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Sunday, September 24, 2017

Business Law-some finer points-Part 2

  1. Reasons to apply for patents outside India would be due to 
    1. software patents issue in India, and friendly jurisdictions such as USA, Australia, Japan; and if technical problem related EU too
    2. Pre grant opposition very easy in India(no need to be interested party also)
    3. Ease of enforcement abroad easier, and thus valuation better
  2. Non economic considerations(beyond market potential) is to increase startup valuation via patent applications :D and quantify sweat equity brought in by promoters. Further, cross border patents allow for potential total addressable markets(TAM) in valuations.
  3. Ways to speed up arbitration
    1. Allow arbitrator the power to impose fines for delaying tactics(such as non filing reply)
    2. Time limit for counter claims/setoff, to include in statement of defence, ensures endless pleading won't  happen. 
    3. CPC provision for max 3 adjournments and reasons recorded in writing/show cause
  4. Dispute resolution is a skill not just a subject. Further, clients classified as as follows
    1. Startups just hate lawyers who complicate thing
    2. Seek same advice from multiple lawyers/too many cooks
    3. those who come after problem arises and facts usually compex/verbal/not in place.
    4. Those who seek advice from the very inception. 
  5. Exclusive jurisdiction clause helpful to allow anti-suit injunction later

Business Law-some finer points-Part 1

Below points basis general reading and the NUJS DEABL Course material/videos. Comments welcome
  1. Deadlock situations more common in JVs than in financial/strategic investments
  2. Strategic investor values business on a more long term basis than financial investor, and often enters at different life-cycle(angle-VC-PE-Distressed/Strategic) and pays a premium as they enter into established business
  3. For PIPE transaction, valuations usually predetermined due to pricing rules/formula, and better for foreign investors as helps them avoid issues in exchange purchase. Here however, no exit clause as listed shares already liquidity there. So enter in negotiated deals and exit on exchange, and less scope of reps/warranties as there is already greater scrutiny/compliance and lot more information enabling buyers to do their own diligence. Due diligence is an issue due to insider trading regulations and risk of triggering change of control norms(hence limited affirmative rights, and conservative view on negative rights). Also, mostly equity and no convertibles/warrants. 
  4. Picking up a block on the market is difficult since prices increase exponentially, hence it is better to purchase from the company. 
  5. However, new trend of complete buyouts of startups but this is not strategic investment per se.
  6. Commercial/Business law is complex, needs quick turnarounds(eg change agreements across multiple documents) and levels of understanding not available on Google. Long term solution is to follow a checklist approach and be through, till you develop your own framework. 
  7. NDA(Non disclosure agreement) may have non compete and non solicit provisions. So READ the agreement w/o presuming it is only NDA. Also, disclosing party usually wants broad scope , while receiving party wants narrow scope, and differ on wish to 'Mark' Documents as confidential which is usually difficult. Also, right/requirement to return/retain copies depends on form(physical/electronic) and also on need for referrals/retention rules. If really needed, then virtual cloud/data room is must with locked/monitored spreadsheets.
  8. Due diligence forms the bread and butter for transactional lawyers especially those representing the target. It is not a judgemental exercise it just brings the relevant('Material') facts to the table to draft representations and warranties, and proceed with txn in best tenable manner avoiding defects/deal killers and bad deals. Be prepared for the worst-due diligence helps you know the worst, and also confirm the business is what is appears to be.
  9. Business due diligence involves business experts(like AT Kearney/BCG), inventory physical checks, people due diligence especially key folks and change of control provisions in their contracts like gratuity, and legal/tax document review to examine present/threatened/potential risks, IPR ownership reviews(does company OWN the IPR part of deal,corporate History/Capitalization review-check for ROFR/lockups/agreements binding the shareholding, financial indebtedness review for mortgage/prior consent
  10. There are multiple procedural ways to frustrate the process(eg no consent for valuer, delay to submit bids) for mechanisms like Russian roulette, so in practice not done. However, this is having both parties submit sealed bids at which they will buy/sell stakes. Even if loan documentation/JV documentation for funding is clear, establishing default is very difficult in terms of choice of instrument, timing, valuation level etc. So to avoid bad blood, even if clause exists to buyout at discount due to failure to fund, done at negotiated deals typically. 
  11. Exit waterfall is usually IPO, strategic sale, put option to company/promoters. However, IPO cannot ever be forced upon on company and there are timing, economic and commercial factors to decide to do it, as also third party cooperation. Strategic sale needs promoter to dilute and share control, as also need for cooperation/continue at times. Drag Along rights are usually value destructive(PE/Fund need to exit at lifecycle end and may not care about IRR, also diversified, but promoter may believe value exists and would not want to take that decision) and hard to negotiate, contractually tough and unless escrow, impossible to enforce. Usually, company not doing well  hence no IPO/drag along works, so unlikely it will be able to buyback the stake
  12. The investor relies on the founder to manage the business and grow his money. Hence, clauses exist on founders such as full time, no competing business, tag along, anti dilution(unless ability to subscribe at same valuation)
  13. Usually, reserved matters consent given by nominee of investor, and meeting to vote needs the mandatory quorum of that representative. 
  14. M&A transactions usually have term sheet, due diligence, definitive agreements, signing and closing interposed by standstills/actions(operational surveillance in the meanwhile). 
  15. Inhouse counsels usually have a kickoff internal meeting, understand business thresholds and imperatives, and then take a look at the contract wrt allocation of risks, liabilities and responsibilities if it meets. This would then result in discussion points(key issues) which when resolved conceptually in meeting/call(eg payment terms, title, O&M) could then go to the wording. To cut the information asymmetry, identifying the deal team including correct persons who can take a CALL on that subject will be must. Also, need to balance timeliness(deal was needed yesterday!), cost and quality. 
  16. Usually, large groups have standard, non negotiable contracts for ordinary course of business, to manage legal risk, with some provisions negotiable. This makes in-house job easier. These depend on your bargaining power, nature and scope of contract and the perspective/importance of items(eg 1 issue with tender)
  17. Also, inhouse counsel not bound by billable hours need to rack up, and often wants to cut to the chase and focus on vital issues

