Let’s have projects instead of promises

He has promised to punish fly-by-night companies of 1994-95. Before making the promise shouldn’t the PM have granted more teeth to SEBI and pushed the Department of Company Affairs out of the business of punishing companies? The PM has promised to open up the insurance business to foreign players but they are hardly likely to jump with joy. For the last five years they have been hoodwinked by three finance ministers who promised toopen up the sector and then failed to deliver. The Russian, Japanese and Asian crises has also dampened international enthusiasm for emerging markets’ business.

The capital market has been most bullish about share buybacks being permitted. Clearly they have missed the rider — that these buy-backs would be as per SEBI guidelines. The market feels that buy-backs are the `reward’ promised to corporate houses for not withdrawing their investment in Unit-64. The SEBI guidelines, I hear, will allow only a few cash rich companies to buy-back shares. It is by no means the Viagra for falling prices that the market seems to believe it will be.

For one, SEBI will ask companies to seek specific approval of shareholders to buy back shares, with clear disclosures about the means of funding the purchase. This is to ensure that promoters do not use borrowed funds to reduce equity capital and enhance their own holding at the expense of investors and the company. The specific approval in all probability will bethrough a postal ballot. This will prevent managements from colluding with irresponsible financial institutions to push through investor-unfriendly decisions.

SEBI is surely going to take care that it is not party to the rip-off of the early nineties when corporates got away with opaquely-worded resolutions which gave them the power to merge, demerge, diversify into unrelated areas, raise unnecessary capital and sell assets without specific approval from shareholders. Their reckless diversifications running into several thousand crores of rupees are now threatening to bring down the financial institutions which funded them.

SEBI is also aware that unscrupulous managements had pocketed over Rs 5000 crores of investor funds by giving themselves preferential shares and warrants at steep discount to their market price. Quite simply, share buybacks will have no immediate impact on stock prices. First, SEBI has to issue its guidelines and secondly, if the guidelines are implemented in the right spirit,only a few cash rich companies can actually buy-back their shares. These too may have to withdraw their investment in units to fund the buyback of shares.

There is no doubt that the government, faced with a sovereign downgrade and the run on UTI, has to do something to revive economic confidence. But the PM’s feel-good policy announcements will no longer work. The Friday rally, a speculative build-up in anticipation of a `revival’ package will soon fizzle out unless the government shows willingness to take hard and sensible decisions. If the prime minister is serious about taking charge of the economy, here is what we would like to see him do.

Firstly, he get his ministers to understand that the country is close to an economic emergency and get their approval for a minimum action plan which can be pushed through without further road blocks. Secondly he should simply shelve the four disinvestment proposals currently occupying all the governments’ attention, and instead ask the Disinvestment Commissionto call for strategic partners in at least 10 of the 22 cases recommended by it for such divestment. He should then back the DC fully, enabling it to complete the process in a fixed time frame. Given such support, Disinvestment Commission Chairman G.V.Ramakrishna is more than capable of finding ways to push through the strategic sales in the next three months and also get the government the best price these companies can fetch. Finally, instead of economic packages, the prime minister should demonstrate his ability to cut through red-tape and ensure full clearance to at least five major infrastructure projects. For instance just clear the Tata airline project. This project has become the symbol of how vested interests can continuously force policy changes and ensure nit-picking to kill a project. These measures alone will do more to restore the confidence of business and stock markets than any economic package. By the way, a revived stockmarket will also salvage UTI without the government being beholden tocompanies for hanging on to their units.