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“I have tried to create a world to protect others’ risks – that too through systems and design”

Dr RH Patil narrates the innovations and battles behind the setting up of the National Stock Exchange

Ask anyone who was the moving force behind setting up the National Stock Exchange (NSE) and few will mention Dr RH Patil’s name. Yet, it is one of the largest in the world and valued at Rs18,000 crore within 13 years of operations. Ask what has he gone on to do after leaving NSE and only gilt market players would have an answer. Well, Dr Patil has quietly created another path-breaking, world-class institution that will change the way gilts and their derivatives are traded globally. That is the kind of person Dr Patil is – unassuming but fiercely competitive; intensely focused on the cause of the institution he works for; remarkably entrepreneurial but totally ethical; an institution-builder but only of the public-service variety. He belongs to a rare category – serial institutional-entrepreneur. India needs people like Dr Patil as much as it needs the Ambanis and Narayana Murthys. Why is this person not a Padma Vibhushan, we wonder? Dr Patil narrates his uneventful initial career, the innovations and battles that made NSE possible and the quiet but revolutionary work he is doing today

ML: Can we start with your childhood and where you studied?

RHP:
I was born in a small town called Nandgad in Belgaum district of Karnataka. My father was a landlord. I completed my matriculation there and then went to study at Karnataka College in Dharwad between 1955 and 1957. I then got bored with Dharwad and shifted to Pune’s Fergusson College. I had scored well in SSC. Everybody said I should go in for medicine or engineering, but I wanted to be different. I thought medicine meant cutting bodies and, being a vegetarian, that didn’t appeal to me. Engineering meant working in a factory or field sites. I didn’t want that either. At the pre-graduate level, I opted for economics, which I liked very much and chose sociology as my second subject. After graduating, I wanted to join the best school in economics, which was the Bombay School of Economics those days. That is how I came to Bombay.

ML: Had you decided on a career plan then?

RHP:
It seems strange, but I have never planned for the long term. I take life as it comes -- try to make the right choice and let events take their course. I got a first class in my MA Economics, so the next step was to do PhD, which I did in international economics. Those days, a job at the Reserve Bank of India (RBI) was the coveted place for economists. After completing my doctorate, I remained with the Bombay University for a while and then joined RBI and was there until June 1975. When I was 38 years old, I shifted to IDBI (Industrial Development Bank of India), which was then owned by RBI.

ML: What was your portfolio in RBI?

RHP:
I was in the international trade division for the first two years. I worked with S.S.Tarapore (former deputy governor). I was later transferred to the international finance division, which used to look after RBI’s relations with IMF (International Monetary Fund) and the World Bank. That was the time when the dollar went off the gold peg. India was a member of the IMF’s “Committee of 20”, since we were one of the five important countries in IMF. Dr Manmohan Singh was the chief economic advisor to the Government of India those days and India’s representative on that committee; I was given additional responsibility of assisting him from RBI’s side.

ML: Did you have a specific career path in mind at IDBI?

RHP:
I intended to remain on the research side. But after IDBI’s separation from RBI, the management decided to have a common cadre for all functions and I was shifted to areas like project finance and treasury. I worked in Chennai during 1989-1990, after which I was promoted as executive director in charge of treasury and later as head of project finance where I had to look after the loans portfolio. In those days, there used to be monthly inter-institutional meetings (IIMs) of the heads of all-India financial and investment institutions. Major policy issues as well as assistance to very large projects were discussed at the IIMs and my research department prepared the policy notes. I attended the IIMs even when the agenda had no policy issues; it gave me good perspective on evaluating loan requests, which helped me a lot later. When I was shifted to loan appraisals, many people said: “This fellow is an economist; he will be a disaster.” To their utter shock, I often knew the background of the project or the sector and could ask for a re-look.  In Chennai, they said I would not succeed because I had no experience of handling both personnel and operational matters; but in less than six months, the then chairman S.S. Nadkarni began to get messages about the way I handled things. He had his ways of finding out how his officers were doing. He would get feedback from industrialists.

ML: How did the decisio­­­­­­­n to start NSE come about?

RHP:
After the Harshad Mehta scam in 1992, the government was groping in the dark about what to do…G.V. Ramakrishna was the SEBI chairman. The finance ministry had called a meeting and I only got to know what was to be discussed on reaching there. Montek (Ahluwalia, then finance secretary), Dr P.J. Nayak (then jt. secretary and now chairman, Axis Bank), Mr Ramakrishna, Mr Nadkarni (IDBI chairman) and I were present. The concept of NSE was born at that meeting. We wanted to do things differently. We discussed setting up a professional organisation with screen-based trading, a weekly settlement system, etc. We also decided not to give dominant shareholding to any single institution and capped it at a maximum of 14%. We later expanded the capital to bring in some new investors and reduced the maximum stake per institution to 12.5%. IDBI was entrusted with the job of setting up the Exchange and

Mr Nadkarni asked me to lead the initiative.

ML:
What was your brief? Was it to offer a serious competition to BSE?
RHP: No; more than serious competition, they said, let’s bring in a clean Exchange. It was not meant to be a shock to BSE. We were asked to create a professional Exchange and offer an efficient alternative. In fact, we at NSE didn’t have any great hope that it would become such a big entity; we only wanted to offer a better alternative.

ML: There was no example of a second Exchange having beaten the dominant Exchange anywhere in the world. How did you go about it?

RHP:
Since we were totally new to this business, we decided to use experts who had the appropriate experience. We identified three such organisations -- PwC (PriceWaterhouseCoopers), Arthur Andersen and International Securities Consultancy Ltd. (ISC) based in UK and Hong Kong and asked them to submit proposals. We chose ISC since its fees were modest and it definitely had better ideas. ISC submitted a detailed proposal and sent a team, which worked closely with us for over two months on the detailed implementation plan.

ML: What was your team then?

