A material mistake by SEBI

The newly coded listing regulations remove materiality as a relevant factor for disclosure of acquisitions

The terms on which companies get listed on Indian stock exchanges just got codified into regulations. The Securities and Exchange Board of India (Sebi) has notified the Securities and Exchange Board of India (Listing obligations and disclosure requirements) Regulations, 2015, (Listing Regulations). They will take effect on December 1, 2015.

For far too long, the terms of listing have been governed by an unhelpful legal construct – the listing agreement, an agreement between the stock exchange and the listed company.

Typically, an agreement is “private law” and governs only the parties to the agreement. However, the listing agreement has been wrongly treated like an instrument of “public law” that would bind the world at large. One did not even need to sign it – it was modified at will by an agency that was not even a party to the agreement, viz Sebi.

Fortuitously, this legally infirm policy belief never came up for serious challenge except in the Mallya-Chhabria takeover dispute over Herbertsons (there, the issue was that the listing agreement had a provision that shareholders who buy more than five per cent shares should report it and the acquirer in that case argued that an agreement that he was not party to, could not bind him). That dispute got settled without the law truly getting tested.

Sebi has now reproduced the provisions of the listing agreement in the Listing Regulations – which would now legally govern the world at large – not just listed companies and stock exchanges, but also the regulator.

While a large part of the exercise has been to consolidate the provisions, there is one area of new policy which is retrograde and lays the ground for adverse regulatory outcomes, no matter how well-intentioned it may be. The Listing Regulations, now mandate that any and every acquisition including an agreement to acquire would need to be disclosed by a listed company without applying any test of materiality for the disclosure.

The term “acquisition” has been defined as acquisition of control or acquisition of five per cent of shares or voting rights by the listed company in any other company. Absence of materiality would mean that regardless of the scale and size of the listed company, acquisition of any tiny company would need to be disclosed. This is a new measure. So far, listing agreement has only required disclosure of price-sensitive information, which by definition, would be information that could have an impact on the price of the securities in the market.

For example, a company with a net worth of Rs 1,000 crores would need to report purchase of shares of 5 per cent or more in another company, or purchase of control over another company, even if the value of the other company were just Rs 10 crores. Often, residential apartments are bought by way of buying companies that own them. Now, if one were to buy the company that owns the apartment it would require a public disclosure under this new requirement, while if one were to buy just the apartment there may be no requirement to make a public disclosure.

This is because the absence of materiality is an element stipulated only for acquisition of companies and not for other assets. The special definition for the term “acquisition” to cover acquisition of companies and not other types of business organisations, is inexplicable. Therefore, if one were to buy a bunch of assets, or, if one were to acquire a stake in a limited liability partnership, one would need to make a disclosure to the public only if the deal were material. But once it is a company that is being bought, materiality would be given the go-by.

The removal of materiality as a relevant factor is a step backwards. Offer documents in the Indian securities markets are extraordinarily bulky and contain a lot of irrelevant information, primarily because in a number of areas, disclosures are not truly linked to materiality. In other words, our regulatory framework requires issuers of securities to err on the side of excessive disclosures, which drowns out what is really necessary (read material) for taking an informed decision.

All pointers to reform of the primary market have been pushing for making offer documents meaningful by cutting out unnecessary, irrelevant and noisy non-material content. Even in the regulations governing insider trading, typical types of price-sensitive information are listed to create only rebuttable presumptions of their being price-sensitive – the contrary may be established.

There is another reason why Listing Regulations positively making materiality irrelevant is a step backwards. It would create fertile ground to mislead investors in the market with noisy, irrelevant and non-material disclosures. Investors would think that such non-material information is indeed material, since the law requires it to be published in the public domain. Such an approach would militate against another regulatory objective of Sebi, which has had occasion to chase listed companies for falsely talking up the share price by making disclosures of non-material acquisitions, leading the market to believe that things are positive.

Now, the defence would be to just point to the new law to say that the surfeit of irrelevant disclosures is in fact a regulatory mandate. At times, the quest to achieve the utopian “best” can easily turn out to be enemy of the “good”.

The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.

