Oh, not again!

India’s e-commerce pioneer’s ownership change underlines Indian enterprises’ struggle to achieve scale

 The churn of big-bracket investors at India’s first digital marketplace continues. The price tag for 77% stake by the new buyer puts a valuation of over US$ 21 billion, making it more expensive than decades-old Old Economy companies such as Tata Motors and Coal India. In the absence of listing, the transaction size becomes a function of the buyers’ capacity for risk and projection of outlook for the business on one hand and the sellers’ doggedness to get the desired price or impatience to exit to cut losses on the other. After all at the turn of the century internet properties were assigned discounting based on eyeballs rather than cash flow. Foreign direct investment in multi-brand retail is not high on the current government’s agenda. At the same time, the fastest-growing economy in the world is too important to ignore by global companies in search of growth. Offline retailer D-Mart in fact is supposed to have mimicked the low-cost model of US peer Walmart, the new buyer of Flipkart, with great success. Despite keeping prices low, the net profit margins are near about 4%, highest for any discount retailer in the world, and are projected to increase 1% point and  the return on equity by nearly half in another three years. The sparkling performance is in stark contrast to the cash-guzzling and loss-making e-commerce pioneer. Interestingly, there was no panic selling in Avenue Supermarkets, indicating that competition from cyber space is not expected to affect D-Mart in the immediate term.

What the transaction instead does is trigger a tinge of regret that India is yet to produce a Jack Ma in the e-commerce space. Alibaba’s US$ 21-billion IPO four years ago is the largest capital-raising exercise so far. Hint of further capital infusion is as an acknowledgement of the Indian consumption story as much to the difficulty in cracking the market. Walmart is known to get is calls wrong. It had to wind up physical presence in Germany due to inability to understand local tastes. Its online investments in the US and China are more of counter-strategies to stave off Amazon and Alibaba. The coexistence of brick-and-mortar retailers with e-tailers highlights a strange paradox of post liberalization India: a nation ready to embrace innovations and at the same time conservative in accepting change. If the two-wheeler segment demonstrates the ability of local companies to beat foreign brands, the consumer durables space is a tale of meek surrender: regulations reduced domestic labels to assemblers of knocked-down kits. The typical reaction of an entrenched Indian enterprise that prospered on patronage to any threat to market share is to scurry into unrelated areas such as telecom, aviation and oil and gas.   

The many bright sparks in the non-digital space are mostly first-generation entrepreneurs. Their horizon is not restricted to the Indian borders. Naturally, they are from sunrise areas. Some degree of success has been achieved by generics makers exporting to the US. The old and new coexist in healthcare, but the money-spinning diagnostic centers have the stamp of start-ups. The personal-care segment is a testimony to the innovative spirit of Indian entrepreneurs so much so that even multinationals are looking at home-based remedies. Similarly, the food business is seeing a replay of David taking on Goliath, with a tilt in preference for Indian savories of regional brands over foreign labels. Though reminiscent of the crowded 2G spectrum era about a decade ago, the money-transfer business looks set to become the next big theme after private banks. More often, an unexpected success sees re-rating of the entire sector. The over 100% subscription and listing returns of Avenue Supermarts brought into fashion Shoppers Stop, V Mart and Future Retail. French giant Lafarge’s entry through ACC and Ambuja Cements prompted a relook at a mature market. The lining up of suitors for distressed steel assets is taken as a sign of recovery. Unfortunately, not all missions have had a happy ending. Many have succumbed under the weight of their ambitions as well as due to the hostile environment post the global liquidity crunch. Suzlon sold itself to Sun Pharmaceuticals, another new-age venture. The wireless business has proved to be a graveyard across generations of would-be telecom czars. Airlines remain work in progress as promoters without baggage of experience struggle with regulations and a brutal marketplace. Yet, the notable take-away from the Flipkart trade, representing 5% of the total assets of mutual funds end March 2018, is that deals in India are going to get bigger. Money is waiting. The question is if Indian promoters are ready to loosen their grip to let in big-ticket investors to achieve scale. Ma owns only 7% equity shares in Alibaba.   