RHP:
The research department was under me already. Ravi Narain, with his MBA background, was part of the team and he chose three others to work on the project. We did not want to set up another local Exchange but a truly national one. The question was how to spread its reach across India. Satellite communication was the best option but nobody had used it to run an Exchange. I said ‘let’s try’. Frankly, many of the decisions that we took were bold decisions; it never occurred to us that some of them might not succeed.
ML: Whose idea was it to use satellite communications: yours or ISC’s?
RHP: ISC’s. Departmental stores and pharmacy chains had used this model in the US even in the 1990s. Any shop in a chain of medical stores could recall your entire medical record from the central database through a satellite link. The second big decision was whether to choose the BSE model of jobbers or direct matching of orders. We weighed the pros and cons and ultimately decided that the anonymous order matching system was the best, although many Exchanges then had a quote-driven system. We were a bit theoretical (laughs). We looked at markets that were the most efficient or competitive and how to bring their features into India. That is how we came up with the idea that we must not limit the number of brokers. We felt, “let as many people come.” We would only prescribe conditions. We also used the deposit concept rather than the sale of membership cards. If anyone felt dissatisfied, he could take back his money: there would be no entry barrier and no exit barrier for NSE membership. We realised that we cannot establish national exchanges in different cities; we needed a fully interlinked system, which alone could generate huge orders and encourage competition.

ML: Didn’t you anticipate opposition from the BSE (which was then not a national Exchange) and the 20 regional exchanges?

RHP:
The government gave us the go-ahead to go national and BSE never thought that we would succeed. Also, in my desire to bring in more people, we never barred brokers from other exchanges. We said, traditional brokers are welcome but we will also encourage chartered accountants, bankers and other professionals to become brokers. When I toured the country, talking to people at other exchanges, they asked, “Why should we come to your Exchange at all”? Nobody took us seriously. They weren’t worried about us at all.

ML: From being an economist to becoming a development banker, you literally had to turn into an entrepreneur at the NSE. How could you make this transition rather late in your career?

RHP:
At IDBI, I had done my own analysis about how and why entrepreneurs succeed. There is a lot of economic literature to show that companies that function on ethical principles succeed in the long run; companies that cut corners do not get financing after a while; and those who are well-meaning and focused, hire good professionals and delegate work to them. So, it was not all theoretical in my case (laughs). In any case, until I was handling project finance and vigilance, I did not have problems. But once I started receiving calls (to pressure him on loans - Editor), I wondered whether I was spending my time fruitfully in IDBI. Around then, Mr Nadkarni said, “Since you are in charge of the treasury and are dealing with shares and stocks, you are the right person to oversee the NSE project.” When I started interacting with the team and the consultants, I found the whole thing very interesting and challenging. Mr Nadkarni then told me that (S.H.) Khan would be the IDBI chairman after he retired and I would be number two in the organisation. I then said, “I want to move over to NSE.” The company had already been formed and I was a director on its board. He was shocked. He said, “People aspire for power and you are saying that you want to go to an entity which nobody is sure if it will succeed or not. Aren’t you taking too much of a risk?” I said, “Sometimes one should take the risk.” He said, “Are you sure you want to take a risk at this age?” I said, “It is only at this age that I can take the risk. Both of us -- my wife and I -- have been earning; we both lead very modest lives. We have decent savings. If we continue to live modestly, I can take that risk.” In fact, many people said that I was a fool. But my own feeling was that, once you retire from IDBI, who remembers you? So I decided that it does not matter whether or not I succeed in setting up NSE. My grandfather used to say, if you make a whistle out of a carrot, it is good if it plays; and if does not, you can always eat it (laughs).

ML: When did you formally move to NSE?

RHP:
In July 1993. Mr Nadkarni and Mr Khan asked me to continue at IDBI for some time. I was released in mid-November 1993. At that time, NSE’s offices were still being done up and we worked out of makeshift tables and would eat in the lounge. Soon afterwards, we started recruiting -- mostly freshers. Only enthusiastic youngsters were attracted to the job: after all, the NSE was not a proven concept. In June 1994, we started trading in government securities and in November we started trading in equities.

ML: Did you have problems installing the V-SATs?

RHP:
When we opted for the V-SAT model, the Department of Telecommunications (DoT) was very powerful and had a highly restrictive policy. H.P. Wagle was the DoT chairman and we were initially assured full support. But when we asked for the C-Band spectrum, they said: ‘no we can’t give you C-Band, because there is a lot of demand for it. We can give you extended C-Band,’ which nobody was using. We agreed but when we asked for a transponder, we were told that there was limited space on the transponder. It was a very funny attitude. When we were finally given one-fourth transponder, it was on a satellite that had already started wobbling. We then started looking for V-SAT equipment, which was not readily available for extended C-Band. Luckily, Shiv Nadar (founder, HCL Comnet) was in touch with Gilat from Israel, which had expertise in TDMA technology. But it did not have equipment for extended C-Band. They said, technically, it was not difficult to manufacture such equipment; with a bit of experimentation, they would design equipment for that frequency and test it in Israel itself. However, we were not fully aware of the problems and the risks involved. Such equipment and technology requires thorough testing in live conditions. Gilat was not a very large company, so the main contract of commissioning the satellite communication project was given to an American company - GE Spacenet. When all the heavy equipment landed at the Bombay Port, the Customs Department went on an indefinite strike and we had decided to start operations around Diwali!

ML: How did you get around that one?

RHP:
The Argentine President, Carlos Menem had come to India and I was invited to a meeting that he was addressing. I met a senior customs official called Surjit Singh there -- a very nice gentleman. He asked me what I did and I told him about the NSE project. He was immediately interested. I told him about the strike and how it had affected us. He went back and told his officers that this was a project of national importance and so “even if there is a strike, we must help.” The equipment was deep inside the dock warehouse, at the farthest point from the entrance. Yet, he persuaded his staff to get it out and clear it. This is how people can come to your rescue if you are well-meaning. The equipment was then installed at Mahindra Towers (NSE’s first office) and we were waiting for DoT’s approval. They said, “no, you cannot set up the antenna here; it has to be set up in a place which is like a valley so that it does not interfere with telecom signals in the surrounding area.”

ML: Didn’t they say any of this before the installation of the antenna?