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Whether judges are punctual or should walk in corridors in a burqa to know their popularity are hardly pointers to whether a selection system is constitutionally valid.  Accountability and independence are always in conflict

By Somasekhar Sundaresan

The United States Supreme Court is no stranger to controversy. The latest debate in the US is about how the US Supreme Court judges are steadfast against recusing (staying off participation in a hearing) from cases affecting companies in which they have substantial financial interests.

A code of conduct that governs federal judges requires them to recuse but the Supreme Court judges refuse to abide by it. They argue that the Supreme Court was directly created by the Constitution while other courts are created by lawmakers using powers given to them by the Constitution. What this practically means is that the US Supreme Court judges have been merrily refusing to stay away from cases where they have conflicts of interest.

The New Yorker recently carried an article that analysed what this means. Last year, the Supreme Court ruled that a television streaming service was illegal since it violated copyright of broadcasters. The Chief Justice who ruled in favour of broadcasters was learnt to hold shares worth USD 500,000 (about Rs 3.25 crore) in a broadcasting company that had intervened in the proceedings and supported the broadcasting industry.

Two other judges Stephen Breyer and Samuel Alito too directly own shares in individual companies. The other judges only held investments in mutual funds, retirement funds and pension plans, which meant they did not have direct holdings in securities of companies. The three judges who hold shares directly are known to have ruled, between 2009 and 2014, in 37 cases where companies in which they held shares had been represented before them. Of these, their rulings went to the benefit of such companies in 27 cases. In no single case did they recuse. Indeed Justice Antonin Scalia is notorious for refusing to recuse himself from a case involving a determination of whether former US Vice-President Dick Cheney had lied in office, even while having gone on a duck-hunting holiday with Cheney, and bumming rides in Cheney’s jets in the process of getting his hunting vacation.

What is the situation in India? Many an Indian judge is known to have simply recused from a hearing on discovery that he holds even pitiful financial interests in shares of companies involving in proceedings before them. There have indeed been cases of judges declaring such shareholding and all parties involved in the case requesting the judge not to recuse and expressing faith in the judge’s independence. That approach too landed some honest judges in trouble. A judge well known for his sterling integrity was accused of being “dishonest” by an activist lawyer in an interview. After contempt proceedings were initiated the accusing lawyer clarified that he did not mean financial dishonesty but intellectual dishonesty. Meanwhile, a doyen of the profession suggested in open court that the judge ought to have recused himself.

A recent constitutional amendment enabled the National Judicial Appointments Commission to be set up, taking away the judiciary’s practice of self-selection of judges. A challenge to the constitutional validity of this law has been heard. Judgement is awaited. Sadly, the proceedings had degenerated into prime-time-television type discourse where the parties arguing went into the quality of work ethic of individual judges rather than focus on whether our Constitution outlawed the creation of a body like the NJAC. Whether a selected judge is punctual or whether the judges are popular in the court’s corridors (a lawyer exhorted them to walk around in a burqa to know what people really thought) are hardly pointers to whether a system of selection is constitutionally valid.

More recently, a committee (Disclosure: I was part of it) appointed by India’s capital market regulator recommended that public servants including judges should be brought within the ambit of insider trading laws if they traded in securities ahead of announcing their decisions that could impact the market price of these securities. Insider trading law only covers insiders of companies that issue shares while judges and bureaucrats, by definition, are outsiders. The reform did not get accepted. Harnessing accountability and financial transparency of public servants is never an easy task anywhere in the world.

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This article was published in the Mumbai Mirror and allied publications on August 21, 2015


The most versatile strategic tool available to us is the ability to engage the other side in meaningful, constructive and sane conversation. Unfortunately, that isn’t the order of the day

By Somasekhar Sundaresan

The power of dialogue is staring us in the face. India and Pakistan have found enough excuses not to have a dialogue. Each side claimed the other started unprovoked firing at the border. Each side built imagery of savage-like conduct by the other side’s armed forces. Each whipped up patriotic zeal and fervour to a level loud enough to make it politically impossible to engage in dialogue without being seen by the public as a loser. Obviously, each side is sheepish about the breakdown in dialogue, and is therefore blaming the other for it.

