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Rajeev Uberoi is the Group General Counsel for IDFC, one of the largest infrastructure financing companies in the country. In this interview with Bar & Bench, he talks about his experiences in the banking sector, the development of infrastructure finance, the growing role of General Counsels and what it takes to be a good corporate lawyer.
B&B: You started your career with the State Bank of India.
Rajeev Uberoi: I joined as a generalist in the SBI and was there for about a year and a half. Then I joined the Reserve Bank of India as a B-grade officer. By that time I had finished an M.A in Economics and was pursuing a law degree.
B&B: At that time, what was it like working for the RBI?
RU: Like any regulator, the RBI is a very stable and balanced organization with a very strong control mechanism. I think it is very forward looking though, like most government-oriented institutions, it had its own slow pace. If you recollect in 2008, one of the observations made by
many people was that the regulators had not kept pace with the market. Even the RBI, to some extent, has this weakness but then a regulator cannot keep pace with the market.
The market is moved by money making and the money maker always tries to be ahead of the regulator because that is how he makes abnormal profit. If he stays with the regulator he will only make normal profits and the investor doesn’t want that.
B&B: How long were you with the RBI?
RU: Fairly long. Technically, I was with the RBI for 15 years, but out of those 15 years, I went for to Italy to complete a post-graduate diploma for which I got an Italian government scholarship. Then in 1989 I got a Canadian Commonwealth scholarship to do PhD. My [thesis] topic was a cost-benefit analysis of the Narmada Sagar Dam.
B&B: That’s an interesting choice.
RU: I belong to Madhya Pradesh and during that time, the dam was a burning issue. And when a consensus was finally reached in the government, the World Bank pulled the rug and said that [the dam] was environmentally unsound.
Anyway, my assessment and analysis was that if you take the cost benefit analysis including the shadow pricing of the value you will get by creating the dam and having downstream benefits coming out of power, irrigation, employment, (direct or indirect) – the cost benefit analysis says that in roughly 30% more time, you will reach break even.
That is very close to the logic that is currently being used, particularly in the road development sector. The PPPs work on the logic that since you cannot get money at a lower rate, you go at the market rate but the asset that is created, will create enough factors of production and income stream to meet the interest component.
If you see most of the roads that have been built between 2006-2010, the analysis they did was at least 30 – 40% lower than the actual income earned. This means that the companies that built those roads thought that they would pay the loan back in 15 years or 17 years; they were able to pay back in 10 years. And they were rewarded for their risk taking abilities.
B&B: You completed your PhD. and then you returned to the RBI. What next?
RU: Along with fourteen other, I was selected to learn the process of computerization and sent to the U.S. and to Australia to learn about super computers. The fun, of course was going abroad at that age rather than learning about computers (smiles).
Anyway, when I came back to India, the RBI in its internal wisdom told me that since I had have not completed 3 years in the concerned department, I would have to go back to the same department and complete the 3 years. I did get a little disillusioned but I did not have the courage to leave the RBI. I could not finish my PhD.
I finally got an opportunity to apply for a position as Director of Institutional Finance in the government of Madhya Pradesh and I was selected. That is where I got to finish my PhD thesis.
B&B: What is your take on Regional Rural Banks? Are they effective?
RU: I think they are effective but the most important thing is the implementation. Even today, when we talk about “inclusion”, we are basically trying to marry the RRB with a universal bank. But the problem is that the rural market is so diverse, the requirements are so different.
Let me tell you about this one experience. I was working in one of these districts where, except the name, nothing was straight. It was called Seedhi district. Now for that RRB, we had to recruit branch managers. Now who on earth would go move from Bombay to be a brank manager there?
At that time, for 4 months a year there was no connectivity. The bus route only worked when the rains stopped. You can’t even think of bottled water. We would drink water from a pond where women are washing clothes on one side; cows are drinking on another side. That is the kind of poverty this country has and for credit delivery you need people who understand this.
B&B: But do you think it is only a problem of bringing in the right people?