RHP:
We did not seek their formal permission since they had already approved our proposed V-SAT system. There was another dimension to the problem. I don’t think they ever took us very seriously. They were, perhaps, under the impression that we will not be able to operationalise such a complex project as no other satellite-based communication system of that sophistication had gone live in India until then. DoT itself was planning to set up 70-80 V-SATs as a commercial proposition on the extended C-Band, but it was stuck in a dispute with the equipment supplier. They were obviously keen that their project goes live before our project. Dr Manmohan Singh was highly supportive and was keen that the NSE project got implemented as early as possible. He had told Dr P.J. Nayak to use his name if the project got stuck in any government department and that was of great help to us. We told DoT that Dr Singh had given us the mandate to go live by Diwali of 1994; they then grudgingly gave us a temporary approval to start, on the condition that we would have to shift the mother-dish antenna to the outskirts of Pune if our system interfered with any other telecom network. But everything worked fine. We were also lucky that our extended C-Band system worked. Since we were in a hurry, it was not thoroughly tested before it went live. We were also not fully aware of the complexity of the communication system we had installed. Sometimes ignorance is bliss! It was almost a miracle that our V-SAT system did not face any glitches. It convinces me that if you are well-intentioned and are not doing things selfishly for yourself, there is a higher force up there that helps you. In the first few months, there was hardly any trade happening. It was about Rs6-8 crore per day in the equities segment. The same was the story on the debt side.

ML: In fact, you started with debt trading.

RHP:
Yes, that created a wrong impression that NSE was being set up mainly as an Exchange for trading in debt instruments. But we had always said that this is the only Exchange where all financial products would be available for trading -- government debt, corporate debt, equities, and all types of derivatives. There was a strong logic to why we commenced our operations with government debt. All the players in the G-Sec market -- brokers as well as institutional treasuries -- are located in Mumbai and we did not have to wait for satellite communications. We, therefore, opted for leased lines for that phase. There too we had to struggle with MTNL to complete the work fast.

ML: You started with debt trading and volumes were not picking up, what was the turning point?

RHP:
Well, Mr Nadkarni used to ask: “when are you going to cross double digits?” Sadly, he (Nadkarni) died before he could see us reach that figure. Sometime around February or March 1995, trading started to pick up and in May it spurted. Everyone was watching whether we would be able to complete our settlements on time and with minimum problems. When everything worked fine, week after week, people were slowly convinced that it was safe to start trading on the NSE.

ML: Issues like signature mismatch on paper-based transactions that slowed delivery and settlement were also a learning experience for you...

RHP: Those issues became serious a little later when volumes increased rapidly. Initially, the issue was whether the system would work without a glitch. Then, somewhere around May, we noticed that the transactions in actively-traded BSE scrips would pick up momentum on the BSE only after NSE opened for trading. Thus, NSE became the price setter and more volumes started flowing into NSE. 

Before October-end, our volumes surpassed those of BSE. Then, delivery of fake certificates and forged documents became our biggest problem. We sent our officers to the shares department of companies and registrar and transfer agents (R&T) to detect fake certificates. We soon realised that we could not rely only on our staff. So we requested R&T agents to depute some people to NSE to help us. At one stage, almost 40 people were engaged in detecting fake certificates before accepting shares for settlement.

As the volume of trading increased exponentially and spread across India, there was another problem. Brokers found it expensive to send share certificates for settlement on their own account. This led to delays. So we began accepting share certificates along with the transfer deeds in three other metros -- Kolkata, New Delhi and Chennai -- and we brought them to Bombay by plane. At one stage, about four tonnes of paper used to come to Bombay every week to be sorted and sent back.

ML: At your cost?

RHP:
Yes. But our transaction charges were higher than BSE’s. Brokers did not mind paying slightly higher charges because they were getting cleaner shares due to our effort; besides, we also offered them a settlement guarantee. (NSE was the first to introduce a settlement guarantee). We borrowed the settlement guarantee concept from the futures exchanges in currencies and commodities, especially in Chicago.

ML: Why did you decide on a for-profit stock exchange and when did NSE start making money?

RHP:
Membership deposits were non-interest bearing for the members, so we earned a lot of interest on those. In fact, interest income was so good that later, when volumes grew, we started reducing the transaction charges. While other exchanges were built on government concessions, Mr Nadkarni said, “You must prove that you don’t need any subsidy from anybody. If you are commercially viable, you will succeed.” We never expected that NSE would become such a large institution and generate so much profit.

ML: What was the tipping point? After all, even institutions were not trading on NSE for a long time.

RHP:
Yes. Even after becoming the largest Exchange of the country, even our promoter institutions did not trade on NSE! Their position almost was, “we have given you money to start an Exchange, now you go survive on your own strength. We will trade only on BSE.” We had to lobby with them to start transferring at least small amounts of business to NSE. In fact, the slowest to start doing business on NSE was UTI, the largest institution. Dr S.A. Dave (then chairman of UTI) said that he would not pressure his managers. He did not know that some of the staff had a nexus with brokers.

ML: This is the exact opposite of BSE’s frequent allegation that NSE had an unfair advantage because of its institutional parentage.

RHP:
Not only Indian institutions but even foreign institutions were giving
NSE the short shrift. Two dealing officers of a major FII even alleged that information was being leaked from the NSE. The most shocking thing was that our policy was to maintain secrecy; BSE had no explicit policy on this at that time. Two dealers of one FII had even persuaded their bosses to take up the issue with finance minister P. Chidambaram when he was in the US. Very interestingly, these two were later sacked for colluding with brokers. In fact, at that time, the automated trading system and depth of the order book position made manipulation through synchronised trading almost impossible. But we were asked to tighten the security measures even further. In another interesting case, the CEO of a large foreign brokerage firm complained to us about leakage of information about their trades. A thorough scrutiny of all possible sources of leakage revealed that their telephone lines were being tapped while receiving overseas orders!

ML: We remember that even getting your stock quotes in the papers was a problem.