An unknown upstart is laying claim to being the new Loh Purush” (iron man) from Gujarat. Hardik Patel, in his early twenties, is green enough behind his ears to now know the finer nuances of the law and policy on caste-based reservations. In seeking caste-based reservations for the well-off and powerful Patidar community (which gave India Sardar Patel), he is on course to triggering a new and dangerous wave of anti-reservation emotions among the higher castes who have a louder voice and greater reception in the mainstream media. He does not carry a sane voice of reason and no sane voice of reason attempted to talk to him.

He had the delusion of being big enough for the chief minister to come to him to accept his representation and the CM did not have anyone bigger than the local collector to collect his representation on her behalf. He was arrested, unrest followed and unbelievably, large parts of Gujarat have had to face curfew.

Arguments with children necessarily place the child at an advantage – you can’t win easily win against them particularly when they lack reason. But you simply have to engage with them to resolve tantrums. They need to be talked to, to be distracted, convinced, or to be given something else to fancy.

Dialogue is critical for making law and policy. Just a few weeks ago, opposition parties in Parliament blew out an entire session. They just refused to engage. Their justification: others have done it before, and we can do the same now. In a nutshell, they refused to participate in any dialogue. In the Lok Sabha, even when a farcical dialogue started – on a motion to adjourn Parliament with one day to go for the session to get over, the two sides talked at each other and not to each other. The dialogue was so base that it was hardly a dialogue. The result: lawless conduct by lawmakers. Parliamentarians took to the streets against the speaker who sought to read the riot act and lay down the rule of law.

The law on making it easy to acquire private land for the larger public good needs a dialogue between the one whose land is being acquired and the one seeking to acquire it. In much the same way, acquiring small investors’ shares to take a company private from being publicly traded needs a format for a dialogue. The format for dialogue in the laws that governs each of these subjects is about the money. For land, the buyer has to compute and provide what the compliant price should be. In sharp contrast, for shares, the sellers get to decide and prescribe what the compliant price from the buyer should be.

Replacement of a multi-state-diverse-and-complex tax regime governing sale of goods and services with a standardised uniform goods and services tax across the nation requires a constitutional amendment. By design, it necessitates a dialogue across political lines and across states, when any one of the multiple stakeholders can argue that some element in the proposal is bad. When Mamata Banerjee wins a package deal for West Bengal to give her consent to something of national importance and you feel like abusing her, think again. She is in fact engaging in dialogue. And getting a political bargain is far better than a breakdown in dialogue.

Remember the ad campaign with the tag line: “Baat karne se hi baat banti hai”? Unfortunately, dialogue is fast becoming a dream that is only sold in ad campaigns for telecom services. If only there was more dialogue.

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This article was published in the Mumbai Mirror and allied publications on August 26, 2015


Firmly embedded in the Sheena murder story is the saga of a breakdown of the criminal investigation and justice delivery system. With media keen to play judge, jury and executioner, there’s little hope for a fair trial

By Somasekhar Sundaresan

One could not have thought of a more bizarre but riveting reality television story. Every consumer and supplier of news is obsessed with it. A shoddy police system is trying to take credit instead of addressing what is evidently a failure on multiple levels. Perhaps because the prime accused is a former media owner, the rest of the media is overzealously crowing over the fallen foe.

The allegation is that a woman planned and executed her daughter’s murder with the help of a former husband and driver, taking her current husband for a ride, whose son was the murder victim’s lover. A son too is alleged to have been the subject of an attempted murder, and he is on television calling for his mother’s blood. A man in a mask claims to be the father of the murder victim, calling for stringent punishment for his former lover. The stepson alleges that he tried to make police complaints about his missing lover but was frustrated and got reconciled to being without his lover. Remains of the murdered corpse are alleged to have been found in some remote place.

Locals are reported to have said that burial of suspect human remains is a usual occurrence in their area. The police in the region do not have records. Suddenly, some fancy technology to “recreate” the face of the victim from the remains is talked about. The face they would seek to recreate is now nationally well-known and is on the front pages of newspapers every day. Yet, this is talked about as credible build-up of evidence. The accused is castigated in the media for “giving the police a tough time” for refusing to confess. A “sting operation” by the police is reported – placing the three accused in the same room, secretly listening in on their conversation. Helpfully, the police “refuse comment” in the reports that carry news of the alleged blow-by-blow account of this allegedly confessional and incriminating conversation. News agencies proudly claim to have copies of police applications for remand of the accused.