-- Mohan Sule

The run-up

Despite lousy macros, the market’s near-quarter gain in slightly over a year to the last general elections was on hopes of a Modi win

The market returned more than 25% from mid April 2013 till the Lok Sabha poll results were announced. As the world’s most populous democracy begins the countdown to elect the next government, the question is how equities will move in the run-up. If history repeats, the benchmark will be near the 40,000 mark five months into next year. Stocks had surged despite the infamous policy paralysis that turned UPA 2 into a lame-duck government for the last two years of its term after a spate of scandals. The Supreme Court early 2012 cancelled the 122 licences for 2G spectrum issued in 2008. Over the first part of the year, CBI investigated if coal blocks allotted between 2004 and 2009 were by bidding. These scams came on top of the discovery of financial irregularities in the 2010 Commonwealth Games and that apartments in the Adarsh housing society in a prime south Mumbai location were given to politicians and bureaucrats instead of war widows and army personnel. There were allegations of a surreptitious environment tax to pass capital-intensive projects. Macro factors, too, had had turned hostile. The 10-year government paper yielded 7.75% and home loans were being disbursed at above 9.70%.  Oil had crossed US$ 100 a barrel. The fiscal deficit in the March 2013 quarter was 3.14% of the GDP (totaling to nearly 5% for the entire year). The current deficit was at 3.58%. The gloom did not restrict equities from scaling new highs. By the time the calendar year ended, the Sensex had crossed the 21,000 level, last seen before the global financial meltdown of September 2008.

A contributor to the rally was the US Federal Reserve finally initiating the anticipated roll-back of the liquidity injection that was introduced to prevent the US from sliding into recession due to the credit crunch as too-big-to-fail banks collapsed. Foreign investors were pleased with the victory of the BJP in Rajasthan, Madhya Pradesh and Chhattisgarh assembly elections, hoping that Narendra Modi as prime minister would pencil broad reforms to boost the economy. There are many similarities with the period five years ago. SBI’s base rate is about 8.7% and yields on government bonds are slightly below even though consumer inflation is at a five-month low of 4.28%. Brent crude is hovering above US$ 70 and looks set to rise further due to slide in output even as the global economy gathers strength. The stark differences include weakening of the rupee to the 66.40 level from 53.5 at end April 2013. The fiscal deficit is projected to decline to 3.3% in the year ended March 2018 from 3.5% in the previous year. Still off the original target of 3%, it is lower than 4% in FY 2015 and 1.5% points down from the penultimate year of the Manmohan Singh-P Chidamabaram regime. The current account deficit was 2% of GDP in Q3 and is expected to be 1.5% in FY 2018 from a low of 1.3% in FY 2015 but much more comfortable than what it was in FY 2013. After hitting a lifetime high of above 36,000 early 20018, the stock market corrected over 10% on higher bond yields in the US and India.   

Another striking dissonance is that small and mid caps have been at the forefront of the current rally. In 2013, investors preferred large caps. Implementation of the long-term capital gains tax on equity instruments and dividend distribution tax on equity mutual funds is a downside. Yet, mutual funds are replacing overseas funds in propping up stocks: their investment in equities was double that of foreigners in 2016 and 2017. Since the start of 2018, domestic institutions’ debt exposure has outstripped that of their non-local peers, who have been exiting from both equities and debt. The Sensex’s jaunty ride in 2016 and 2017 was as much due to global liquidity finding its way to high returns emerging markets as to the cleansing of the real estate sector, roll-out of GST and shepherding defaulters to insolvency by shortening the outstanding loan recovery process. Later reforms such as opening up coal mining and putting Air India on the block as well as forecast of good monsoon have not energized on concerns of what farmers’ loan waivers and guaranteeing minimum support price 1.5 times the cost of food-grain production will do to the fiscal health. High-growth stocks are expensive even after correcting more than 10% from their peak. As such the triggers for the market are more likely to come from the US (pause in the scheduled three rate hikes by the Fed) and China (maintaining the manufacturing momentum). Overriding economics will be politics. The tailwinds of the BJP passing the test in Karnataka can only get stronger if Modi wins the three-state sweep-stake at the end of the year.