RHP:
Yes, in fact you were the first to start putting our quotes in a national daily (this was when Sucheta was financial editor of the Times of India). Business Line also used to give us prominence. Thereafter the others started publishing NSE quotes, but that too very grudgingly. Despite the fact that NSE is the third largest stock exchange in the world and way ahead of BSE in every area, Indian pink papers write as if BSE is the only Exchange that matters. Is this indicative of the level of market ignorance or a bias, which has been consciously perpetrated by some vested interests?

ML: After NSE took off, you set up the National Securities Clearing Corporation Ltd. (NSCCL).

RHP:
Yes. We felt the need to guarantee the trades. As you know, clearing and settlement with guarantee is a commercial activity. In the process of offering this guarantee, the Exchange can go bankrupt, if markets turn volatile and there isn’t enough money in the guarantee fund. It would be disastrous for a public institution like the stock exchange to go bankrupt; that is why we created NSCCL as a separate entity. Later, when the problem of fake certificates began to hit us in a big way, we realised that we can’t go on like this and had to move towards paperless trading through a depository. In 1995, we set up the NSCCL; and in 1996 the National Securities Depository Limited (NSDL) became operational.

ML: The NSDL took off very smoothly didn’t it?

RHP:
Yes; but there were vested interests that opposed the depository idea too. People in share transfer departments used to run a racket in re-selling stamps attached to transfer deeds. The badla lobby was also opposed to the depository. The very survival of badla depended on physical share certificates, since shares deposited with the badla financiers were being delivered back into the market, etc. Once settlements moved to the depository mode, badla -- at least the cream in badla -- would disappear (badla is the interest charged to carry forward transactions). The same lobby also opposed rolling settlement, since shorter cycles would kill their financing. Fortunately, the government exerted a lot of pressure to move to paperless trading and that did help. Rolling settlements were next on the agenda to eliminate settlement risk inherent in the earlier system. Later, derivatives trading was launched.

ML: In retrospect, NSE was just a phase in your career. You have since gone on to build another hugely successful institution - the CCIL (Clearing Corporation of India Ltd). Did you leave the NSE because your term was over, or you didn’t want to go on?

RHP:
I follow one simple principle -- when it comes to myself, I will not ask for anything. I never asked for an extension of tenure. We already had a succession plan in place because I sincerely believe that the institution should not suffer when you leave. I also believe that you should not project yourself, but project the institution for which you are working. The moment you start projecting yourself, you are more likely to start doing things for your personal publicity rather than for the institution.

ML: How did CCIL happen?

RHP:
At the NSE, we were in regular touch with RBI and needed their support at all times. Before retiring, I had called on Dr Venugopal Reddy, who was then the deputy governor, and told him that I was retiring. He laughed and said, “Good, good; this work is waiting for you, you must take it.”

I used to be in the steering group for setting up the CCIL. The idea had been around for years, but nobody was willing to bell the cat. You require some entrepreneurial spirit and if things go wrong you should be willing to receive brickbats also. Given my experience in the setting up of NSE, I was asked to take over the responsibility. Luckily, I didn’t face the kind of protests that I had faced in NSE.

Here too, so much had to be done. Primary dealers (PDs) and bank treasuries worked until midnight to settle transactions. The RBI could not take up transactions in a sequence; if there was no cash in your account at the time the transaction was processed, it would be kept aside until credit was available in your account. If people forgot to sign the SGL form correctly, they called you to the RBI office to sign it. All this caused delays and gridlocks, which disappeared once we started netting and clearing G-Sec transactions.

CCIL was set up in May 2001 to address these issues and by February next year, we started clearing and settlement of G-Secs. Simultaneously, we were developing the foreign exchange (forex) clearing and settlement software. This is a unique experiment globally. Nowhere in the world is there a central counterparty for ensuring guaranteed clearing and settlement of inter-bank forex transactions. The clearing mechanism here is very different. Usually, a big bank acts as a counterparty for the settlement, but does it on a transaction-by-transaction basis. When there is no money in the account, that transaction is set aside for later settlement or settled only to the extent of pre-decided counterparty credit limits; there is no concept of netting and clearing. For example, HSBC does it in Hong Kong, while the CLS Bank does this globally. Nobody does it with a central counterparty clearing institution like we do in India today. This is cost-efficient and saves a lot of work for the member banks. Netting of trades reduces your financial obligations on an average by 90% on both sides -- for rupee or forex. So your liquidity requirements are smaller. The other problem was - when a rupee is bought or dollar sold, the rupee transactions are settled in the RBI, while the dollar transactions are settled through the nostro accounts of banks. Banks had the horrendous task of maintaining reconciliation of thousands of forex transactions as they were being settled individually.

When we set up CCIL, I was shocked to see that un-reconciled transactions were pending for a year or more with some banks. Today, they are settled with us on a daily basis. Foreign banks used to charge $4 per transaction for deals routed through their nostro account, while we charged Rs100 per transaction from the very beginning. They dispensed with several peons who used to run between banks with cheques for reconciliation. Each bank must have saved almost 80% of what they used to spend for settlement of forex deals. On 26 July 2005, when there was the deluge in Mumbai, banks could not function but our clearing mechanism functioned normally.

ML: What is the risk involved in netting and how has CCIL impacted transaction volumes?

RHP:
Basically, there has to be a central counterparty to do it. You must also have the entire risk management mechanism in place, right from the margining system and follow-up. It requires a separate, highly efficient and well-funded institutional mechanism. When we came on the scene, forex transactions used to aggregate $1.5-$2 billion. Today, the daily average is $10 billion. Our month-end figures are sometimes $45-$50 billion on a single day because all the forwards are clubbed.

ML: What else has CCIL done?

RHP:
Before CCIL came in, there were two money market instruments used to borrow/lend money - repo and call money. We have introduced a brand new instrument which is unique to the world - the Collateralised Borrowing and Lending Obligation (CBLO). It is a repo instrument that is traded on the automated screen. We monitor all CBLO transactions on a real-time basis to contain market risks. The daily CBLO volume is well above Rs30,000 crore -- more than the typical daily combined volume of repo and call money transactions.

The CBLO screen helps traders to have a continuous assessment of the overall money market on a real-time basis. Recently, we have created a trading screen for call money transactions as well. Again, there is no compulsion to trade on this screen. We have only a facility to trade at the click of a button. Nearly 80% of the call money transactions are now happening on the screen and people have started getting addicted to this screen.

