Where does the buck stop?

 

Ask what you can do for Air India and SBI, the government seems to be telling taxpayers

By Mohan Sule 

 

The protesters occupying the streets housing financial institutions and stock exchanges in the US and Europe are united in their disgust at corporate greed but not on how to wean away companies from their gluttony. Their anger seems to be directed at the bailout of too-big-too-fail corporations with taxpayers’ money. Arguments that doing nothing would have had a contagion effect, sweeping away other stakeholders including minority shareholders, clients, suppliers and employees with exposure to the failed institutions, do not appear to have made much of an impression. Many of these once-tottering empires have started making profit and returned government funds but their turnaround has had no impact on job creation. Instead of bringing growth back on track, the chain of events has resulted in economic slowdown. No wonder the rich countries of the euro zone are reluctant to foot the bill of the spendthrift members who have taken on too much debt to make their present comfortable at the expense of their future. The events of the past three years, therefore, have put a question mark over government intervention. A company gets another chance only if the opportunity is used to clean up the balance sheet. This means its shape and size are altered as divisions are hived off and employee strength trimmed. Allowing companies to collapse, viewing their extinction as a natural process of evolution, is a gamble. The hands-off approach to Lehman Brothers resulted in a credit crunch and meltdown of equities around the world.

The bailout of state-owned UTI in 2001 has been a turning point in the Indian government’s approach to sick companies. The quick intervention by pumping liquidity through government bonds prevented the domino effect from spreading to the stock markets. The bull-run that followed helped the mutual fund to repay the government. Since then, the landscape has changed drastically. The government has become proactive. Mergers and acquisitions have been reckoned as an important solution to the problem and not obstructed as happened in 1983, when NRI Swraj Paul tried to take over Escorts, whose assets were not producing the desired returns to the shareholders. A government-appointed committee shepherded Satyam Computer Services, felled by an accounting fraud by the promoters, through the auctioning process. Financial institutions encourage corporate restructuring instead of turning their back on the borrowers. This is in contrast to the pre-reforms era. It was common to stretch the death pangs of sick units by referring them to the Board for Industrial and Financial Reconstruction. Mumbai’s textile mills were allowed to wilt under a prolonged labor agitation. At the other extreme, government took over companies considered vital for the economy or simply because they were found to be profiting from the demand-supply mismatch. Overnight in 1969, 14 privately owned banks were forcibly converted into public sector. Air India, the international airline started by JRD Tata in 1948, was nationalised in 1953.

Now, these two showcases of socialism are in a state of disrepair. Air India is on the verge of bankruptcy. Lack of powers to take market-oriented decisions, dip in passengers following 9/11 in 2001 and meltdown of financial markets in 2008-2009, and rising fuel prices have resulted in losses. The merger with Indian Airlines in March 2007 to create a single entity for operational efficiency has not met with success. It is facing debt of Rs 67000 crore and seeking equity capital of nearly Rs 49000 crore as against Rs 2000 crore pumped in so far. Dithering over an IPO, first planned in 2005, to bring in additional capital has proved costly. A complete sell-off or partial divestment to Indian or foreign investors could give it a chance to recuperate. This looks unlikely considering the paralysis in decision making at the Centre. The condition of SBI is not as serious but the situation is more complex as it is listed. Being majority owned by the government, the bank’s priority is fulfilling social obligations. No wonder, it has to increase its provisioning for bad loans, as per the recent Reserve Bank of India directive. In view of the stock’s plunge to 52-week low, the Rs 23000-crore rights issue to meet its tier I requirement looks remote in the short term. Instead, the government would be infusing around Rs 10000 crore. Unless it pads up its capital, around 7.5% of the assets now, the proxy for the Indian economy won’t be able to grow its loan portfolio. Indeed, a sad commentary on India’s ambition to expand 9% per annum over the next decade. It would be instructive to know what the Wall Street Occupiers would have to say of the government using taxpayers’ money to bail out taxpayer-owned companies mismanaged by it.

Mohan Sule