INDUSTRIAL INVESTMENT TRUST LIMITED
ANNUAL REPORT 2001-2002
Ladies & Gentlemen,
I extend to you my warm welcome to the 69th Annual General Meeting, of your
Company. The Notice of the Meeting, together with the audited accounts for
the year ended 31 March, 2002, has been in your hands for some time. With
your permission, I should like to take these documents as read.
In my Chairman's Statement this year, I seek to provide you an overview of
a number of issues of concern regarding the political and the economic
situation in India & other countries, since these factors do have relevance
as regards the affairs of your Company. The world in which we find
ourselves is fragile, and the economic environment in which we all interact
is volatile. The world is changing, and India must continue to change in
order to maintain the positive growth trend established over recent years.
Your Company, as it enters its 70th year, has had a further, very difficult
year - a year in which we have continued the process of survival as opposed
to growth. Due to the financial strength of the Company, I am pleased to
say that, in spite of this difficult year, we are able to propose to you
that a dividend be maintained, at the same rate as in previous years. In
the present markets, such recommendations, especially for financial
services organisations, are by no means to be taken for granted!
A FRAGILE WORLD
A look at the year behind us reflects the unparalleled degree of fragility
that has developed in our daily lives as regards the social, political &
economic environment, in India and elsewhere. This sense of fragility is
both shocking and disturbing - and nobody who has experienced the trauma of
the last year can be free of the sense of uncertainty that has cast its
shadow over all our lives.
Much has happened that could cause depression, dejection & anxiety, but
such pessimism does not mix well with business. To succeed in business one
has to be realistic, especially in the evaluation of business risk - but
reasonably competent management should be able to identify zones of
optimism within the prevalent aura of economic pessimism, in most
The fragility that we have experienced covers the real as well as the
emotional, the political as also the socio-economic, the human and the
Permit me to illustrate this fragility:
* The tragic events of September 11th, as seen so vividly on television all
over the world, destroyed the lives of many, in an untold and immeasurable
manner. But the disappearance of the Twin Towers of the World Trade Centre
demonstrated to each of us the fragility of major structures of steel and
concrete, when attacked by determined and effective suicide bombers.
* And the commencement of the war on terror that began with the terrorist
attacks on September 11th caused every traveller in the world to realise
the fragility of our systems of security, transportation and communication,
for they were unable to withstand the acid test of a terrorist attack.
* Nearer home, the tragic, systematic slaughter of men, women & children in
Gujarat represents a human & economic tragedy. Gujarat was transformed into
a disaster zone without precedent, when a few religious fanatics &
political extremists created social chaos in one of India's most
economically successful States. The very substance of our social systems,
where religions have co-existed for generations, was suddenly shown to be
* Whereas incursions into India across the Line of Control in Kashmir have
become an uncomfortable fact of life over the last half-century, the
fragility of life in the Kashmir Valley was reflected in the massive death
toll brought about, once again, by suicide bombers and determined
* And this, in turn, resulted in us all realising the fragility of peace,
for there was a near declaration of war between India and Pakistan, where
the world at large was anxious about the trigger fingers of political
leaders in both countries, as their hands moved towards the nuclear (first
or retaliatory) strike buttons, which would have not only destroyed this
fragile peace, but would have rendered the sub-continent (and areas
beyond) uninhabitable for generations to come. Here, the fragility was not
rent asunder - even as both sides demonstrated unique brinkmanship skills.
* And the fragility of economic systems has been put into clear perspective
by the collapse of so many major companies in the USA and elsewhere, where
the attacker has not been the terrorist extremist, but the combined force
of greed and corporate mismanagement. This has resulted, in turn, in
turmoil in the stock markets of the world, which have all "crashed", one
after the other - replacing resilience with fragility, brittleness &
* In part linked to these events, the fragility of reputation was reflected
in the sudden demise & extinction of the accounting firm of Arthur
Andersen, the auditor of a number of entities that have collapsed, bringing
to an end many decades of noteworthy reputation building in professional
services, causing one of the "top five" accounting firms in the world to
vanish, almost overnight. Here the poor judgement of a few appears to have
caused the elimination of the reputation of one of the world's great
In this Brave New World, we appear to be confronted with many ill omens,
which all point towards various avenues of disaster. Indeed, the IF Group
has also suffered in this difficult environment, on which I shall comment
below, but the fragility of our times has had less impact on us, due to the
strength and resilience of our strong balance sheet and our robust
We must learn to cope with fragile systems, with evil men & women, and with
the difficult economic environment that confronts us.