ML: Things are smooth today, but there was a lot of anguish and heartburn when CCIL put brokers out of the gilt market, isn’t it? There is a feeling that even though you have set up NSE, you don’t like brokers.

RHP:
(Laughs). The broker community has benefited immensely after NSE, NSCCL and NSDL came on the scene. People now feel proud about the efficiency of our capital markets, yet they call me broker un-friendly! Interestingly, I had requested the very same brokers, to start putting at least small trades on NSE’s wholesale debt market screen. They refused. Why? Because they didn’t like transparency. That is the real problem. Sucheta had exposed how HomeTrade (a high profile brokerage company that went bust) cheated several cooperative banks and minted money because of this non-transparency. Cooperative banks remain the favourite dumping ground in the money market.

ML: Are you saying that once there is a transparent screen anybody can trade without brokers?

RHP:
Earlier, BSE also used to claim a better understanding of the market, but front-running and all kinds of malpractices were rampant. They created problems for themselves. If the broker-managed BSE had functioned well, would NSE have come up? If you do rampant daylight robbery, there is bound to be some reaction.

ML: Now that they are out of the system and you are innovating and introducing new products… all this would not have happened if brokers were around, right?

RHP:
Yes, it would not have happened. CBLO certainly would not have happened. Under CBLO, whoever wants to be a borrower has to compulsorily deposit government securities with us. If he deposits Rs100 crore, we give borrowing limits up to a point. He can then trade freely with no risk to the lender because we guarantee settlements. The call money market requires you to take counterparty risk without security. In the CBLO, we hold the security and guarantee settlement. Cooperative banks are the biggest beneficiaries of CBLO, because until it arrived, they were almost untouchables -- nobody wanted the risk of dealing with them. Now, once they have borrowing limits, they get the best, market-based prices.

The CBLO has brought everybody on par. There is nothing like a more influential or more creditworthy trader. But the purpose was also to collateralise the market. In short, nobody should be allowed to borrow beyond his credit limits and anyone can borrow if they can provide security.  Banks cannot lose because of large lending/borrowing in a collateralised money market. It is a safe market and you come here if you want the best prices. In the olden days, when the giant State Bank entered the market to borrow, rates used to go haywire. On the anonymous screen, SBI can do any amount of borrowing/lending and the market will not move.
 

ML: What happened to the Patil Committee report on debt market that has not been implemented for more than two years? Is it lack of will or vested interests?

RHP:
SEBI has to answer that. In fact, it is not that the potential of this market is small. Currently, fresh issues of privately-placed corporate debt are in the region of Rs80,000 - Rs90,000 crore a year. So, the reforms have to begin with primary issue regulations as also listing guidelines so that there is an incentive to do away with private placement of corporate debt and it becomes exchange-traded like equity. Debt requires a different set of listing guidelines.

As they say, one has to begin at the beginning. Reform has to begin with primary market regulation governing corporate debt. All over the world, there are good reasons why debt is an institutional market; in equity, there are possibilities of huge appreciation but in debt, the upside is capped while the downside is enormous because the issuing company can go bankrupt. So, most individual investors do not want to invest in corporate debt. I feel there is a lack of appreciation of the quality and structure of debt markets among policy-makers.

ML: What about currency futures? Will RBI set up the currency futures market or will they be under equity or commodity regulators?

RHP:
The reason why I am in favour of RBI as the regulator in this area is that exchange rate management is the statutory responsibility of RBI. You can’t entrust that regulation to somebody else. I don’t think currency futures can be under the commodity markets. In the US, it happened because of a historical accident. A regulator who does not have full understanding of a market will find it difficult to regulate it efficiently and I don’t think the commodity fellows understand currency markets as well as RBI.{break}

ML: Will RBI then set up the currency futures market?

RHP:
I have deliberately kept away from what is happening in this area. I don’t want someone to allege that I’m trying to influence RBI to get it under CCIL. Moreover, our hands are now full. We are actively working on a platform for OTC derivatives contracts -- interest rates futures, futures rate contracts and options, etc. It is really strange that, even in the US, the OTC markets are not properly monitored/regulated. For instance, a contract is legally binding only when confirmations are exchanged. I am told that confirmations of OTC derivative trades are sometimes delayed for months. The market is working purely on trust. It appears to be a worldwide problem. The New York Fed President has taken up this area for action. The other real problem is that everybody is entering into contracts, but nobody knows the sum total of risk of all such transactions on a near real-time basis to monitor counterparty risks. There is no daily “mark-to-market” even in many developed countries. So we are soon launching a platform where all RBI regulated entities will mandatorily report all the trades. We will process this information and inform each participating bank about their respective counterparty risks in interest rate futures. The first phase will be launched soon. RBI has also asked us to automate the auction platform for T-bills and dated government securities. We are also developing a screen-based dealing system for repo trades which are currently executed on telephone.

ML: As someone who creates new markets, where do you invest your money?

RHP:
In RBI bonds and in mutual funds - there too I invest in FMPs - so no risks. You need a different mindset to take risks. I prefer to devote my limited energies to do things that are more productive, especially from a social point of view. I have tried to create a world to protect others’ risks -- (laughs a lot) - that too through systems and design. Remember, systems and design only. After all, what are margins? They are walls so that the speculators don’t jump into the sea.

ML: Does it ever excite you to create exotic products like weather futures…?

RHP:
I would like to do more mundane things. Quite frankly, I am greatly influenced by the saying of that great economist, Joseph Schumpeter, quoted by Peter Drucker. He said; “Ultimately I have realised that things that improve the quality of life are far more important than all our intellectual speculation.” I would go by that. I wouldn’t like to get into areas that have little immediate practical value.

ML: You are very aggressive when it comes to growth and defending your position - both at NSE and CCIL. Where does that streak of aggression come from?

RHP:
(Ponders) You want to be doing something all the while and you don­­t want to be left behind tomorrow.