Firmly embedded in this bizarre story is the story of the breakdown of the criminal investigation and justice delivery system. With such wide-ranging public coverage of every allegation from every quarter, some painfully in contradiction with others, one can hardly expect a free and fair trial. Despite the breakdown of the policing system, leading to a three-year delay in even discovering the alleged murder, it would be a complete surprise if the trial leads to acquittal of the accused. In the unlikely event of acquittal, society would turn against the justice system itself. Talking heads on prime time television would spew venom on the breakdown of justice. A movie may be made titled Nobody killed Sheena. In short, the current social dictum is: if someone has allegedly been killed, whoever is accused of the murder must surely be punished.

The media coverage is reminiscent of the coverage of the notorious murder of one Prem Ahuja by KM Nanavati, a decorated militaryman in the 1950s. Society got divided into the Sindhi camp (supporting the prosecution) and the Parsi camp (supporting the accused), and the trial was conducted by the media, with Parsi-owned Blitz magazine firmly supporting the Parsi cause. The accused was acquitted and the media coverage played a role in a mistrial being declared.

In 2012, a Supreme Court constitutional bench headed by Chief Justice SH Kapadia refrained from issuing blanket guidelines on gagging the press, but laid down the principle that one may indeed ask a court to issue a writ postponing reporting of court proceedings. The court ruled that a temporary ban on publication of court proceedings may be necessary to maintain a balance between freedom of speech and the need to protect against prejudice to the administration of justice. Critics assailed it as a development that would give rise to a gagging culture. Far from it, the fear of a media backlash and the consequential adverse scrutiny makes one shudder to think of seeking a gag order. Little wonder that the only two known beneficiaries of gag orders since then are a senior counsel and a retired judge.

Meanwhile, trials in the kangaroo courts of television studios and front pages continue unabated. Everybody loves a murder.

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This article was published in the Mumbai Mirror and allied publications on September 4, 2015


By Somasekhar Sundaresan

Diplomatic immunity is in the news again. And it will flare up emotively yet again. A Saudi Arabian diplomat and family are alleged to have held hostage two Nepali women hired as domestic help in their apartment in Gurgaon. The women have also alleged sexual assault, and medical examination is reported to have confirmed it. The diplomat’s immunity would be at the centre stage again, and debate would rage over whether the immunity would at all be available since sexual harassment of domestic help would not be in the line of diplomatic duty.

Diplomatic immunity as a custom predates the immunity as we know it since 1961, when the Vienna Convention on Diplomatic Relations was signed. Even in the Ramayana, it is said that Vibhishan reminds Ravan that Hanuman was only the messenger of Ram, and could not be put to death. The need to ensure that a country does not shoot the messenger has been at the root of the immunity. Insults to messengers have caused many a war in the history of civilisation. The Vienna Convention binds all member states. Under the treaty, “members of the diplomatic staff, and of the administrative and technical staff and of the service staff of the mission” enjoy “immunity from the criminal jurisdiction of the receiving State”.

The immunity ends up getting tested. Devyani Khobragade, India’s deputy consul general in New York, was arrested for allegedly lying on oath about the remuneration she paid her maid. Just before the arrest, she had moved the courts in Delhi against her maid. In retaliation, the then UPA government aggressively reviewed the security detail provided to the US Embassy. The US moved out its Ambassador to India when it was discovered that the US had given the maid’s husband in India safe passage and asylum in the US. The two countries have since been busy at patching up relations with the US President being the chief guest at this year’s Republic Day parade in India.

Conflicts between diplomats and their domestic help has been at the core of many a controversy over whether the immunity is absolute. The abuse of diplomatic immunity and the seemingly logical need for nations to rework their agreement on it are increasingly making news.

However, it is critical to appreciate the need for immunity. Absence of immunity would mean that diplomats could get dragged into politics with false charges being levelled and getting embroiled in legal proceedings to lead evidence on their defence on merits. It would enable frustrating the diplomat’s capacity to serve effectively.