A famous maxim bears reiteration: "All that is necessary for the forces of
evil to win in the world, is for good men to do nothing". [Edmund Burke]
We, as the good men of the world, cannot sit back and do nothing!
THE IMPACT OF FRAGILITY ON BUSINESS SYSTEMS
Long-term survivors and participants in economic systems everywhere know
that only the robust survive, generation after generation. The robust,
typically, have the resilience to withstand most envelopes of fragility
that impact their environment. However, fragility in the economic
environment, in business systems and in the behaviour pattern of managers
are all factors that contribute to & accelerate the demise of those who are
weak. Such fragility shakes to the core the foundations of the insecure.
And the insecure, unable to develop resilience at short notice and in good
measure, rapidly weaken and collapse.
The extraordinary chain of business failures in the Western world,
particularly in the rapidly expanded energy & telecom sectors, underlines
the instability of many of these new conglomerates. Instead of developing
resilience, they have developed robust facades, with no substance at the
core. And, one by one, environmental fragility has caused those without
substance to "run out of cash" and to see their "lies catching-up with
them". Sadly, many business leaders have been able to structure their
personal reward systems in an opaque manner that shareholders and others
would never have accepted, had -transparency been an accepted business
practice. Unfortunately, the prevalent opacity (helped greatly by misguided
accountants and financial 11 entrepreneurs", many of them driven by
different forces of greed) has made it difficult for owners of businesses
to establish the extent to which they have been looted over the years.
Unparalleled greed has no place in business systems, and in fragile times
greed is an important catalyst towards self-destruction.
The world at large has learnt, perhaps to its own surprise, that whereas
the environment & framework for high-quality corporate governance was well
established in the United States of America, the implementation of
corporate governance, in many instances, was at the best weak, and at the
worst fraudulent. Many business leaders appear to have run businesses as
their personal fiefdoms, letting their charismatic personalities carry the
day, convincing markets and shareholders of their "bona fides"! Again, we
have experienced in the USA the very fragility of business facades without
underlying substance - and with no resilience to cushion against economic
Much has been written about this malaise. But the relevant aspect of this
trauma, the aspect that we must take with us to India, is in learning from
the experiences of such economic disasters in businesses in the USA and the
We need to learn that there is a world of difference between having an
effective system and implementing the system in an effective manner. We
need to remember that the one common thread through many of these economic
collapses has been the unadulterated greed of managers, who have been able
to manipulate results of operations to the advantage of their stock option
plans, their bonuses, etc. And we must learn to recognise, in India, the
manifestations of accounting and economic creativity, in so many different
forms, all designed initially to aid & abet the avarice of managers, and
then to protect the reputations of these same managers for as long as
possible, on the down-turn. We must learn how to avoid such creativity.
Accounting creativity must have limits. It is apposite here to remember the
distinction between genius and stupidity - for it is well known that genius
has its limits! The unlimited (accounting) stupidity of many business
managers, chief executives and their professional advisors has clearly
shown that this adage holds true today, as it did aeons ago!
But there is one important caveat that the Indian has already learnt over
the years. These multiple business disasters in the West will tend to lead
towards over-regulation, with the attendant risk of creating a bureaucratic
morass (which we have learnt over the years to manage in India), which is
akin to quicksand in its ability to absorb time. No sane Indian would seek
to advise anybody in the West to establish excessive regulation, but the
challenge to find an appropriate balance is a difficult task confronting
regulators all over the world. The shareholder must respect the rules of
caveat emptor, but the system should not make it excessively easy for the
shareholders to be cheated!
Above all, if shareholders lose faith in the equity markets of the world,
this would have untold negative consequences in the long term for
developed, and in the medium term for developing countries. The power of
the equity market to fund growth is unparalleled - and this positive force
cannot be allowed to weaken or become fragile to the point of becoming
What then are the lessons to be learnt, for India?
THE LESSONS TO BE LEARNT FOR INDIA - CAN WE SUCCESSFULLY VOID OVERKILL?
In many earlier Chairman's Statements of your Company, I have commented on
the need to improve accounting standards, to strengthen corporate
governance and modernise our standards of reporting and auditing.
Therefore, I should be glad that much is moving in this direction in India.
The Institute of Chartered Accountants in India, Government-appointed
regulators, stock exchange listing managers, industry associations &
confederations, etc., are all devoting significant attention towards the
improvement of accounting, reporting & auditing practices. But there
appears to be a "lemming-like" rush towards the target entitled corporate
From hugely deficient governance, we have migrated towards new and complex
rules, without providing for the necessary education of directors,
regulators & other business system participants in respect of the
application of these standards of corporate governance. And the rules are
complex and may be difficult to implement.
