with whom cases pending which included a hefty in- related to direct taxes… terest component for late payment, with State Bank of CASES PENDING WITH NO. OF CASES AMOUNT INVOLVED India, alleging that the pub- `CRORE lic sector bank had not com- Commissioner of IT(Appeals) 2,32,126 plied with its advance tax 3,83,797 commitments. The bank ITAT 37,506 1,45,534.70obliged the tax department on the same day, but also sent 37,684.00an accompanying letter detailing its advanced tax pay- High courts 34,281 46,545.00ments for the fiscal. Supreme Court 5,661 6,13,560.70 The taxmen acknowledged the receipt of the letter,conceded their oversight (faulty record keeping) and pro- TOTAL 3,09,574cessed the refund of `9,500 crore on April 1. In the Indiantax system, this would have gone down as ‘routine’ and …and indirect taxesnot something to make a hue and cry about. However,essentially, the taxmen were playing the system to meet CASES PENDING WITH NO. OF CASES AMOUNT INVOLVEDtheir collection targets for the financial year 2015/16. The `CROREarrangement worked well for them – the `10,000 crore CESTAT 61,429figure went down as part of the tax collected for the fiscal 1,20,145in department records, and the refund two days laterwould be recorded as part of transactions for 2016/17. High courts 10,985 19,437 It could very well have slipped through the cracks if not Supreme Court 2,569 8,630for the revenue secretary, who detected three large refundstotalling over `20,000 crore in April 2016. A probe was Commissioner of IT (Appeals) 29,293 6,927ordered into the incident. The two tax officers were trans-ferred. This led to protests by other tax officers in Mumbai. Settlement Commission 157 350 The incident brings to fore the pressure of ‘targets’ TOTAL 104,433 35,344under which tax officers work and the frivolous nature oftax demands. It also points to one of the major worries for Data as on 31 March 2015 CESTAT: Customs, Excise and Service Tax Appellatethe department – the large number of disputes and pending Tribunal Source: Ministry of Financecases at different levels of adjudication. tax disputes (direct and indirect taxes) at different levels of Frivolous tax demands by the department have, in fact, adjudication and appeals were worth `7.7 lakh crore. Ofbeen a big concern for businesses, both domestic and these, disputes related to direct taxes alone accounted forMNCs, over the years. Some of the tax disputes, especially `6.15 lakh crore.those involving international players, have not only givenIndia a bad name, but have unnecessarily held back large A big chunk of direct tax cases – involving `3.84 lakhsums in legal wrangles causing great loss to both busi- crore, which was almost on par with the government’snesses and the government. revised revenue deficit for the fiscal – was pending before the Commissioner of Income Tax (Appeal) in 2014/15. InThe Problem the first half of 2015/16, the amount had gone up to `5.67 lakh crore, says a CAG report.The gravity of the situation can be gauged from the factthat at the end of 2014/15, the amount stuck in different While our legal system is very slow in disposing off tax- related disputes, even at the CIT (A) level the pendency rate is very high. In 2014/15, out of the 306,000 cases pend- ing before the CIT (A) only 74,000 were disposed off – the highest in five years. Cases pending before the Income Tax Appellate Tribunal (ITAT) for the fiscal were worth `1.45 lakh crore, followed by the Supreme Court at `46,500 crore and high courts (`37, 600 crore). August 28 2016 BUSINESS TODAY 35

CORPORATE Tax DisputesExperts says many cases that come before the CIT (A) auditor general. As a consequence, these reportedare repetitive and despite precedence and Supreme Court anomalies find a place in the annual Public Accountsguidelines, the same assessment errors are committed year Committee report placed before the Parliament, whereafter year. This results in a large number of cases going the executive has the right to ask for an explanation andagainst the revenue department. “The errors are repetitive even initiate civil or criminal proceedings against theand the main problem is lack of supervision from senior erring officer for causing loss to the exchequer. Given theofficers,” says Himanshu Sinha, who served the Indian risks, a tax officer usually plays safe and raises demandsRevenue Services (IRS) for more than a decade, and is now even if he is not sure about the assessment. On the otherPartner, Direct Taxes, in law firm Trilegal. hand, say experts, the taxpayer has multiple channels toThe poor success rate of the department, especially in get the assessment rectified.cases of direct tax disputes, also speaks volumes. Between The government’s penchant for retrospective changes2011/12 and 2012/13, 50-60 per cent of cases before tax in tax laws has further added to the number of disputes.tribunals and courts, leading all the way up to the apex Vodafone and Cairn Energy tax disputes are cases in point,court, went in favor of taxpayers, while the revenue depart- where India could have been spared of negative publicity.ment got favourable verdicts in 10-25 per cent of cases.Sinha, in fact, pegs the failure rate of the revenue depart- Solution at Sight?ment at 70-80 per cent and says that 95 per cent of the Mounting tax disputes and slow disposal of cases makelosses