The country that has sent the diplomat may indeed waive the immunity and make its diplomat face trial in the receiving country. Even the individual diplomat is not free to waive this immunity since the benefit of the immunity is not to the individual but to the country that sent the individual diplomat. Indeed, when the country represented by the offending diplomat waives the immunity, and a diplomat is sentenced by the local court in the country where he is serving, the diplomat would typically be sent back to his home country to serve the sentence there. The immunity from prosecution in the country that has received the diplomat does not mean that the diplomat would go scot free. The home country may also prosecute the diplomat or take appropriate action under the home country laws, and punish there for the violation.

Diplomatic immunity got tested in an extremely improbable situation in India when the Supreme Court asked for deposit of the Italian Ambassador’s passport. The court had permitted two Italian marines who were facing trial in India to go home when the Italian Ambassador promised that they would come back. Italy changed its mind and refused to send the undertrials back, and the court took away the diplomat’s passport.

Taking the passport away would constitute an arrest with the territory of India being the prison. The marines indeed came back and the diplomatic crisis was defused. The latest on the subject is that the proceedings in India have been stayed by the Supreme Court after a United Nations tribunal has reportedly directed India and Italy to maintain status quo.

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This article was published in the Mumbai Mirror and allied publications on September 11, 2015


By Somasekhar Sundaresan

Corporate India has ordinarily never mustered the courage to speak in one voice on any national issue in an institutionalised manner. That they are doing so now with the mess that is Parliament is welcome even if comical.

The Confederation of Indian Industry has launched a petition on change.org, and social media is aflutter. The group has initiated an appeal to political parties to “have a collaborative and consultative process… and allow Parliament to function, to debate and legislate”.
Corporate India is one section of our society that has singularly demonstrated a lack of cohesive national policy focus. Every corporate chief has typically been focussed on the slant that our laws and policy should have to suit his or her own objective without a thought to the wider section of society. Perhaps due to this reality, the appeal has barely managed to refer to the only possible neutral topic: the importance of amending the Constitution to bring in the goods and service tax. It generally speaks of the need to “discuss important issues, like floods, security issues, other economic priorities, etc.”

The appeal does not name the Congress or any other political party. But the Congress and the Left are enraged. Payback time, says the Left – indicating that industry is being loyal to the king. This is proof that the current government is one set up for industrialists, says Sharad Yadav of Janata Dal (United). Comical, says the Congress’ Manish Tiwari, asking where the industrialists were when the BJP wiped out session after session for ten years. “Return on political investment (is) floundering (and) now they want Parliament to bow to their diktats,” he argues, finding fault with the timing of the first ever institutionalised collective appeal from the corporate sector.
Self-censorship is a classic Indian trait. Attacking the timing of any principled campaign is the easiest way to attack the principle underlying the campaign. And no campaign to make an unpopular point popular, or to shake up society from its slumber, can be won without sticking hard to some core principle underlying the campaign. Attack the timing as inappropriate and you can hope to shoot the message along with the messenger.

Examples abound. One may campaign against capital punishment and merciless handling of mercy petitions, but when Yakub Memon is being hanged, one is supposed to keep shut. One may campaign for free speech, but one must not do so when the national debate is over the effect of pornography. One may have sympathy for the plight of Kashmiris but one must not make a mainstream movie on it since Pakistan has made noises at the same time. One may argue that throwing anyone in jail indefinitely without support of a single legislated legal provision is really bad, but doing so when it is Subroto Roy who has been thrown in jail, is not acceptable.

It is indeed true that Corporate India has ordinarily never mustered enough courage to stand together and speak in one voice on any national issue in an institutionalised manner. Little wonder that we have a horrible company law governing corporates. When it really mattered, there was no cogent debate on the core issues that were wrong with the law. Individual industrialists spoke against issues like limits on board tenures for friendly “independent” directors and rotation of auditors, but worse measures still got through, such that in less than two years since the new law the government committee is trying to rewrite it.

Of course corporates have also been effective in collective efforts. Mumbai’s industrialists have effectively stymied the building of a vital flyover at Peddar Road, where many of them live. They came together to support a law that would make acquiring land from farmers even easier – while this is said to be a failure, truth be told, today it is easier to forcibly acquire a farmer’s land as compared to forcibly acquiring a public shareholder’s shares in a listed company.

