Cheques & Balances s

The very same industry bodies have never tired of lecturing government on interference in decision making or to criticise it for the delay in public sector divestment. If the private sector lobbies against divestment of its shares by FIs how does it dare to criticise the delay in PSU privatisation? The Modis, say newspaper reports, want the FIs to hand over the shares to them at a fair and negotiated price. If the matter has not been settled for over half a decade, it is surely because what the Modis consider fair is seen as a throwaway price by the FIs.

When industrialists have spoken against the presence of FI nominees on company boards, they received considerable sympathy from the investing public. FI nominees have been notorious for making no meaningful contribution in the decisions of companies or in preventing bad decisions and diversion of funds. When FIsdemanded a board presence on account of their equity holdings, there were fears that it would only lead to allegations of insider trading.

However, the FICCI and Assocham stand on Modi Rubber should quickly wipe out any sympathy that investors have had for corporate management.

Industrialists seem to suggest that FIs should lend them money and then neither interfere in the decision making nor have the freedom to sell their holdings. Don’t FICCI and Assocham realise that such an attitude is untenable? At a time when Indian and foreign investors are seriously worried about the health of Indian banks they have demonstrated that Indian industry has a long way to go before it begins to understand the concept of corporate governance, shareholder rights or even liberalisation.

Mercifully, Rahul Bajaj, President of the Confederation of Indian Industry (CII), has not only shown the courage to go against the stand of the other two associations but has been willing to go public with his views. Bajaj points outthat at best Indian companies should have the first right to buy back their shares from the institutions. This again has to be at a market price and only to ensure that FIs do not indulge in wanton destabilisation of management.

Bajaj correctly indicates that the bogey of predatory moves by multinationals is a lot of hogwash. It is not so simple to acquire Indian companies. It is an interesting coincidence that this has been demonstrated by the decision of ICI plc of the UK to sell the 4.5 per cent stake that it had acquired in Asian Paints, an embarrassing two years ago, back to the promoters. The price that they have obtained is lucky face-saver in a booming market.

Let us look at other implications of FICCI and Assocham’s demand. If the finance ministry and the FIs give in to pressure from these industry bodies then other companies would be lining up for similar consideration. FIs who have never distinguished themselves in protecting their investments will simply use government interference as anexcuse for other bailouts. Already, the Ruias of Essar are back on the agenda for a fresh loan by the FIs. It is amazing how the FIs continue to discuss new proposals by the group at almost every meeting, in an attempt to avoid drastic solutions. According to newspaper reports, ICICI wants the FIs to lend a whopping Rs 3,500 crore to Essar Oil Ltd against the pledge of a 51 per cent stake by the Ruias.

The FIs are so over-extended in their lending to the Essar group that they ought to be looking for a strategic buyer of the Ruia’s majority stake in Essar Oil right away, instead of being satisfied with the pledge of shares. Over the last year, there have been frequent reports about the Ruias being willing to pledge a controlling stake for more funds. It seems clear to everybody but the institutions that the Ruias have failed to come up with a viable plan for funding and completing the refinery, just as it has failed to avoid a default of the $ 250 million Floating Rate Note (FRN) issue of Essar Steel lastJuly. The FIs are now considering funding the FRNs at a discount.

If the government has to interfere in the working of FIs, it ought to be asking them why unsecured holders of the FRNs are being secured by funding the FRN repayment at the cost of other investors? It also needs to point out that there cannot be a different set of rules for Modi Rubber and the Essar group companies. In fact, if the government fails to ask these questions, it can be accused of standing by and watching banks and FIs add to their NPAs when it continues to hold a majority stake in them.

Secondly, if the government is serious about disinvestment or privatisation of public sector units, it has to demand accountability by the FIs for their various decisions and also distance itself from the private sector and allow the free play of market forces. After all it cannot tell employees and trade unions of public sector undertakings that they should support privatisation if private sector industrialists behave like this. To his credit,Finance Minister Yashwant Sinha has once again scored over his more illustrious predecessors by first letting the FIs go ahead with the sale of Modi Rubber shares and then telling FICCI bluntly and publicly that the government will not interfere with the decision. In fact, Sinha ought to pressure the FIs to sell the stake as quickly as possible and prove by example that he means business.

While FIs continue to hang on to Modi Rubber and support the Essar group, it is difficult for government to demand that bank and insurance unions and those of other public sector companies should support the privatisation of PSUs and jeopardise job security. It’s time the government demonstrated that it means business.

Author’s email: suchetadalal@yahoo.com