-Mohan Sule

A new threat

Apart from the rocky transition to a rule-based economy,

Indian companies have to brace for smear campaigns

Besides facing headwinds of cyclical demand, out-dating of technology, regulatory changes and shift in consumption pattern, companies have now to brace for another kind of storm: allegations of impropriety. The battle between promoters and activists over compensation packages of top managers is a cause of much grief to the small investors. Crimping on the quality of processes and products is another source of wealth destruction. Giving unsecured loans and favorable terms of trading to related parties is not uncommon. These corporate governance issues can occur without warning unlike industry-specific rumblings that can be heard before they hit the boardrooms. Investors get a whiff of the dodgy practices only from auditor’s qualifications or stock exchange filings. Of late, whistle blowers are playing an important role in shining a light on how companies are run. The problem is ascertaining their motive. Many might be risking going to the authorities due to genuine concern about the effect of the toxic environment at the headquarters on the health of the company. Some might be acting out of spite for some perceived wrong. Another worry is if the informant has fully comprehended the systems and procedures that are causing distress. At the receiving end of undue attention recently has been ICICI Bank. The directors do not feel the CEO and Managing Director acted improperly by clearing a loan as part of a consortium of banks to the Videocon group, whose promoters had invested in her husband’s company.

Whether it was a knowing abuse of power or there was ignorance of what constitutes a conflict of interest will eventually be established. Or it might not as the case winds up through various layers of investigation. The important issue is what happens in the meantime. The erosion in market value in most cases is halted if the protagonist steps down till conclusions are established. Yet there is a loss reputation (of the boss) and opportunity (for the company) as much of the energy and time of the successor is expended in putting the embattled enterprise back on track. The dilemma for those caught in such a rotten situation is whether to make symbolic sacrifices or fight it out.  Credibility of a brand is not based on following established procedures to the letter. Perception of trustworthiness is a combination of tangible (financial performance) and intangible (treatment of various stakeholders) acts over the years. The crux is how quickly it takes for those at the centre of the storm to acknowledge the problem, initiate steps to make amends, and establish communication with the shareholders to shape the narrative. Many times there is diffusion between transgression of moral boundaries and violation of law, making taking a stand difficult. There might be temptation to find scapegoats as impatient institutional investors build pressure on the company to adopt an arm’s-length distance from the controversy to cap any more slide in the share price. Though ICICI Bank is off from its March high and has under-performed the private bank index, the underside has been limited. The message from the market is that the damage is not irreparable.

What the unspooling of the episode tells is that a new type of threat has emerged: smears. The shocking decision of a global technology investor’s founder to bypass his heir-apparent, it is now understood, was influenced by a campaign launched to tarnish the contender’s image. For companies, the danger of theft of intellectual property seems to have been taken over by insidious attempts to spread misinformation in the market place. In the pre-social media days, scorned analysts would rip companies by knitting together pieces of information to paint a portrait of rapacious promoters.  A few years ago, a new-age real estate group with interest in financial services filed a criminal complaint against an overseas research firm for depicting a vivid picture of window-dressing.  Handles, anonymous and known, have to post a few ambiguous tweets to raise doubts about a stock to spur investors to exit till a clarification is forthcoming. In a way, companies have to take some of the blame for increasingly becoming susceptible to accusations of cover-ups in the smug belief that their attempt to trapeze between what is acceptable and what is not will remain private. If the digital era has made conducting business easier, it has also enforced transparency and heightened scrutiny. The recall of high-value notes in November 2016, the roll-out of the goods and services tax from July 2017 and the implementation of the bankruptcy law are steps to a rule-based economy. Those who fail to adapt to the transition will end up losing investors’ confidence.      