are because the cases are weak. Only 5 per cent are India a difficult tax jurisdiction. But the government haslost because of the quality of legal representation. been working towards creating an environment whereThe Cause not only are disputes minimised, but the judicial pro- cesses are also expedited. The committee headed by re-The revenue department has often been criticised for mak- tired judge R.V. Easwar has already come out with a seting wrong and aggressive demands leading to unneces- of recommendations to simplify the regime, and thesary tax disputes. While most experts attribute this to the government has accepted most. There’s more to come.tax officers’ lack of understanding of evolving business Since July 2014, the Income Tax Department hasmodels, proper guidance and unre- issued 23 circulars to help tax offic-alistic targets, insiders point to a LOW CONVICTION ers become more efficient and ap-deeper malaise. Says Sunil Agarwal, proach cases with more clarity. TheSenior Taxation Partner, at AZB & Cases pending before tribunals apex court, too, played its part byPartners, and a former ITAT coun- and courts are on the rise constituting a special bench to hearsel: “The (unwritten) instruction 1000 (669) only tax cases and deposed 197from the CBDT is that if an assessing cases in 2015. The special bench isofficer is not sure about the assess- likely to continue hearing cases thisment and there is a possibility of an year as well. The government haserror, he or she must err in favour of 800 also come up with a direct tax dis-the department.” pute resolution scheme to clear This, says Agarwal, is to cut pending cases before CIT(A) anddown on the possibility of not taxing (641) cases involving tax demand due tosomething that should have been 600 (209) retrospective changes in laws. Thetaxed, because the department does revenue department is hopeful thatnot have remedial measures, and a lot of people may come forwardmay even be reprimanded by the and pay their dues to settle disputes.Comptroller and Auditor General 400 (244) While such one-time measures may be effective, concerted efforts to(CAG) and the executive for an er-ror. “There are powers of reopening (283) change the way the tax departmentthe cases but those powers come thinks and works will be key towith a lot of conditions and limita- 200 bringing down tax disputes andtions,” he adds. During an audit, the high pendency rates. However, ifCAG has the power to raise objec- the government is serious about itstions and ask the department why a ‘ease of doing business’ initiative,particular transaction was not 0 technology will have to play a ma-taxed, based on its calculations. The 2010/11 2011/12 2012/13 2013/14 2014/15 jor part to overhaul the Indian taxtax department is entitled to respond Acquittals Compounded* Convictions assessment system. ~to the CAG audit, but counter argu- Figures within brackets indicate number of @Dipak_Journoments are often dismissed by the prosecutions every year; *Exempted from jail term; Source: Investigation Wing, CBDT36 BUSINESS TODAY August 28 2016



AJAY THAKURI

CORPORATE PharmaceuticalsA little-known Chinese pharma company buys an equally lessknown Indian firm for an astronomical valuation, and causes astir in the industry. Why exactly did the deal happen?By E. KUMAR SHARMA he jury is still out on whether Shanghai Fosun Pharmaceutical Group’s recent decision to shell out $1.26 billion for a controlling stake in Hyderabad-based Gland Pharma was too aggressive. Some say the bid for a contract manufacturing firm valued at $1.35 bllion, besides having a US presence with `300 crore net profit and over `1,000 crore in sales, was a strategic acquisi- tion that demanded Fosun to pay a premium. Others,including Indian pharma majors who lost out to the Chinese group’s bid,however, are of the view that despite Gland’s track record and positioning,the deal should have been in the range of $800 million to $1 billion. The fact that the $8-billion Fosun Group was keen on the US marketmakes the deal special, given that 62 per cent of Gland Pharma’s revenuesof $169 million in 2015 came from the US, compared to 16 per cent fromIndia and the rest from other geographies. Besides, Gland expects morebusiness from the US as its prototype for Enoxaparin – a leading anticoagu-lant that commands a $1.4-billion market shared by half a dozen pharmaplayers – is waiting US regulatory nod. What’s more, Gland’s enterprise value (equity plus debt, minus thecash) was pegged at $1.35 billion based on the company’s earnings beforeinterest, taxes, depreciation and amortisation (EBITDA) for 2015/16, onlya shade below the current valuation of $1.46 billion, which is basedon the deal. And, to further drive home the point, a section of indus-try experts feels that the $1.05 billion, or $96.87 per equity, Fosun August 28 2016 BUSINESS TODAY 39