 

User

“I had begun to feel that I had the potential to be much more than a peon”

He rose from washing cars and selling vegetables to become an MP.  Here is Shivajirao Patil’s incredible story of self-belief

His life story almost sounds like an absurd daydream, not merely because he rose from washing cars and selling vegetables for a living to become a Member of Parliament; but because he did it by mastering information technology and turning entrepreneur at a time when the country was barely aware of integrated circuits and microprocessors. That is Shivajirao Adhalrao Patil’s incredible story of achievement and self-belief. His firm Dynalog started out by producing manuals for microprocessors and went on to build industrial computers and later to supply components and assemblies for India’s missile programme. Dynalog’s profitability gave him resources for social work at his hometown of Landewadi in Pune district and got him elected to the Lok Sabha. Ironically, it is as the people’s representative he feels bitter that his efforts at social development are frustrated by dirty politics and mindless rivalries. Patil narrated his amazing story with passion and objectivity
 

ML: We believe that you come from a very humble background. Can you tell us something about your childhood?

SP:
I was born at a place called Landewadi in Ambegaon taluka of Pune district near a place called Mancher. This was in 1956. My family was into agriculture but since it was a very small landholding, my childhood was one of struggle. Going to school was also an issue. There was resistance from my family; they wanted me to earn money instead. When I was in the sixth standard, they wanted me to drop out and work on the farm.

ML: You went to a school at Landewadi?

SP:
Yes. From the very beginning, I was very fond of reading and studies. After my first standard, I got a ‘double promotion’ to the third standard, because the teacher thought I was good enough for that level. Since I was very interested in studies, I did my schooling up to the seventh at Landewadi and then did my eighth and ninth standard at Mancher. I had to travel by bus if I could get a concession pass; but if I didn’t have the money to buy a pass, I would walk five kilometers.

My father wanted me to join him in Mumbai. He used to go to Mumbai at least four months in a year, during the mango season to sell Alphonso mangoes. Sometimes, he just went to Crawford Market, bought a few boxes and sold them on a retail basis at Ghatkopar. At other times, he sold vegetables, fruits or lemons. Since he insisted on my joining him in Mumbai, I agreed, on the condition that he would allow me to study in a night school. We used to stay in one of the slums at Ghatkopar’s Golibar Road.

ML: Did you have any brothers and sisters?

SP:
Yes, I had one older brother in the military; he later joined the post office as a clerk. Another brother worked at the family farm and I was the third child. So, in Mumbai, I worked with my father during the day and went to night school at Ghatkopar East. After two-three years, my father decided that he wanted to go back to Landewadi. But I refused. I said I have been here for two years; let me make my career here. So I stayed back and tried to carry on the business of selling fruits and vegetables. But I didn’t like carrying boxes around and trying to sell them.

ML: So where did you stay after your father left?

SP:
My father had sold our little hut when he left. So, initially, I stayed with a friend. But since he had a family, it really meant sleeping in the open and leaving in the morning as soon as I had bathed. I had nothing, just one set of clothes and a little bedroll. One always slept in the open and, during the monsoons, we found shelter in some under-construction building nearby and slept there. This was during 1971-73, when I was around 15.

ML: How did you earn money then?

SP:
After my father left, I did a variety of odd jobs. I worked as an usher at cinema theatres, as casual labour at a textile mill at Rs seven for a 12-hour shift. I have worked at Crompton Greaves as gate-labour -- they used to pay Rs10 a day -- and, sometimes, as a railway porter. I also got into bad company, since there was nobody to guide me those days… I didn’t work until I ran out of money and then went back to a daily labour job. Then, my brother, who was in the post-office, found me a job at Zenith Computers at Walkeshwar. This was an assured job as a peon and gave me Rs125 per month. Once I settled down there, I started studying again. I joined Vivekanand night classes in Dadar. I also learnt typing and English conversation. I used to do three classes at a time - every evening - one hour of typing, then an hour of English conversation and then the night school. In that way, I completed my 11th standard and passed with a first class.

Zenith Computers used to sell the latest technology integrated circuits (IC) and chips for computers. I was around 18 and got very interested in what they were doing. I used to read all the manuals and literature. I worked for three years at Zenith and, since the office was very small - just eight-ten employees - I got to work in every department. As a peon, I worked with accounts, with marketing, purchase and the technical people. If someone was absent, I would help out wherever needed. I became an all-rounder. 

ML: You learnt all this on the job?

SP:
I had become quite the favourite there. For instance, if the marketing manager was absent, there wasn’t a problem because I knew his work. But if I was absent, they were stuck. Meanwhile, having finished my 11th  standard, I joined a correspondence course at the Shivaji University for my graduation.  It was a pre-degree arts course.

In the three years that I was with Zenith, I would do everything -- from bringing tea for the marketing manager and cleaning his table, to dictating correspondence when he was absent. Sometime then, I began to realise that there is no future in it for me. There were regular increments, which were undoubtedly good, but no promotion and, therefore, no future.

ML: Did you work directly with Raj Saraf (owner of Zenith Computers)?

SP:
Yes, absolutely. It was a very small office those days (Zenith Computers is now a listed company with Rs300 crore turnover). He used to have a second-hand car those days, where if he braked hard, his foot got tangled in the wires! He was a very generous man and encouraged me a lot. He gave me money for my exam fees and tuition fees for college -- well beyond my salary. His moral support was very encouraging. But still, I had begun to feel that I had the potential to be much more than a peon.

At that time, a few new companies had begun to enter the business of trading in electronic components -- other than the shops at Lamington Road. Although the products were required by a wide spectrum of industries using electronic equipment, few people understood the business. Then, in 1977, I saw an advertisement. This was by a family called Gupta who had come from America to start an electronic trading business. I applied for the post of a clerk and was called for an interview. After a detailed interview -- where they asked me a lot of technical questions -- I was told that I had been appointed as a Sales Executive. I said: “But I have applied for the job of a clerk”. They looked at my application form again and, finally, said, “Since you have answered all the questions, why don’t you join as a Sales Executive”?

They asked me about my salary expectations and after some discussion, offered me Rs1200 per month. My last salary at Zenith was Rs250.

