Mumbai:In March 2005, at a corporate awards function in Mumbai, India’s finance minister P.Chidambaram buttonholed the chief financial officer of a large Indian company. He was keen to understand how the company had managed to get rating agency Standard & Poor’s to rate its foreign currency debt issue higher than India’s sovereign rating.
On 31 January 2007, the same CFO watched on proudly as his company made India’s largest ever overseas acquisition.
Koushik Chatterjee was part of the team headed by Tata Sons’ executive director Arun Gandhi that represented Tata Steel in its bid for Anglo-Dutch stee-lmaker Corus Group.
His case could be representative of the growing importance of the CFO in Indian companies, although Rajiv Memani, the country managing partner of audit firm Ernst & Young India believes that the heads of the finance function have always been important in the Indian context. He argues that Indian companies have always been very “wary of finance” and that they involve CFOs in all major decisions to assess the impact of these decisions on profitability.
Still, the role of the CFO in India today has changed, if only because the rules of business in the country have. With the economy growing companies need money to expand to cater to increased demand.
They need to effect global acquisitions to stay competitive in their businesses and then successfully integrate the acquired companies with their own. And they need to comply with accounting norms that are becoming increasingly stringent in the interests of transparency, and manage the expectations of analysts and investors. That’s very different from the traditional role of a head of finance, says Praveen Kadle, the executive director in charge of finance and corporate affairs at Tata Motors: “The old role of a CFO was as a good accountant.”
The first requirement of the new role is that the CFO be a good strategist. “The CFO has to work with the chief executive officer to achieve the objective of creating value for the shareholder and all stakeholders,” adds Kadle.
For Indian companies strategy is no longer about exclusively managing the regulatory regime (although there is some amount of that required), and focusing on reducing costs. Today, all strategies revolve around growth and competition and involve raising capital at the lowest possible cost; acquiring companies in India and abroad to achieve economies of scale in the business, cater to lucrative markets, or acquire skills and competencies; and scanning the global business environment for risks.
“You have to be the one who has to identify the risks and mitigate them,” says Saumen Chakraborty, Executive Vice President & Chief Financial Officer, Dr Reddy’s Laboratories.
In late 2005, as it became clear that the risks of being a discovery driven drug firm were weighing heavily on Dr Reddy’s stock price, the company formed a separate drug development firm, Perlecan Pharma Private Ltd, with an equity commitment of $52.5 million from venture capital firms Citigroup Venture Capital International Growth Partnership and ICICI Venture. In effect, the company was diluting the financial risk associated with its strategy of drug discovery by sharing it with others (the venture capital firms got to share the reward too). “CFOs have to have expertise in the area of business analytics and have an outside-in perspective,” adds Chakraborty.
CFOs should also be able to manage growth. All growth, organic or inorganic requires capital, and as E&Y’s Memani points out, “there are several options of raising capital.” Indian companies can raise money by making an equity issue in India or in any of the international exchanges.
They could also choose to issue debt in India or elsewhere. Most companies use a combination of these. With media and analysts tracking most companies closely, CFOs also have to manage investor expectations.
According to J.J.Irani, a director at Tata Sons, they need to anticipate what investors need to know and provide that information. This isn’t just a question of knowing numbers, but knowing how to talk about them. The biggest challenge facing CFOs in India, and in other parts of the world, today, is compliance.
With stock market regulators and governments starting to look at the affairs of companies and their conduct more closely, and with investors becoming more activist, CFOs have to ensure that their companies are very transparent about all accounting transactions and that they comply with all government laws.
“Boards do not want surprises,” says Tapan Ray, an executive director at audit firm Pricewaterhouse Coopers, adding that this means CFOs have to focus on monitoring and compliance.
“Transparency and governance are the key words today,” adds Y.M. Deosthalee, the chief financial officer of engineering firm Larsen & Toubro.
Tax regimes too have become more complex. Indian CFOs have had to deal with new taxes, such as the value added tax, or with complying with tax laws across the various countries in which their companies operate.
The emerging role of a CFO means a growing overlap with a CEO’s responsibilities. Tata Sons’ Irani believes the CFO’s role is to give “clear strategic advice to the CEO.”
In terms of operations too, the line between the two roles is blurring, according to Sumant Sen, the CFO of Nicholas Piramal Consumer Products. The change in the role of CFOs hasn’t been gradual. It has been brought about by business imperatives.
“I think the role of the CFO has changed dramatically and reasonably abruptly,” says Prabal Banerji, the CFO of the Hinduja Group.
While some CFOs, especially those heading the finance function in large companies, have coped, others still have a lot to learn, according to an investment banker who works mostly with small and mid-sized companies. “Only 10% of them are comfortable with their expanding role in today’s India,” Banerji says.