CORPORATE Pharmaceuticalsis expected to pay upfront is also in line with the price-to- The Deal that happened...earnings (PE) ratio of 35-40 that leading Indian pharmacompanies are trading at on the bourses. Gland is privately > Fosun Group to invest $1.26 billion in Gland Pharmaheld and is not a listed company. > Will get 79.99 per cent equity in the Indian company > Will also subscribe to convertible preference shares by Gland, The remaining amount will be paid over a period of twoyears as a contingent consideration if the US launch of the representing another 6.08 per centEnoxaparin prototype goes through – if the US Food andDrug Administration (FDA) approval is obtained before 31 ...And WhyDecember 2016, Fosun will pay $50 million; betweenJanuary 2017 and 31 December 2018, the upper limit will > Gland Pharma had profit before tax of `459 crore, and netbe $25 million, and if the launch is after 31 December 2018, profits of `313 crore in 2015/16the Chinese firm will not pay any contingent consideration. > The Indian company has strong presence in the US Once the deal is completed, the Chinese group will > Awaiting FDA nod for Enoxaparin, an anticoagulanthold 86.08 per cent equity interest in Gland Pharma – adirect acquisition of 79.99 per cent equity interest and How They Compare6.08 per cent through the subscription of convertiblepreference shares issued by Gland. The deal also allows Landmark deals in Indian pharma spacepurchase of the 10 per cent equity retained by the pro-moter shareholder at a later date. “The founder share- > In 2008, Japan’s Daiichi Sankyo bought Ranbaxy at nearly fiveholders shall have the right to exercise a put option times of Ranbaxy's saleswithin one year from the expiration of the period of oneyear after the share purchase agreement (SPA) closing > In 2010, US-based Abbott acquired Ajay Piramal's pharma armdate to require the buyer to further acquire the remaining at nine times its salesshares of Gland held by the founder shareholders for aconsideration up to $180 million,” says the deal agree- > Gland’s acquisition is over eight times of salesment. However, for now, Ravi Penmetsa, the currentVice-Chairman and Managing Director, will be appointed Who Are They?as the CEO for a three-year period. Penmetsa, however,refused to comment on the development. Gland Pharma > Gland Pharma, launched in 1978, is a contract manufacturer ofWhat’s in a Deal injectable drugsIt is hard not to compare the Fosun-Gland agreement with > Produces vials, ampoules, pre-filled syringes, dry powders, etc.,other mega deals in the Indian pharma space – the 2008takeover of Ranbaxy by Daiichi Sankyo, and Ajay Piramal for domestic and overseas marketsselling his formulations business to Abbott in 2010. At thesame time, there is a huge difference. Piramal and Ranbaxy Shanghai Fosun Pharmawere bought for their domestic branded formulations busi-nesses. Gland Pharma, on the other hand, is a contract > Fosun Pharma Group is based in Chinamanufacturer of injectables, which are mostly exported to > Primary focus is manufacturing and R&D, healthcareregulated markets. > Produces medical diagnostic kits and other devices Analysts say the valuations of the Gland deal cannot 48 to 132. In comparison, India saw an increase from 72be compared with the Piramal-Abbott and Ranbaxy- to 203. But in India, there are many good facilities withoutDaiichi transactions because it is more of a manufacturing FDA issues. Gland Pharma was one such company.capacity acquisition or an asset purchase. Yet, the numbersmake for an interesting case. Piramal’s formulations busi- High Margin Businessness was acquired by Abbott for nine times its sales, whileRanbaxy was acquired at five times its sales. Gland, going Global generic injectables market is estimated at $17-bil-by the March 2015 sales figures of `1,000 crore, roughly lion. And given the fact that the largest players, Israel-translate into eight times sales – something that the Indian based Teva Pharmaceutical and US-based Hospira, arepharma companies, including Dr Reddy’s, Torrent and facing issues with the FDA, there is an acute shortage ofBaxter, were not willing to pay. injectables in the US market. Getting a slice of this would not only mean immediate pricing power, but also a bigger Analysts feel the move by Fosun was triggered by the market share. Also, estimates show that if EBITDA marginsfact that most Chinese companies, like some of their Indian were 20-25 per cent for generics tablets and capsules, forcounterparts, are facing the US FDA heat. Between 2010 injectables it is 50-60 per cent EBIDTA in the US market.and 2015, the number of inspections in China rose from Fosun’s Forte The Fosun Group, which has a business strategy of “organic growth with external expansion and integrated business operation”, sees itself as “dedicated to becoming a first class enterprise in major global healthcare markets”.40 BUSINESS TODAY August 28 2016

Key Financials uity investor Ventureast. The company had just touched sales of `2.5 crore when Sarath Naru, the ManagingHow Shanghai Fosun and Gland Pharma’s numbers compare Partner of Ventureast, was impressed by the approach of its founders. “One, Gland’s manufacturing capability in smallShanghai Fosun Gland Pharma volume parenterals (primary packaging material for biotech drugs or liquid medicine) was impressive. Two, the founders12 37 were extremely hung up on quality and execution. It was the first company to get an SPV facility approved by the US10 2014/15 35 2014/15 2013/14 2013/14 FDA in India,” says Naru, adding: “The other thing that convinced us was the involvement of Vetter, a German1,940 1,926.20 997.90 1,001.60 SPVmanufacturer, which came in as a strategic inves- tor and provided technology and training.” 