I went back to Mr Saraf and told him that I was leaving for better prospects. He said: “if salary is the only issue, I will pay that much”. But I said that I have already committed to join the other company and left. Within three months of taking up the new job, I realised that I had little support from the company. I was buying parts on my personal credit -- because everybody knew me from my Zenith days -- they didn’t know the new company. The sales were also based on my previous contacts -- All India Radio, Glaxo and Doordarshan -- just about everybody who needed electronic components.

I then realised that I don’t really need the company to be able to do the business; so in three months, I decided to strike out on my own. I went to the owner of the business and told him about my decision. He tried to persuade me and offered to increase my salary to Rs2000. I said, “No, Rs 1200 was not a small amount for me, but I want to try my luck and see if I can succeed”.

ML: Where were you living those days?

SP:
I still lived in the slum with a friend but it changed after I started my own business. It was a very large slum near Dharavi. Since I was the only person buying an English newspaper in the slum, the paper vendor was curious about me and we got to know each other. One day, he told me that someone in a nearby building was looking for a paying-guest to share his apartment. I moved there in 1978, and started my business with Rs3500 in the bank. I used to give the address of my paying-guest apartment for my business.

ML: Wasn’t it a problem getting a phone, etc.?

SP:
Yes, but it didn’t matter because I wasn’t expecting anyone to call me. My schedule those days was to get out of the house very early and go from one company to another on a door-to-door basis. Once I picked up enquiries for a specific part, I would go to Lamington Road in the evening to check the sources. The problem those days was availability of electronic components and parts. There were thousands of components in a machine but they were not easily available. What I did was to look for alternatives -- for instance, if a television has a particular transistor, say the SL 100 which was made in Russia and was not available -- I would look through the data books and manuals to find an alternative component made by another company or another country. In 99% of the cases, the trick worked and I was able to supply the part. Most shop-owners at Lamington Road did not know this strategy -- of finding alternatives, even though the technical journals were available with them. That is how I started serving the industry. I then worked on my Zenith contacts at Kota, Ahmedabad and Baroda.

I called these companies and they would send me a list of components that they were stuck for and which were not available in India. I then studied the journals during the night, figured out alternatives and took samples to them. This was a value addition that people really appreciated. Jyoti Ltd. was one company that really supported me; it used to be in technology at that time. Similarly, Instrumentation India Ltd., in Kota, was a government company that supported me a lot. Whenever I went to Kota, their engineers and research scientists used to sit with me to discuss which is the best component to be used while designing a product -- say a temperature controller or data acquisition system. For instance, which IC should they use in a specific amplifier or timer that would be commercially viable and also regularly available for the next 10 years. So they told me their requirements and I would suggest commercially viable options to them, which they appreciated.

ML: You were working alone all this time?

SP:
Yes, mainly alone. In fact, there is another story behind that. Just before I decided to start out on my own, I had applied for several other jobs. In fact, it used to be my hobby to keep applying for various jobs -- that of a ticket-checker at the Railways or a peon at Canara Bank, etc.  On 15th August 1978, the very day that I wanted to start my business -- fortunately or unfortunately -- I received three appointment letters. One as a peon at Canara Bank, the second as a clerk at Raj Khosla’s office and the third one from another company, whose name I don’t remember now. I was really confused and couldn’t decide what to do. Here I was, starting on my own and I was going to turn down three steady jobs. It was very confusing and a difficult choice. I thought about my options through the night and decided that I would start my own business. I could always do a job; but if I wanted to get into business, I would only get one opportunity. It was now or never. At that time, I had about Rs4,000 in hand and was earning over Rs1,000-1,200 every month and I was risking that. The first month, I really didn’t get good business. But, at the end of the month, I had earned Rs500 and thought it was a good start. From then onwards, there was no looking back. At the end of the year, I had earned nearly Rs60,000 and I thought I am in business. That was in 1978-79.

ML: For how long were you into trading and when did you get into manufacturing? 

SP:
From 1978 to 1982, I was purely into trading in components. I got an office in 1979 -- just a table space at Botawala Building at Flora Fountain in south Mumbai. My previous boss at Zenith, who had also started his own business, was there. I approached him and he said, “I will help you”. It was a good address those days. After being successful at trading, I was reasonably settled -- financially. I bought a second-hand car and booked a flat at Vile Parle for Rs two lakh. Then, I decided that I must get into manufacturing.

The year was 1982 when the world saw a revolution in microprocessor technology. The most popular microprocessor was 8085; then came 8086, 8088 and so on. So, 8085 was the commercially viable microprocessor in 1982. To explain what is the 8085 microprocessor: Intel started what is called a ‘microprocessor system design kit’ for engineers to understand and evaluate how it works, its internal architecture and capabilities. I felt that all engineering colleges would require this microprocessor training kit. Intel was selling the product at Rs25,000. I also imported some kits and sold them. Then I wondered: why  can’t I manufacture the product here? I hired an engineer who copied the product for me in three months. I then added features on my own which were required by engineers but were not provided by Intel. So I made an Indian version. When I made this product, there were four or five others -- professors and PhDs who had produced similar products, but mine was more successful in India. In 1984, the government had a policy of encouraging microprocessor applications through the Department of Electronics, and the Dynalog product was selected. When I started manufacturing, I employed 8-10 people -- that was a turning point, not only for my company but also for Indian technology training business. Our major buyers today are educational institutions and R&D centres of companies. If anyone wants a microprocessor in any of their products and processes, they need to have the training kit to learn how to use it.

ML: When did you start Dynalog? And why the name Dynalog?

SP:
It was then that I set up Dynalog -- it was a combination of Digital and Analog -- so Dynalog. We were the only ones to export that product to countries like Singapore, Malaysia and Hong Kong. Then, we started making industrial computers, add-on cards and other products. The trading part of our business is still going on. Our manufacturing base is in Pune and Ghatkopar.

ML: Why did you get into industrial computers? Is it a special line of activity?