NUJS-Diploma-Course-in-Entrepreneurship-Administration-An unbiased review

As a student of the Sep 2016 batch of this online diploma course( a JV between NUJS Kolkata and a legal startup iPleaders), I thought to give a review of this course, now that I am at the end of the course.

-Plenty of videos tightly edited and focused on relevant topics from industry professionals
-Business focused and practical points-for instance the structuring checklist is probably well worth the entire course fee
-Phased course outline
-Novel concept and inclusive education.
-Recently introduced apps

Areas of improvement
-Access to the course is NOT lifetime but just 1 year. This can be extended if you are part of their 'Club'/'Whatsapp' group but this appears more fit for college students. They should extend it to lifetime access for students who do well, or on payment of course fee
-Plenty of college students who have a different focus and 'Sir/Maam' culture, this is one key reason why I left the official whatsapp group
-Quizzes are open book and therefore extremely easy-you can answer 15qn in 15qn by a quick Google if you have a reasonable understanding
-the monthly writing assignment
-Obsessive focus on IPR to the extent of watermarking pages, and very little downloadable attachment. This is ok if access lifetime but otherwise quite constructive. Also, charges for printed material is way more than cost.
-Monthly writing assignments focus on minimum word count rather than writing quality.

In brief, I'd say the course is worth it IF you are able to spare 2 hrs/week-thats all it would take on an average. If you wish to take benefit of all webinars etc then double that time.

Tuesday, September 19, 2017

How NPCI is silently transforming Indian payments ecosystem

Quick. Name a major Digital/Skill India/Make in India success story of the public sector, other than IRCTC. Hint, this is related to banking. Given up guessing? Its NPCI.