RU: There are a couple of things here. For effective credit delivery system, human interaction is the most important. Let me give you an example: while working with RRBs I got the chance to interview people for the post of bank manager. The most effective branch manager of the 4 or 5 whom I recruited was a panditji (priest). He was also a teacher in a school. I still remember he was from Chitrangi village in Seedhi district on the UP-MP border.
This man who was actually a pandit and a teacher became a branch manager. He used to do his puja in the morning and then run the bank the whole day. And he was so successful because the whole village was around him and had confidence in him. He gave the people the loans they wanted, he took deposits from them and kept the deposits safe.
Why is there so much talk about private banking nowadays? A private banker can align to me and talk to me. In any financial inclusion, irrespective of the level, you have to align with the person whom you can trust with your money and your problems. If you need money for your daughter’s wedding, you can’t tell the market “I need money”
Secondly the laws are also such that you are not able to give money for the right purpose. And lastly coming to the government schemes, they have huge leakages.
B&B: In 1996, you joined ANZ in the bank’s compliance division. Any changes over the next decade?
RU: Some huge changes. I remember when I joined the RBI, lending was between only 9 to 5 which means you take deposit at 5% and lend it at 9% and go to sleep. In fact one of the deputy governors called this “lazy banking”.
Apart from this, even when there were large loans to be given, there were RBI standards on how much to give a person, when it should be given, on what cycle etc. For example, if it is cotton then this is the cycle, if it is oil then this is the cycle. Everything was defined and the bankers were not supposed to apply their mind.
This entire system changed after the deregulation of interest rates. You can’t imagine how revolutionary this was.
B&B: From RBI to a private bank- must have been quite a shift?
RU: Well, I worked more in the private sector than I worked in the government. Yet, I am still branded as an “RBI guy” because my mind set is like that –
B&B: What is an “RBI guy” ?
RU: Well, a conservative, someone who can’t be a cowboy. In the private sector you have to be a cowboy (smiles)
The shift was difficult but you have to stick to your value systems. If it is wrong, it is wrong. That is why I took this job because I am paid for telling the right thing.
Of course, I do find it very challenging because I don’t have a cut throat personality. I can tell you with pride that in my 30 years of experience, having gone through several ups and downs, I have never taken anyone else’s job. There are times when people say I did not get a promotion because I was not cut throat, I say “Well that is who I am.”
B&B: How was your time at StanChart?
RU: I had an interesting career there. I always like to do different things so for a short while, around 3 years, I was regional head for operational risk, which was basically a new thing for coming out of Basel. It covered legal, compliance, operations, technology etc. Then in 2009, I joined IDFC. I think it is the best place to work for a person compared to foreign banks, or private banks –
RU: A couple of things. One, this company is very young, very open. There are some very good people at the top. If you look at the top management of IDFC, it would match that of any foreign bank.
B&B: Speaking of which, you are on the Board of IDFC. Does this reflect the growing importance of a legal department?
RU: When I came to ANZ, my objective was to create a position for compliance officer, there were no compliance officers when I joined. In fact, there was no designated compliance officer even in foreign banks. And then in 1991 the Harshad Mehta scam took place and the foreign banks of the world, the Citibank, Stan Chart, ANZ, Bank of America – they were all hit. They were asked by their regulators to have compliance officers.
I can say with some element of pride that anyone who is a recognized compliance officer within the Indian banking industry has either been mentored by me or worked with me.
B&B: What got you to IDFC?
RU: I was offered all the responsibilities that I enjoyed taking up. I also look at corporate governance. Externally, I have taken upon myself to create a new “animal” which is the General Counsel. Till about 5 years ago, there was no designation as GC in the Indian industry. I have spear headed the concept of having a GC in the Indian industry and today I am happy to say that every large business group has a GC. Go back 10 years and you will not find any GCs in India.
B&B: Why do you think this post is so important?
RU: A GC has a much larger role than just legal and compliance. You are the wise man to the Board, an advisor to the management not only on legal and compliance but any other issue that can impact the company. This could be tax, governance, ethics etc.
B&B: What are your responsibilities as IDFC’s GC?