369.10 345.80 But, in 2003/04, Ventureast exited Gland Pharma. “We got a good exit – a high single-digit193.70 226.90 multiple. We exited because we play a portfolio game and we cannot stay all the way till double-digit multiple2013/14 2014/15 2013/14 2014/15 in every case,” he adds. Gland was later funded by twoRevenue Operating Profit Revenue Operating Profit other PE investors.Operating profit margin (%) Operating profit margin (%) Test CaseFigures in $million; Data as on Dec ending; Figures in `crore; Margin: operating The Fosun-Gland deal, coming close on the Indian govern-calculated on exchange rate of year-end profit/ revenue; Source: Ace Equity ment’s decision to allow foreign direct investments of up to 74 per cent in pharmaceutical manufacturing, has en-Source: Company thused a section of industry insiders, while others still re- main sceptics. Some pharma industry veterans feel it mayHurdles Ahead not be easy to get investment easily. “This will be a test case for the government of India in special verticals, such as> India has allowed FDI of up to 74 per cent in pharma; Fosun’s acqui- injectables and vaccines, and much would depend on who sition of 86 per cent stake in Gland will need CCI and FIPB nod within the Indian government today would do the advo- cacy for a Chinese company in the current political atmos-> Approval from the antitrust authorities of the US phere,” said an expert on condition of anonymity.> Approval from China's planning agency NDRC> Nod from shareholders of Fosun Pharma For the moment, however, there is a long list of posi- tives from the deal, including the mouth-watering valua-Nevertheless, analysts still see its inability in terms of build- tion of an Indian drug manufacturing firm. There’s also aing such capacities in China. Perhaps the need to gain mo- lesson from Gland’s success – the will to excel and plannedmentum and expand their operations in the US drove the execution can take Indian companies to new heights. Sayscompany to seal the deal with Gland Pharma. The Group, an analyst: “Gland is the first injectable drug manufacturerset up in 1994, is a behemoth of sorts – a leading healthcare that has been approved by the FDA and has obtained GMPgroup in China primarily engaged in pharmaceutical manu- certification for markets around the world. Gland’s mainfacturing, research and development, healthcare services, business model is joint development of products and intro-production and sale of medical diagnosis kits and medical duction of licences to provide all global major pharmaceu-devices, and pharmaceutical distribution and retail. The tical companies with the manufacturing services in rela-company’s other arm involved in the deal is Fosun tion to injectable generic drugs. As one of the few compa-International, whose businesses include integrated finance nies that engage in the manufacture of injectable drugs,(wealth) and industrial operations. The integrated finance Gland takes a leading position among the comparable(wealth) business includes four major segments: insurance, companies in the Indian market.” That is some food forinvestment, wealth management and Internet finance, while thought for other Indian manufacturers.the industrial operations division includes health, happiness,steel, property development, and sales and resources. For the moment, however, the tax department may be watching – for if all goes well with deal, there may be a goodGland Slam sum – around `800 crore, or thereabouts – in tax collections, too. Now it is up to the regulators to clear the deal – theGland Pharma was incorporated in 1978, but took off in Competi-tion Commission of India (CCI) and Foreign1996 following an investment of `1.5 crore by private eq- Investment Promotion Board (FIPB). ~ @EKumarSharma August 28 2016 BUSINESS TODAY 41

PHOTOGRAPH BY VIVAN MEHRA Railway employees working at Delhi's locomotive shed

COVER STORY RailwaysSuresh Prabhu is on a mission to make the Indian Railwaysfast, efficient and profitable. But he faces extraordinaryodds in his quest. BY ANILESH S. MAHAJAN

SURESH PRABHU’S IMPROVED CONSUMER RAISING FUNDS OUTSIDE EXPERIENCE: Free Wi-Fi, BUDGET: Prabhu stitched MAIN ACHIEV E- improved cleanliness, better together capex plan ofMENT S SO FAR… ticketing, better food, running modern trains `8.56 lakh RAILWAY crore, with BOARD FASTER DECISION-MAKING ON INFRA: `1.5 lakh crore Prabhu takes weekly reports on REFORMS: dedicated freight corridor (DFC) funds commitment coming Elevated post and infrastructure projects. from LIC; various projects of Chairman; Project directors directly under PPP and FDI rolled out report to Mittal and Prabhu ensured continuity with extension for A.K. Mittal as chairman; and started three cross-functional directorates LOCOMOTIVE PROJECTS: GE and Alstom roped in to manufacture locomotives at Marora and Madhepura, respectivelyVIVAN MEHRAE very week, without fail, Vijayawada on the east coast. The new DFCS will optimise the Railways Minister Suresh existing tracks and will opt for greenfield projects selectively. Prabhu takes stock of the two dedicated freight corridors However, DFCs are not the only thing occupying the (DFCS) that are being con- minister’s mind currently. Prabhu is also in the process of structed – one running from restructuring the Railway Board (See The Restructuring Delhi to Mumbai and the other of Railway Board) to change the way decisions are taken in connecting