One of the conditions enabling the widespread corporate fraud in the USA
was the perception that each facade, by definition, was backed by a
structure, and could not be a mere shell. In India, today, we are exposed
to the risks of corporate governance being paid lip-service by managers, or
worse, by the creative entrepreneur using "corporate governance" to polish
his facade of an empty shell. Indeed, corporate governance misused can
represent a powerful tool of concealment, for the extent of data that a
listed company must now provide its shareholders is so voluminous that we
run the risk, collectively, of establishing a forest of confusion, where
the wood cannot be seen for the trees! We have entered the zone of
For a small group of companies such as the IIT Group, the Annual Report is
no longer bound into one volume, and has to be split into two booklets. The
amount of disclosure, some of which is covered by newly introduced audit
reports, requires diligent examination by the reader, to be & to feel
better informed. The number of meetings that are now required by committees
of the Board has multiplied. The zones of discretion have been reduced, not
always in a logical manner, as incomplete sets of accounting principles are
now applied, rigidly. The list is long, but the message is the same - with
overkill, corporate governance can become irrelevant.
In the technological arena, India has been an effective leap-frogger. We
have often moved from old technology to the most relevant technology of the
age, without going through the various phases of technological change
experienced in similar companies in the Western hemisphere. In the area of
corporate governance, we appear to have leapfrogged from the Stone Age into
today's age without providing the necessary help to "move up the learning
curve", for market participants to become effective in their new-found role
of protecting investor and lender interests.
The implementation of change (which is what will protect the investor) can
only come to pass when the implementation of this framework becomes
effective. In the interim, lawyers and auditors will enhance their fee
levels, independent directors (fearful of a growing litigative environment)
will hesitate to serve on the Boards of companies, and clients will
continue to pressurise auditors to "sign-off" on financial statements that
do not give a totally true and fair view. As a result, instead of attaining
effective protection for the Indian investor, the focus will rest on the
multitude of detailed rules, which will be broken frequently, but in such a
creative manner that the breach may be difficult to detect!
The critical lesson to be learnt, clearly, is the need to avoid overkill.
But there is a strong, dangerous negative "lesson" that some may also
learn, namely the ability to apply creativity to counter measures set in
place to provide investor protection. I suspect the Indian has no master in
such matters; the accounting illusions applied by so many companies in the
Western hemisphere are no match for the true "Indian rope trick". We do not
need illusionists, for in India we have true accounting wizards!
There is one further hazard, which we know from experience is as
irresistible, to the Government of India, as Eve's apple was to Adam! If
the Government of India concludes that private sector controls and market
mechanisms are inadequate in their function, they could cause regulators
and legislators to intervene, creating even a more bureaucratic environment
and regime than we presently face. In my opinion, this would be an
unmitigated disaster, as we would then end-up with a "good", but totally
ineffective framework for corporate governance.
PROFITS OR PROPHETS?
The earlier quotation from Edmund Burke, implying that the best attack on
"evil" is for the "good men" to act, is an absolute that we must respect.
Reactive behaviour can never lead to effective business systems. We must be
able to predict uncertainty, manage fragility and plan realistically, in
order for businesses to be truly profitable. The words "doom and gloom"
should not be applied in business, today. Prophets and their prophecies
have little place in an unemotive, analytical world. If the Boards of
Directors and the management of companies heeded the words of prophets, I
am personally convinced that profits would never see the light of day. We
need to be more proactive than ever before to identify opportunity, and we
must be willing to change, as "good men", in order to continue growing in
dimension, but also in resilience.
Even though prophets may be "good men", in the context of modern-day evil,
true profits are an effective counter to such evil. We need profits, not
prophets; we need to motivate positive, proactive corporate behaviour, as
"good against evil".
THE HT GROUP IN TODAY'S FRAGILE WORLD
The fragile environment, clearly, has affected the IT Group. India's
financial markets are in disarray, and investors have stayed distant from
these markets. Many stock market intermediaries and service providers have
had to conclude that the business of servicing investors & intermediaries,
which has never been for the weak hearted or inadequately capitalised, has
no future. Many have exited the service activities that interface investors
to investees, and investors to one another.