Yet, when corporate India speaks up on the need for Parliament to function, it is useful. Light from any source is illuminating. The CII campaign has caught the public imagination, thanks to public tolerance of failed Parliamentary sessions wearing out. Just as we finally have a Speaker who knows to throw the rule book at lawmakers, we finally have a generally-disinterested group taking a public stance. The need for any principled stand is always at a time of crisis.

This piece was published in Mumbai Mirror and allied editions on August 14, 2015

Iran is the new horizon for India

No other development in international law has been more significant for India’s corporate and business sectors than the Iran nuclear deal. India’s businesses typically take no interest in geo-political issues but this is once that they ought to sit up and move in to exploit an advantage they would have over businesses from the western world.

The agreement between the Islamic Republic of Iran and the “P5+1” group (the five permanent members of the United Nations Security Council plus Germany) can truly be a game-changer for Indian industry. The western powers have historically tried (and failed) to cripple Iran into a banana republic, and the latter has fought back valiantly (and successfully). Germany alone has maintained robust trade relations, despite deep inconvenience. To cut a long story short, the sanctions against Iran by the western powers has gone way beyond what the sanctions by the United Nations legitimately endorse.

Sanctions by the United Nations are only restricted to arms, ammunition and contraband, while the sanctions from the western nations went beyond that and attempted to cripple the nation’s financial systems and channels of funds. The idea was to be coercive with the republic and get them to wind down a nuclear programme, which was feared to be convertible into a weapons programme, that Iran kept insisting was never about making warheads.

The bargain to resolve the impasse and lift sanctions has been inevitable in more ways than one. Against the teeth of the sanctions, Iran has built a reasonable quality in its infrastructure, good public transport, decent public health indicia, and consequently bolstered Iran’s resilient national pride. Iran’s own internal politics is complicated and divisive – just the same type of divisiveness that one sees in other democracies such as India and the United States.

The Department of Financial Services in the State of New York extracted an expensive settlement of $340 million from Standard Chartered Bank for allegedly helping Iran’s trades – this was among the settlements that sparked international literature on the extortionate state of the United States’ law enforcement policy, since defending oneself is so expensive that one would rather settle fights with state agencies. This was a case of a local prosecutor enforcing federal law – somewhat like Kerala Police harming entire careers of India’s space scientists on charges of espionage against India. Even larger settlements ($9 billion against BNP Paribas for allegedly facilitating trade with Iran, Cuba and Sudan) have reflected even more poorly on the US. Indeed, Coca-Cola and Pepsi-Cola are widely available in Iran due to exceptions on “humanitarian” and “food supply” grounds.

In the United Kingdom, the Supreme Court came down heavily on the government for harassing and seriously harming the interests of Bank Mellat, an Irani bank’s operations in the United Kingdom.

The upholding of the rule of law by the UK legal system in fact is still in play – proceedings for payment of damages by the UK to the bank are under consideration by UK courts now.

Gradually, the lawless means of hurting Irani interests, all in the name of safeguarding the world from weapons of mass destruction – a hollow phrase one has heard of earlier in the context of Iraq – had to give way. What does this mean for India businesses? If Indians get out of their stereotypical thinking and realise that Iran is neither like Saudi Arabia in cultural conservatism nor like Egypt or Morocco in being a pushover for other world powers, they would see the opportunities that abound there.

First, Islamic capital markets entail sophisticated derivatives contracts (using put and call options to get around sharia limitations on payment of interest) and market players are highly sophisticated in appreciation of financial products. Second, the release of sanctions would pose immense opportunities for Indian players active in the banking and financial services back office industries, more particularly for the information technology industry.

Third, and most importantly, if the agreement is operationalised, the sheer inability of an Indian business to trade with Iran because just doing so would lead to others who trade with these Indian businesses violating US laws would go away. India could well be the regional headquarters for multinationals entering Iran if India strikes good bargains with good treaties on investment protection and tax avoidance.

Contrary to popular western and Indian middle-class perception, Farsi is far closer to Urdu than to Arabic. India is also physically closer to Iran than to China and the United States. And, for the record, in the Ease of Doing Business survey report of the World Bank, Iran ranks 130 out of 189 countries, while India ranks 142. In enforcing contracts, Iran ranks 66 while India ranks 186. This is an opportunity that Indian businesses can only ill-afford to lose.

(This piece was published in my Without Contempt column in Business Standard edition dated July 20, 2015)