Ludhiana to the Indian Railways, improve passenger amenities by up- Dankuni in West Bengal. He grading the quality of coaches, adding WI-FI, running special trains like super luxury Tejas and modern Deen Dayalu, etc., pores over the reports giving while also reducing costs, speeding up project execution, and dreaming up new ways of raising finances. details of different segments of Fixing the Indian Railways, the fifth biggest rail networkthe two stretches. And he has also started getting drone foot- in the world with 1.3 million employees, won’t be easy. It connects the entire country through 68,525 km of routeage of various stretches, which will be sent to him quarterly. track (in 2014), 12,961 passenger trains, and 8,637 freight trains. It also runs 125 hospitals, 586 polyclinics, 102Work on the two corridors, which began under the UPA schools and sundry other initiatives.government in 2008, had been slow. Things began to change Impressive. But it is also archaic with poor facilities and on-time record. It spent 92.5 paisa last year to earn everywhen Prabhu became minister in November 2014 after the rupee of revenue, leaving practically nothing to invest in new facilities or improve current ones. Then there are un-new NDA government took charge. Today, 95 per cent of the ions to deal with, who dislike all change, small and big. And Prabhu plans to spend `8.56 lakh crore to fix all problemsland is acquired, and projects worth `48,000 crore allocated. by 2019, assuming he remains the Railways Minister.The first stretch of the Eastern DFC connecting Khurja (near It is a Herculean task. What works for the Railways is that it can still count on huge passenger traffic where bothAligarh) to Bhopur (near Kanpur) is expected to be commis- road and airlines are unviable for multiple reasons. It also owns thousands of acres of land. Both factors can be lever-sioned in December 2017. And both the DFCS are likely be aged to raise funds as well as recurring revenues. But to understand whether he can make a difference or not, onecommissioned in full by end-2019.Prabhu is clear that nothing should hold up work onthese projects. After all, the DFCS are crucial to his plan to raiserevenues and regain lost freight market share from roads.There are hiccups – 1,042 court cases and 3,391 arbitrationcases are being fought between those who lost land for theprojects and the DFCCIL. But Prabhu is undeterred – he wantsto add three more DFCS connecting Delhi-Chennai (north-south), Kharagpur-Mumbai (east-west) and Kharagpur-44 BUSINESS TODAY August 28 2016

…AND HIS BIG OPERATING EFFICIENCY DECONGESTION OF TRACKS:CHALLENGES CHALLENGE: Operating ratio target of 92 looks Two DFCs are under way, HUGE WORKFORCE: difficult, largely because of but still 492 sections need A mammoth pay and pension hikes to be decongested fast 1.3 million employee base BETTER BOOK KEEPING: PROCUREMENT EFFICIENCIES: Prabhu ensured Prabhu attempting to push FDI in locomotive manufacturing, but failed to (highest in India), replete Railways to move from cost- convert similar opportunity for train sets with powerful unions based accounting to accruals, makes it difficult and not an easy task NEW WAYS OF MONETISING SERVICES: inefficient to run PSU RailTel doesn’t plan to convert free Wi-Fi into REFURBISHING STATIONS: Not sustainable business model. Food contracts con- taking off. Private players tinue to be bone of contention. Advertisement need more concessions revenues are much lower than potential WINNING BACK MARKET SHARE FROM ROAD: Collections from freight dipping; Prabhu pushing diversification of basket, but congestion and delayed train movement are spoilersneeds to look at both the details of the problems he needs to uncompetitive vis-à-vis roads. This strategy worked reason-solve, as well as the plan he has worked out. ably well in 2004-2009 when Lalu Prasad was the railway minister. The global and Indian economy were booming andThe Nitty-Gritty customers did not worry too much about freight costs. But as the economy slowed, Railways’ freight charges became in-Different Union governments and railway ministers have creasingly uncompetitive, though ministers like Mamatacommissioned multiple studies on what ails the Railways Banerjee and Trivedi – who came after Lalu – kept raisingand how to turn it around. Over the past 10 years, at least them and refrained from touching passenger fares. “Our pas-12 committees have presented their reports on the sector, senger fare is cheapest in the world and freight is the costliest.the latest being the Bibek Debroy Committee report, which This is increasing the inefficiencies, distortion, and the perfor-was commissioned in 2014 (two months before Prabhu mance of Railways,” says Railway Board Chairman A.K.took charge) and was presented in June 2015. Most reports Mittal. In the last Budget, Prabhu tabled freight earnings ofagree substantially on the basic problems, though they dif- `1,11,853 crore out of the gross traffic receipts of `1,67,834fer in their approaches to solutions. crore. The rest were from passenger fares and advertisement revenues. That ratio should ideally be 1:1. The first problem is that all governments worry aboutthe Railways becoming a big financial burden on the Union The other two reasons for losing freight market shareBudget, and want to make it a largely self-sufficient