RU: IDFC is a conglomerate and it started as a government initiative where the RBI and the government owned 40% and another 20% was owned by financial institutions. The mandate was to develop infrastructure.
It was supposed to play the role of credit enhancement for banks for infrastructure. It was not supposed to lend but I think it was ahead of its time and the Indian infrastructure sector was not ready for credit enhancement. [Credit enhancement] basically means that if you give credit for a company at ‘A’ rating then by IDFC appraising it and giving it an enhancement it would get an “AAA” rating and the interest rate would come down.
So for couple of years we did that but it did not go anywhere. Then it was [Executive Chairman] Rajeev Lall who came on board and said we will do something different. So we went for public issue and today we have Rs. 15,000 crore capital. But we also had to develop our peripheral offering so we went and bought an investment bank, we now have IDFC Securities.
Then we realized we could raise larger amounts of money with small investors so we went and bought an asset management company. We have 5 venture capital funds in which we have raised US$ 4 billion.
In 2009, when I joined IDFC, we had a balance sheet of Rs. 50,000 crore and were not allowed to enter retail services. So we were borrowing from banks at a rate that was market driven. Now we had to take this money and, using our own management requirement, lend to the same borrower to whom the SBI would give loans.
So obliviously my cost will be more and my spreads were thinning. Then we went to RBI and said if we have to do infrastructure the current process will not work. So they said that because we were doing infrastructure, we could become a specialized NBFC – that is how we got a license for an infrastructure NBFC. We could now raise money overseas through ECBs at an interest rate lower than the domestic rate.
In 2011 and 2012, I can tell you with pride that my lending rate was almost at par with SBI, and lower than many private sector banks and public sector banks. This is despite the fact that such banks have a huge CASA.
B&B: When did infrastructure financing really pick up?
RU: I would say it was only 2006 when the highways took off. I think the whole NHAI framework is quite transparent and in the private sector you make or break yourself. I think in 2010-11, many highways and road projects were making huge money because of the economy growing and throughput increasing.
I think they started bidding recklessly, thinking that the rate of growth would remain the same. Clubbed with that, you had the problem of land acquisition. I think that problem [of land acquisition] could have been resolved. The NHAI land concession agreements have a provision that allows for tolling to begin even when less than 10% of the land is not acquired. There are ways and means but then it really comes down to effective implementation.
B&B: Is there a particular sector that you would like to focus on over the next 5-10 years?
RU: I think power was one sector that would have seen substantial growth, especially the natural gas power plants. These plants had a quick turn around time compared to either coal or hydro plants. But that did not turn out to be the case. Today I strongly believe that at this point in time, we should focus on finishing road projects because the linkages of road projects are very high.
B&B: Your take on FDI in infrastructure sector?
RU: There is no cap on FDI in roads or in ports. Having said that, the impediments for foreign investment continue. For example, the exchange rate, forward cover etc. The government is committed to developing infrastructure.
In fact, I was part of a committee that studied infrastructure financing. The basic concept was that when a road or a port is completed and becomes income generating then why don’t we securitise that income stream and ask the investor to go out and start another [project]. After all, the investor has to unlock his investment and there are provisions in the concession agreements that you have to keep 25% and 75% you can unlock. But that could only be done if the cost of refinancing is lower than the cost of financing. So if he has borrowed from me at 13% when the project was under way and there was a project risk, once this risk was mitigated the interest on which he could refinance was 11%. So if the foreign money has to come, it should be less than 11%. If you somehow got foreign money at 8% you would immediately refinance and release the capital that was stuck in that project.
But that did not happen for various reasons. The government always said that you would always have to take forward cover – that was prudent. Second the investors did not have the confidence that a particular policy concession would not be cancelled. For example, the coal block allocations were cancelled – I think that is where we faltered a little.
B&B: At IDFC, how often do you outsource your legal work?
RU: Well, we had to create very strong legal background and I can tell you with confidence that I almost run a law firm or maybe better than a law firm especially in my core competency that is infrastructure financing. When we restarted business, even the law firms did not have the expertise in infrastructure financing.