Last week, Google made the news again in India when it introduced a payment system. However, unlike other players, it chose a different route. Tez is neither a mobile wallet nor a modified version of Android Pay. It is built on UPI. Ever since demonetization(aka withdrawal of specified bank notes), the acronyms UPI, BHIM, Rupay, Aadhar Pay have all entered the general lexicon. What is common between these? All these are  brands/products of the National Payments Corporation of India (NPCI), an umbrella organisation for operating retail payments and settlement systems in India. It is the payments utility of the Indian financial system, which aims to innovate retail payments for achieving greater efficiency in operations and widening the reach of payment systems. L ike India leapfrogged the landline to mobiles, and cards to wallets, payments systems are similarly seeing digital first viz online players becoming mainstream and digital natives. For instance, across smartphones, fully secure, encrypted, virtual payment addresses, etc. 

 It is a Section 25 company (Like GSTN) which has broad-based shareholding across all sectors. The payments system globally has been an oligopoly between Visa, Mastercard and Amex. The developing world however has resisted this, with China locking out these majors and leapfrogging to Alipay, while India has not explicitly resisted them, but imposed limits/caps on their fees. So for these global players, India remains the last virgin frontier.

However, this was not reflected in the pricing which was high, viz anything between `5 to `8 per transaction as switching fee, which allowed NPCI to disrupt the market by charging around 5% of the other, and still earning a profit.

NPCI was created along with UIDAI, and has leveraged the identity/digital revolution to establish itself across debit, credit, contactless and prepaid, with flagship products of National Financial Switch, Cheque Truncation Systemand Aadhaar Enabled Payment System. While these target the bigger value transactions, smaller value transactions are enabled via Bharat Bill Pay, National Common Mobility Card and National Electronic Toll Collection. And of course, the USSD enabled BHIM.

Lets understand these acronyms a bit better
-UPI: 24*7 instant money transfer, with value added facilities of customer ID like email address, Scan and Pay/Collect and Receive/QR Code/free of charge notifications and multi lingual, the last part being vital for financial inclusion. The ‘instant’ credit allows it to substitute ATM, however customer security(via 2FA and PIN)/dispute handling/fraud treatment will be critical to its replacing credit cards

BHIM- Launched in December 2016, the BHIM app is essentially a rebranded version of UPI and Unstructured Supplementary Service Data (USSD). Available on the Android app store, the app allows users to send money, receive from friends, family and customers through a mobile number or payment address. For that, one has to register his bank account with BHIM, and set a UPI PIN for the bank account.

-One may wonder why UPI when IMPS already offers instant credit. However, the features of single APP(across all banks) and P2P give it an edge.

-NPCI being a bank owned utility reflects in their ability to retrieve account details in a masked manner, which is passed to BHIM via encryption to the extent required. However, it is not neutral in the sense that wallets are not linked to UPI so far-it is unlikely they would want it, as it’s a competing tool anyways.

-Rupay-This is India’s answer to VISA/MasterCard/Amex. It has 380+ MnRupay cards issued by 800+ participating banks, driven by Kisan Cards and PSU banks mainly. However, private sector is also issuing these cards(eg PAYTM virtual Rupay card), due to the advantages of no need for hedging Forex risks, low fees(switching fees nearly 1/3 of global peers) etc.  Also, for the less tech savvy banking segment such as RRB/Cooperatives, Rupay  has allowed them to enable their customers with good technology. Interestingly, the global tie ups for cards are not with the biggies, it is with Discover Financial Services and Japan Credit Bureau.
For more information, the below links are useful:
Of course, such initiatives are not without their detractors. The government announced an outlay of nearly 495crores to encourage BHIM transactions. The private wallet players felt this was not neutral. Ironically, it’s the private sectors who have lagged behind neutrality, for instance, the ability to read all 5 payment constitutes(Mastercard, Visa, American Express, RuPay ,UPI) in one QR code was only within BHIM. Other UPI apps had not followed suit. So now the government mandated it.