organi- are inefficiency of railway freight and continuous neglect ofsation run on the lines of an efficient corporation. But they infrastructure. The days of liberalisation saw subsequentalso want Railways to serve as a transport system for the governments increasing investments only in roads.poor. Result: much of the passenger traffic is cross-subsidisedheavily, and some decisions – like new trains and routes – The second challenge: Indian Railways has bloated intoare often decided on non-commercial reasons. Successive a mammoth, centralised organisation with hierarchicalrailway ministers, for example, have refused to raise pas- decision-making and a culture of operating in silos. As asenger fares. Dinesh Trivedi from Trinamool Congress, who result, even simple decisions take years to resolve. Debroywas the minister in 2012 in the coalition UPA II govern- talks about one decision on hot cases to keep food warm forment, had to resign because he raised passenger fares with- passengers, which was kept pending for 25 years. “Theout checking with his party leader Mamata Banerjee. As a member (electrical) had one view, while the member (traffic)result, passenger fares, especially at the lower end have re- had another,” he says.mained static for more than a decade. The third problem lies with finances and accounting. To keep its finances from going underwater, successive Indian Railways spends heavily on revenue expenditureministers have also raised freight charges, making freight – there is little left for capital expenditure. As a result, that August 28 2016 BUSINESS TODAY 45

COVER STORY Railways doesn’t even maintain accounts on commercial lines. So, when a new train is introduced, it cannot tell whether the line is profitable or loss- making. No return on expenditure is calculated on any expansion or any new project currently, points out the Debroy Committee report. The fourth big problem is general inefficiencies that have been built in over the years. On almost all param- eters, Railways lags behind. Its pro- jects are both commissioned late and end up with cost and time overruns in execution. In the previous fiscal, it missed most of its targets, including of electrification, track renewals, bridge VIVAN MEHRA works, and doubling of tracks. In fact, out of the capital outlay of `1,00,010.62 crore, it could spend only `82,192.11 crore. In 2014/15, projects worth `6.5 lakh crore were stuck, including works related to dou-“The assured offtake (of locomotives) bling, new lines, gauge conversion, traffic facilities, and electrification.gives us comfort of designing Today Railways faces a burden ofthe whole project” `4,83,511 crore for the execution of 458 unfinished projects.BHARAT SALHOTRA, President and CEO, Alstom Transport (now Alstom India) More worrying, operating ratios (what Railways spends to earn each rupee) are likely to get worse as costs pile up, including money for the 7th Pay Commission recommendations – nearlymoney comes mostly from the Union Budget. But for real `28,000 crore this year to retirees and serving employees.change, IR needs to generate enough funds on its own for Prabhu’s request for additional budgetary support ofcapital expenditure and also find new, non-government `32,000 crore from the finance ministry was rejected. Thesources of funding. But that can only happen if Railways Railways is expected to save `5,000 crore in fuel costs (die-is run as an efficient corporation with a healthy balance sel, thanks to global slowdown and electricity because ofsheet that can be leveraged to raise debt. Currently, it innovations), but Prabhu needs to do more to reach theSLIPPING EFFICIENCY TOP 5 RAIL NETWORKSRailways’ operating ratio has been slipping India has the world’s fifth-longest railway network94.9 US 2,93,564 93.6 China* 191,270 Russia* 87,157 90.2 91.3 90.5 Canada 77,9322011/12 2012/13 2013/14 2014/15 2015/16 India 68,525Figures in per cent Figures are total route km in 2014 * Including high-speed railSource: Ministry of Railways and Union Budget Source: CIA46 BUSINESS TODAY August 28 2016

100 LOSING OUT90 Railways’ share of freight movement is now far behind roads80 86.2 61.9 60.5 Roads 59.9 64.5706050 Railways 40.140 38.1 39.5 35.5302010 13.80 1950/51 1960/61 1970/71 1980/81 1990/91 1999/2000 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12targeted operating ratio of 92 this year. ted to a loan of `1.5 lakh crore. VIKRAM SHARMA “If Railways has to perform like a corporate house, ra- He is also trying to rope in private investments, such astionalisation needs to come,” says Vijay Kumar Dutt, former for the redevelopment of 412 stations. The first station –additional member of the Railway Board. But Sudhir Habibganj in Madhya Pradesh – is already undergoing re-Kumar, who was OSD to Lalu Prasad when the latter was development; next in line are Bijwasan and Anand ViharRailway minister, believes it is impossible to implement in Delhi, and Chandigarh. “Private players are negotiatingbecause no minister wants to start increasing fares rapidly. that the age of lease must be extended from 55 to 99 years;One reason for that, says a person working with Prabhu Railways is working out the modalities,” says Shashankaclosely, is that over the years passenger amenities have Shekhar Panda, CEO of Blue Earth Enterprise, a public policydeteriorated, which