In fact, when I was collecting an award for Best General Counsel, the person handing me the award told me, “My only request is, please give us some work” (laughs)
B&B: And how do you select law firms?
RU: We have a very transparent way of looking at this. Any law firm that is interested should first be empanelled with us so that at least we know what he is doing. We have a centralized administration.
The second thing we do is internally assess the performance of a particular law firm. And third, we try to clearly define in which areas we would like to go to a law firm.
For example, I am hugely dependent on law firms when there is a cross border [transaction]. When we were raising infrastructure bonds in Singapore for a US$1 billion, I had to go to Slaughter & May. I couldn’t have done this in-house.
And then maybe my position is such, both personal and that of the company, that I get the best among the best. I am happy to say that whether it is Shardul [Shroff] or Zia [Mody], people are aware that if we have any issues, I will be picking up the phone and speaking to them directly.
Are they expensive? Yes. But I think Indian law firms are arriving on a global level.
B&B: And how has your experience been with these law firms?
RU: I may be excused for this but my interaction with law firms is very limited because I have a very strong in-house team. With respect to the firms we generally work with, including Amarchand, AZB, Luthra etc, we categorize what work we have to give because cost is also important.
If there is a private equity [transaction] we have to take a very high caliber law firm that is recognized domestically and overseas because my Limited Partners are all based overseas. They would like to have a law firm that is acceptable to them.
B&B: What do you think of the argument that India needs a unified regulator?
RU: This question has been around for the last 15 years. When I was in ANZ, Australia had first experimented with the centralized regulator called APRA. And soon they realized that it is so diverse that it is difficult to deal with.
We have funded the T3 airport in Delhi. And I remember reading this statistic that number of people who use T3 every year is equivalent to Australia’s population. So what can an APRA do when your whole population is going through my T3? This is just to strengthen the point that in India, the field is totally different.
In bureaucracy the more power you have, greater is the interference. Why do you think we are making so many states? A smaller state can be much more easily administered. And here you want to create a super regulator where the chain of command is much more difficult.
B&B: You have spent some time studying outside the country. What was your experience of foreign education?
RU: In North American universities you are given the material and then it is completely up to you. You could not go to a class without preparing yourself because you will lose out. The professor will come for a 3-hour session, take one aspect of say, macro-economics and if you are struggling to understand what he is saying because you don’t have the background reading, you land up being much behind the others. On the other hand if you had come prepared, you could ask specific questions and clarify your doubts. This is the kind of education that is expected in the US universities.
B&B: That is an interesting point. Those who have taught at Indian law schools some times say that the students are simply not putting in the reading that is required.
RU: See there are two things to this – one, the student himself or the “raw material”. If the raw material is not as good or as inclined, the final output cannot be good. The second aspect is the person who is creating that raw material into a marketable thing, ie the professor or teacher and also includes the infrastructure. By putting in money, that infrastructure is created but the raw material is the question mark. And last but not the least any product you create, that product has to be marketed.
The market is not looking for an ace lawyer who understands the laws and its implications but they are looking for a person who is a good lawyer and can manage their affairs. That is the market and this aspect is not at all in my control. So even if you get the best students and you get the best faculty, will the market pay the relevant compensation for the product that is created? That becomes a vicious circle.
B&B: Any advice for law students who are interested in pursuing a career as in-house counsel?
RU: Well, one of the persons I know is Ashish Nanda from Harvard Business School. His last assignment was at Harvard Law School and now he is the Director of IIM Ahmedabad. I was mentioning to him that it is time that you should have law courses for management schools. Today I think my law degree has helped me sharpen my skills as a manager.
If business schools offer a law course, not law per se but commercial law, they will realize that those MBAs are doing much better because they know the law. Without knowing the law, you cannot do the business.
B&B: What do you think makes a good general counsel?
RU: Well, knowledge is extremely important. The second important thing is you should be practical in understanding both the business and the legal angle.
B&B: But don’t the two often clash?
RU: That is the wisdom you need to have. Third you should have a very high level of integrity. This is where the ethical aspect begins. The animal instinct is in every human being and every organization but there is that old saying that, “An unbridled horse throws the rider.”