Tuesday, September 12, 2017

Annual Reports 2016-17-Part I

Ecoplast Limited, Valsad(Gujarat) based manufacturer of plastic films mentions that it has increased capacity of value added products from 1000MT to 2400MT. Presumably, this change effective Sep-16 will drive mix improvement and eventually sales/profit growth. For a company with total EV of ~45crs and capacity ~10,000MT, this 14% mix improvement should be substantial.

Kaveri Seeds saw its EPS(Earnings per share) more than halve during the period, but most of this change was due to an exceptional item viz lumpsum recording of disputed seed royalties of earlier years. The company however explained it in a single line viz An overall deficit monsoon in the Kharif season 2016. The exceptional item disclosed as  As per the agreement with M/s. Mahyco Monsanto Biotech India Limited, during the financial year the company has made a provision of Rs.5923.80 Lakhs for payment of royalty against the short provided royalty in the previous years.

Zicom saw disruption of its import and distribute business model due to the Budget 2016 provisions, wherein CCTV/security components were allowed at NIL customs duty with corresponding excise benefits, which helped Make in India players. They had to take an inventory writeoff, and with the Middle East slowdown, also had to writeoff receivables from Qatar, UAE etc, with order slowdown. They therefore delayed bank repayments to the tune of 94Crores, which almost entirely got converted into equity via SDR at valuation of Rs 43/share. However, they still took additional funding via working capital borrowings(!!) mostly from PSUs who ideally should have stopped lending

UFO Moviez is exploring interest adjacent business models such as UFO Framez is a cloud-based advertising technology platform..offers hyper local advertising clients a seamless avenue to advertise on UFO’s in cinema advertising platform, co branding of local greenfield cinemas under the brand 'NOVA'(maybe learning from OYO), as also Cinema on Wheels/Club Cinema. These have implications for growth of Just Dial, multiplex stocks like Inox/PVR and media in general

Sunday, September 10, 2017

Delta Corp-2016-17(2017) Annual Report overview

Motilal Oswal has been bullish on Delta Corp (read the below reports  http://www.motilaloswalgroup.com/AnalystVideo/Pdf/227183999DELTA-20170321-MOSL-IC-PG042.pdf and also the most recent one (http://www.dsij.in/productattachment/BrokerRecommendation/DeltaCorp_BUY_Motilal_31.08.17.pdf)

Having traded in and out of the stock between 145-180 levels, I thought to revisit the annual report to analyze how the business outlook has changed. The 256 page annual report (http://www.deltacorp.in/pdf/annual-report-2016-2017.pdf)

1)Currently, only 12 Indian states offer lottery, six states allow horse racing, and two states (Sikkim and Goa) and one union territory (Daman) allow casino-based gaming. ..In India, while on-shore casinos are permitted in Goa, Daman and Sikkim, off-shore casinos are permitted only in Goa, and online casinos in Sikkim and Nagaland...Regulatory moat since onshore casinos in Daman/Sikkim can only be set up in 5 star hotels-Delta owns the only 5* hotel in Daman and this business has a long gestation period. Also, Goa presumably would not issue any more licenses. These are however high regulatory risks
2)Management guidance of no further growth capex-However Adda52 M&A deal does not sync
3)Two other listed entities to piggyback-Arrow Textiles and Delta Magnets-latter is a self professed turnaround story
4) Equitable managerial remuneration increase-The average percentage increase made in the salaries of total employees other than the Key Managerial Personnel for Financial Year 2017 is around 11% to 14%, while the average percentage increase in the remuneration of the Key Managerial Personnel is NIL.
5)Conservative revenue recognition: As per the company's policy, gaming revenue is recorded based on net gain/loss at the end of each day. The revenue recognised includes gaming related taxes and duties which the Company pays as a principal but excludes amount collected on behalf of third parties such as entry tax.
6)Pedigree in promoters, auditors and board: Promoters are the Mody family(noted lawyer Zia Mody's husband). Audit committee has renowned audit partner Chetan Desai, and auditors are Grant Thornton.