makes passengers disinclined to pay strategy consulting firm. Prabhu told BT he is reworkingextra. Prabhu is working to rapidly improve passenger the entire plan to make it more lucrative for investors.amenities so that charges can slowly be increased. Prabhu is moving on other fronts as well. To cut theStitching the Plan “Today capital is no issuePrabhu has started on the recovery process by implement- for us; we need to make ouring a recommendation of the Debroy Committee – com- projects bankable and makemercial auditing. An audit has started in Ajmer division, them earn good IRRs”which will cover the country in the next two years. Prabhusays that he has asked his PSU, Centre for Railway A.K. MITTAL, Chairman, Railway BoardInformation Systems (CRIS), to do an analysis of potentialearning and actual earning of every train. “This exercisewill give us enough data to understand which train makeshow much money, and what more alterations can be madeto make more money and expand operations,” he says. Next up, Prabhu is unlocking stranded projects. He hasappointed seven mission directors to ensure smooth andefficient execution of the projects, who report directly to himand to Mittal. Along with this, he has started very few newtrains in the past two years. In his two budgets, Prabhu hastaken the outlay to `1.21 lakh crore. He has come up witha five-year plan, and is committed to take the investmentsin Railways to `8.56 lakh crore by 2019. Since this is be-yond the budgetary support he can get from the financeministry, Prabhu is looking at other ways of financing, in-cluding SPVS with states and PSUS for projects that are spe-cific to them, and raising money via debt – LIC has commit- August 28 2016 BUSINESS TODAY 47

COVER STORY RailwaysTHE RESTRUCTURING Time for Reforms CHANDRADEEPOF RAILWAY BOARDSuresh Prabhu is trying to streamline the operations of the Railway Board. The responsibilities of some key personnel have been tweaked to break the existing silos hampering the Railways. For instance, onMarch 21, a few days before the superannuation of Navin Tandon, Member(Electrical), Prabhu asked officers of Signals and Telecommunications wingto start reporting to V.K. Gupta, Member (Engineering). Prabhu has now en-sured that Ashwani Kapoor — who took over from Tandon in March — willalso be responsible for all locomotives (electrical and diesel) as Member(Traction). And in a recent August 3 order, Hemant Kumar, Member(Mechanical), has been asked to take care of all the rolling stocks as well. This is the first reform in the Railway Board — the highest decision makingbody of the Railways — since it was constituted in 1951. In his budget speech,Prabhu resolved to revamp the Board, along with a promise to make its chair-man more powerful and run the board like a CEO. But since these changes di-rectly impact the seniority and promotions of the officers, reforming the boardwould be a tough task. The task at hand before the Railway Board is to merge the eight ser-vices cadres into two unified cadres — technical and non-technical — as sug-gested by the Debroy Committee. To begin with, Prabhu has formulatedthree cross-functional directorates to oversee mobility, non-fare businessand environment & cleanliness, instead of clubbing the cadres of existingstaff. Prabhu has set objective KRAs for all general managers and alsogiven them more powers to decide on project finances.inefficiency in track electrification, he roped in Power But critics say it is not an original idea. “The MOU with statesMinister Piyush Goyal. Last fiscal, Railways met its target of is only repackaging, with some changes, of earlier participa-1,600 km of electrification. Goyal is bringing in the expertise tive models and practice to provide connectivity to ports,of power ministry’s PSUS EESL and Power Grid Corp to exe- miners and industrial hubs, besides building new railwaycute electrification of 35,000 km in the next seven years. overbridges and underbridges and for new manufacturingApart from speeding up execution, this will also cut diesel facilities,” says former Railway Minister Pawan Kumarconsumption. Last year, Railways consumed diesel worth Bansal.`16,000 crore. Railways is also complementing Goyal’s Prabhu’s plan, though, is more integrated. He wantsendeavour of pushing renewable energy by adding 1,000 these JVS to also take up projects of station redevelopment,MW by 2020. This includes turning several stations com- construction of new lines, formulation of new suburbanpletely on solar. “We are working on the modalities,” says railway networks, etc. The JVS will be allowed to form pro-Goyal. “The nation would save a lot once this is executed.” ject-specific SPVS with equity holding from other stakehold-Restructuring the Organisation ers such as banks, ports, PSUS, mining companies and oth- ers. “These JVS not only give you managerialPrabhu wants to create a holding company `8.56 support from state governments, they alsofor Indian Railways, and bring all its PSUS as lakh crore increase the efficiency and ensure earlysubsidiaries. This holding company can take completion of projects,” says an official fromfinancial leverage and access bond or debt The amount the Railway ministry.markets, and may also help in improving Prabhu wants But a BJP chief minister questions this.execution. The flip side: faulty execution of to spend