The IIT Group has suffered on many counts, as a result of the markets in
India being inactive, thin and weakened. Our portfolio valuations are low
and our corporate services business is at an all-time low ebb. We have
actually suspended operations at our brokerage business, for the time
being, to avoid the high costs associated with this segment, at such a low
level of activity (with relatively high attendant risks).
In my Chairman's Statement for the year ended 31 March, 2001, 1 described
that year as being the IIT's "anno horribils"; this year has been no
Fortunately, as a long-standing & traditional investment company, IIT
Limited has always accounted for its affairs as an investment company. We
have substantial silent reserves, since the value of our investment
portfolio is far greater than the cost thereof; the portfolio is carried at
the "lower of cost or market" in our books of account. This gap in
valuation is not accounted for, as we do not wish the results of our
operations to be impacted by the fickle volatility of stock markets, a
symptom of today's economic fragility. We record gains & losses only when
we dispose of elements of our investment portfolio; we do not "mark-to-
Today, the IIT Group is strong on reputation and strong on its asset base -
but we do recognise that we are weak in respect of our revenue stream. Your
Board is apprised of this dilemma and much discussion continues at the
Board level and with the management of the Group companies to determine the
right path forward, with the primary aim of safeguarding your interests as
As you will see from the financial statements of the IIT Group, where
consolidated results of operations and a consolidated balance sheet have
been presented for the first time for the year ended 31 March, 2002, we
have dramatically reduced our cost-base, especially as regards employment
costs. The lean market environment has not generated an adequate flow of
business revenue as far as our corporate services activities are concerned.
As regards our registrar & transfer and depository participant activities,
we are presently evaluating the merits of continuing in this business.
Your management has looked at opportunities for becoming a business process
outsourcer, using our infrastructure in place for activities outside of the
securities industry. We have only just begun making some headway in this
regard. One of the problems faced by most of the smaller business process
outsourcers in India is that they have no direct customers in India and
they are reliant on intermediaries in the countries for which the
outsourcer works, frequently the USA. These intermediaries are the main
profit earners in the value chain; there are dangers in any excessive focus
on this business activity. We shall not add any significant cost-base
without explicit assurances of long-term revenue streams.
The IIT Group has large reserves of unused property in the Mumbai area, and
excess property elsewhere, but we are unable to realise these reserves at
any reasonable valuation, as the property markets are at all-time low
levels - of price & of transaction activity. The market is poor as regards
large floor-plate properties in the Mumbai suburbs such as IIT House, built
some years ago. Moreover, there is an over-supply of modern, attractive,
"glass & steel" structures, which customers and clients prefer over the
more traditional facilities that we have to offer.
Fortunately, we have been able to realise reasonable capital gains in the
course of the last year, and we are pleased to sustain our level of
dividend, in order to respect our long-term commitment to you, the
shareholders of the Company. But we cannot continue ad infinitum paying
dividends from the disposal of capital assets. We need to re-examine the
future direction of our business.
Over the last year, your Board has studied many alternative strategies,
directions and opportunities - but the jury is still out. Our present
thinking points towards a "back to the basics" philosophy as the most
appropriate way of protecting shareholder value. Today, there is no merit
in the IIT Group being an insignificant player in a niche business; we
either need to be, or to become a dominant player in any sector in which we
engage, outside of the investment arena. This is difficult, in today's
The cost of attempting to increase our penetration in any of our existing
service areas appears, now, to have no merit as contrasted to the benefit.
Building a significant business process outsourcing activity, such as
running call centres, processing third-party data or entering the medical
transcription field, would result in our entering markets that are already
cluttered. We can legitimately experiment, but we should not make any
substantial investments to compete with the major players in these sectors.
Clearly, if an opportunity were to arise to conclude a liaison with one or
other of these existing major players, we should seriously consider such a
We continue to seek the right idea that protects and enhances your
shareholder value. We are determined to try to avoid any further erosion in
shareholder value. We wish to move ahead more rapidly, than hitherto, in
arriving at appropriate long-term solutions in this regard.
The IIT Group remains uncle, the ongoing leadership of Mr. C.K. Thanawala,
who has agreed to stay on for yet another year as the Group Managing
Director, to provide the necessary leadership and the value-added
performance that has helped us maintain our dividend in this rather
In conclusion, I offer my thanks to our loyal employees, to our senior
managers and to my colleagues on the various Boards of Directors of each of
the Group companies. We are working hard to cope with the challenge of
tough, fragile and difficult times. I end by quoting from the famous song
by Joan Baez - "We shall overcome!"
Sushil K. Premchand
29 July, 2002