Points to see further
1) In case of one of the subsidiary company there is a default in payment of Interest to FCD-A, FCD-A1 holders since April 2010.
2) Nearly all the promoter shareholding(40%) held in the form of trusts potentially to ensure smooth inheritance for the owner's daughters. Is this good(ensure continuity) or bad?
3) Normalize shareholders equity numbers-As per the IND-As reconciliation, 318.6 million Rs is the increase in retained earnings/equity as at 31-03-2016(Date of IND-AS). This is due to ~770 M INR goodwill offset mainly  by investment markdown ~383 MINR.
4) Sikkim not material from financial perspective-Key revenue driver seems gaming positions which is 1500 at present. Sikkim contributes to ~12% of this. While Daman approval awaited for ~1200 positions which will rampup capacity by 80%, this is therefore key number to watch.

Risks disclosed in QIP Document
1) Relocation of Goa casino ships out of river Mandovi: The company claims on-shore casinos are more profitable however this risk factor Pursuant to the letters dated April 7, 2017 of the Government of Goa each issued to our Company, HCEPL, and DPCCPL, we have been asked to submit a fresh undertaking in favour of the Government of Goa to relocate the operations of our Offshore Casinos out of the river Mandovi by June 30, 2017
2) Limited Pricing Power: While they can drive footfalls, they cannot really "hike prices" or show pricing power as the inherent nature of the business is house %.  While we may modify our entry fees and introduce new games or modify existing ones, the ability of our Company to charge our customers for its services offered is limited
3) Natural Disasters-However company claims to have insurance against earthquakes, floods etc

Tuesday, September 5, 2017

India Services Sector-some takeways from Deloitte's report

Recently, I stumbled across the below report India Services Sector | A Multi-trillion Dollar Opportunity for Global Symbiotic Growth. While the report proceeds along predictable lines of asking industry status, subsidies and more infrastructure with less taxes(:D), this was quite useful to provide base rate data and some context for India shining. Some views basis that report(Italics is quotes from report, with my comments in normal text with listed company names in bold. Please note, this DOES NOT CONSTITUTE INVESTMENT ADVICE

 Conversion of 75% of the existing single screens into two screen multiplexes can unlock revenues of INR 40-50 billion for the film industry through higher average ticket price, occupancy rate and advertising and food and beverage revenues This is nearly 30% of the present realization. Could be positive for UFO Moviez. 

 In India, fantasy sports is called ‘game of skill’ which is outside the purview of gambling. With rising number of sports enthusiasts, internet penetration and usage of smartphones, India would be an obvious destination and business choice for fantasy sports operators. Nagaland is the only state in India that has issued online gaming licenses for skill games including fantasy sports Will Delta Corp be able to capitalize on this or be disrupted? Already, virtual gaming is big abroad.

The Ministry of Urban Development has come out with a Smart National Common Mobility Card (NCMC) model to enable seamless travel by metros and other transport systems across the country, as well as retail purchases.  If this disrupts wallets, impact on PAYTM

 The government has accorded CGD network the status of public utility. This will allow the CGD system to increase its reach and make it comparatively easier to secure government licences and clearances Increasing competitive threat to Adani Gas Indraprastha Gas, Mahanagar Gas

• The government has in-principle approved the decks for use of LNG as an auto fuel. The draft norms for LNG application in road vehicles will be ready in FY2018 Demand to explode for listed gas players? 

Facility management has become a tool that allows businesses to integrate their noncore activities, focusing attention on core activities...Government regulations including Private Security Agencies (Regulation) Act 2005 and Foreign Direct Investment Policy and Goods and Services Tax is building the foundation for a key segment of this (Facility management) sector. Positive for Teamlease

 As companies increase their workplace wellness expenditures, it generates many related business opportunities, including a proliferating number of third-party providers that supply services, products, and platforms (e.g., screening assessments, diagnostic tests, incentive programs, wearable devices, counselling services, etc.) Positive for listed diagnostics and health insurers