to fix “Most state governments don’t haveprojects could land Railways in a debt trap. all problems enough funds to finance their own schemes;“You have Air India run as a ‘corporate’ how do you expect projects of Railways toentity, and its finances are a complete by 2019 and get fund from state budgets?”mess,” says a former Railway Minister on bring Indiancondition of anonymity. “You have to de- Railways Road Vs Raillink politics from the economy of Railways It’s a battle that successive Railway minis-to make it run like a business house.” back on track ters have lost. The contribution of railway transport has shrunk to 0.8 per cent of GDP;Prabhu also took Cabinet approval forhis ambitious plan to form JVS with states. for roads, it is 5 per cent. What worries48 BUSINESS TODAY August 28 2016



COVER STORY RailwaysDOING ALL RIGHT BUDGETARY SUPPORTEmployee productivity is lower for freight than for Gross budgetary support is on the risepassengers, compared to Russia and China 34,661 Russia China India 28,174 31,624 25,2341.81 0.66 1.23 0.38 0.15NTKM (MILLION)/ EMPLOYEE 0.44 PKM (MILLION)/ EMPLOYEE 2012/13 2013/14 2014/15 2015/16(RE)NTKM: Net tonne per km PKM: Passengers per km Figures in ` crore 2015/16 numbers are revised estimates; rest areSource: UIC Statistics 2009-10 (12th Plan document) actual Source: Outcome performance budget 2016/17many is that Railways’ freight output is stagnant at 660 a new PSU to be created. In June, Prabhu initiated a JV withbillion tonne km. And there is increasing competition for Delhi Mumbai Industrial Corridor – an SPV under Nirmalapassengers from low-cost airlines for traffic in AC-1 and AC-2 Sitharaman’s DIPP. “This will speed up things, as DMIC al-category. The draft civil aviation policy recommends easing ready has land, and are anyway developing their projectsair connectivity of smaller cities, a Railways stronghold. adjacent to DFCS,” says a senior official from the PMO.One of the solutions on offer is a regulator to rationalise This new logistics JV, along with Prabhu’s pet project oftariffs. In January, Prabhu floated a consultation paper to setting up an auto hub in Walajabad near Chennai, couldset up a regulator to determine tariff (passenger and freight), help Railways reclaim lost market share. Last fiscal,to ensure fair play for private investors, and to maintain Railways reported earnings of roughly `100 crore by mov-efficiency and performance standards. The Cabinet note to ing 4 per cent of India’s automobile deliveries. Prabhu wantsformulate this is ready, and might come up as an executive to take this to over 20 per cent by 2026. One rake can takeorder, which would later be followed by the legislature. 300 cars, in comparison to 20 cars in a container truck. OnCurrently, Parliament has the authority to March 1, the first phase of the Walajabadfix tariff and fares, and it would require ap- facility was inaugurated, which can park 5,000 cars. The first train moved in July,`6.5proval from both Houses to delegate the and covers Delhi to Chennai in 72 hours lakh crorepowers to a regulator. There are critics to introducing a regula- worth of against 14 days earlier. The adjoining areastor such as Bansal, Kumar and Lalu Prasad. projects such as Oragadam, Sriperumbudur and“The regulator will work on cost-plus model. were stuck Singaperumal Kovil have capacities ofThis will not allow Railways to reap the Hyundai, Nissan, Ford, Daimler, etc., andbenefits of a free market, or to work like a in 2014/15, can manufacture a million cars annually.corporate entity,” argues another former including But while it is cheaper for companies toRailways minister. Prabhu sees this as a re- works relatedform that would give stakeholders, including move freight on trains, they prefer roads. “I am ready to move my products onprivate investors, a level playing field. to doubling, Railways, but Prabhu needs to convince me his trains will not get late, and I will be able Prabhu is also pushing his men to look new lines, etc. to track where my goods are,” says an offi-for ways to increase the freight basket from10 commodities to over 40. Initially, they cial at a top automobile manufacturer. Thelooked for an answer in TransLoc. Starting Delhi-Chennai freight train, in fact, is thewith a paid-up capital of `500 crore, this first to run on time. If this continues, thenew enterprise was to have 10 existing goods sheds and Walajabad hub can easily save 20-25 per cent of logisticsdevelop 30 small multimodal logistic parks. The ministry cost of original equipment makers (OEMS) on movement ofwas also to develop its air cargo infrastructure to integrate their products. But if it doesn’t, Prabhu’s calculations willthe movement of air cargo between inland container depots remain only on paper.(ICDS) and the gateway airports. This could have been the Prabhu is also busy improving last-mile connectivityfirst serious move by Indian Railways to move away from and building infrastructure to increase traffic from ports andthe traditional 10 commodities, like iron ore, aluminium, bigger industrial projects. Last fiscal, Railways commis-coal, and grains, which bring in 90 per cent of its freight sioned connectivity with Tuna port, and work is on to reachearnings. But the Prime Minister’s Office (PMO) did not want Jaigarh, Dighi, Rewas and Paradip.50 BUSINESS TODAY August 28 2016