SP:
Let me tell you. When I started manufacturing microprocessors, we sensed that personal computers (PCs) were very popular. Until 1985, PCs were used only for data-entry applications and office automation. Then onwards, throughout the world, people started using PCs in real-world applications -- like controlling office and industrial processes. You take a standard PC, include some add-on cards, design software for it and make the PC a controller -- for textiles, engineering or other industrial processes.

At that time, I felt that add-on cards were the emerging opportunity and made various kinds of PC add-on cards after understanding the requirement of different industries. We made almost 100 different PC add-on cards. Between 1985-89, commercial PCs were used for industrial applications. Then industrial PCs began to be used for specialised applications and we started making rugged versions of PCs for industrial applications. We also decided to tie up with some foreign vendors who are established leaders for making industrial PCs.

Then we began to deal with the defence sector. The DRDO (Defence Research & Development Organisation) is a sound organisation which uses the latest technology -- industrial computers or military computers are used by defence services all over the world. DRDO also needed them. We entered this market by taking up a project for supplying computers and components for major DRDO projects such as Prithvi, Agni and Bramhos missiles. For the last 10 years, we have been involved in these projects.

ML: In what capacity have you been involved?

SP:
We provide sub-assemblies and sub-systems to all these defence-related projects.

ML: You are now a Member of the Lok Sabha; when did you decide to enter politics?

SP:
While doing business, I used to spend three days a week at Landewadi. I realised that there was need for a high school at my village - the nearest high school was five or six kilometres away. In 1987, there were 57 students in my zilla parishad of which 38 were girls. Normally, girls don’t go to other villages for further education. I thought it is a serious situation -- they would not be able to study further. The villagers also requested me to do something. So, on non-government grant basis, I started a school there. That took me to the village more often. And, once you start doing something, people begin to come to you. Around 1989, I met Dilip Walse Patil, who was then an aspiring politician and working as a personal assistant (PA) to Sharad Pawar. We were both from the same village. Once I started my school, his father, who was an ex-MLA (Member of the Legislative Assembly) befriended me. Since 1989, we were together almost until 2003.

After the school, I started a cooperative credit society and then a cooperative bank. I started listening to the villagers and helped resolve their problems. We then started a sugar factory where I was initially the chairman.

ML: But you are an MP from the Shiv Sena. How did that happen?

SP:
Initially, I was with Sharad Pawar. I worked with him and Dilip Walse Patil for nearly 15 years. I supported him and the party, even financially, during their rough times. Somewhere, there was an understanding that they would give me a ticket for the Lok Sabha elections.

ML: Until then, you had not stood for any elections?

SP:
No, never. But I had done the kind of work in my constituency that led to a silent projection that I would be the next MP.  Mr Pawar specifically told me that I was doing a good job and that I would be considered for a ticket. In 1999, when Pawar launched the Nationalist Congress Party (NCP), I supported the NCP again, on the understanding that I will get a ticket during the next elections. Everything was okay until 2003. But all of a sudden, when it came to actually giving me a ticket, I found that Dilip Walse Patil was negative. It was a big shock to me - I had supported him fully for three elections. When I was told that I would not get the ticket, I was upset, but decided that I would quit politics and stay focused on my social work. I didn’t want to join another party either. I announced my resignation from the sugar factory and my plan to quit active politics. But I began to be harassed by the party - they would spy on me, keep a watch on who I met, etc. My school began to have problems. I tried to tell them to leave me alone; but it did not work. During that time, the Thackareys of Shiv Sena approached me. Since I was being harassed by the NCP, I decided to fight back and agreed to contest elections on a Sena ticket.

ML: What is the extent of your involvement in the business now?

SP:
I have given it up completely. I have resigned from all my official posts -- in any case I cannot hold an ‘office of profit’. Meanwhile, my son completed his MBA from the US and joined the business.

ML: What next, are you enjoying being a politician?

SP:
Not really, I am not happy with politics the way it is today. It is too dirty. For instance, as an opposition party MP, I am not even allowed to work for the people. At all levels, they work hard to block my progress or the development work I am attempting to do. I end up spending a lot of time just fighting with the local authorities or the police. There are also attempts to involve me in various police cases. It is just too dirty and, if it continues like this -- and there is no support from the party -- I will have to consider what to do. In the zilla parishad elections, I fought three seats and won two, but the party hasn’t even called me. If this continues, I will again consider getting out of politics and go back to doing social work.

ML: But isn’t there a lot of satisfaction in being able to take up issues at the national level in Parliament?

SP:
Yes, absolutely. There is a lot of satisfaction in that. I am one of the members who has asked the maximum number of questions in the Lok Sabha - 802 at last count. You can see it on the Parliament website. I also did a lot of work on the Forest & Environment Committee and the Committee on Defence where I was a member. There is also a lot to learn from the speeches of politicians from various parts of the country.

It is the local politics that is dirty. For instance, bullock-cart racing is a big event in the villages. So just to alienate the farmers from me, the state banned bullock-cart racing, using the false cover of a High Court order banning animal fights. When we tried to protest, the police beat up the farmers very badly, arrested them and slapped cases of attempt to murder under Section 307 of the Indian Penal Code. All this talk about vision for development is just a sham.

But I don’t intend to give up so easily or allow myself to be defeated by them. Even today, I spend just a couple of days in Mumbai; otherwise I am constantly in my constituency working with my people. I pull out information and data from the Internet and follow up on developmental issues by approaching all the ministries concerned.

ML: Are you doing anything to develop entrepreneur-ship in terms of giving people support and helping build businesses?

SP:
Entrepreneurship is not the issue; government policies are not conducive to business. I have organised 26 entrepreneurship development camps in the last two years with the help of the Maharashtra Economic Development Corporation (MEDC). In one of the projects, 12 unemployed youth, trained by National Horticulture Board, have set up green houses on a two and half acre plot. It is already profitable.

I talk to people in order to remove the fear of doing business.

User

COMMENTS

Mandar

2 years ago

Inspiring life story of a self-made man, businessman and leader

Mandar

2 years ago

Inspiring life story of a leader

Patils

2 years ago

Don't give up Sir, we salute to your work and contribution. would like to be a CM of Maharashtra. Maharashtra really needed politician like u.
We are with you, best of luck.

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