Mohan Sule

Shots fired

The new-age wars are about self-preservation by altering the economic, trading and regulatory landscape

After a year of a secular bull-run fuelled by global liquidity, equity and debt are facing headwinds. The first worldwide selloff after the cessation of the bond-buying program by the central banks in the US and Europe was ignited by US and North Korea trading threats of missile strikes in August 2017. Even as the market was recuperating from the thrashing, the US Federal Reserve’s hint of three rate hikes during the course of 2018 and the Indian government’s inability to stick to the fiscal deficit target sent yields on government paper surging and stocks skidding. Oil prices spiked to the US$60-a-barrel level after the Saudi crown prince’s move late last year to jail some of his close relations, many of whom opposed his gradual liberation. Financial markets caught a cold as President Donald Trump stepped up to implement his America First promise. The unspooling scenarios featured a cast of characters in quest of self-preservation. No blood was spilled. Instead of loss of life, the outcome will be loss of jobs. Earlier, trade embargo was slapped on unruly nations to achieve political objectives without firing a shot. Recently, the instrument of trade barrier, junked after the creation of the World Trade Organization in the 1995 and becoming all-pervasive after China’s entry in 2001, has been dusted and polished to meet in-house compulsions. If proof is required that there are no gainers in any clash of egos, the tit-for-tat exercise of the US and China to protect local manufacturers and punish dumping should be an illuminating example. In retaliation to US imposing 25% duty on steel and 10% on aluminium, China has drawn up a list of 128 US products for higher tariffs. America’s manufacturers will gain at the cost of the agriculture sector.

An equally high-stake game is unfolding between Indian and Singapore stock exchanges. Whether the formation of a cartel by the domestic bourses to stop export of real-time data, except for exchange traded funds, will bring volumes back is still early to tell. Instead, the question is why there is craving for investment-grade sovereign rating when we do not care for foreign investors. Competition based on ease of trading, low fees and superior infrastructure, instead of building a wall, should boost revenues. Undeterred, the Singapore trading platform will introduce new products to provide access to Indian equities. Another example of how the battle to control liquidity can end up with liquidity being the chief casualty is being played out between the Securities and Exchange Board of India and brokers using artificial intelligence. Ever since the scandal over the misuse by some intermediaries of the NSE servers located on their premises to gain first-mover advantage, the market regulator had been grappling how to provide access fairly to all classes of traders. Big-ticket investors use algorithm-based transactions, programmed to act in split second. Their bulky orders impart liquidity. A congestion charge might result in splicing up the voluminous orders and distorting price discovery. The moot point is if Sebi wants stock values to reflect their strengths or a sluggish market for the risk-averse investors.

It is not only countries, regulators and market players that go on the war path to shape the environment. Enterprises expand market presence by innovating, diversifying and expanding. Of late, promoters of even those companies on the brink of extinction are showing a fighting spirit to retain their kingdoms. A war of nerves between the lenders and defaulters over control is a source of amusement. If the intention of banks is to recover as much of their outstanding dues, then whether the promoter remains in the driving seat after repayment should not be a matter of concern. If the aim is to eject crony capitalists who came to own the assets because of their fancy for easy money, then financial institutions are perfectly justified in ensuring that the ailing unit is passed on to capable hands. In which category does Binani Cement fits? It wants to revive with the help of big player UltraTech Cement but the National Company Law Tribunal is in favor of the resolution plan submitted by Dalmia Bharat-Bian Piramal Resurgence Fund. In view of the bitter PSU divestment experience of successful bidders eventually disposing of the trophy later for a tidy profit, the dithering is understandable. What is not is that there are no winners in the Reserve Bank of India’s war against misuse of import facilities by outright banning the issuance of letters of undertaking and comfort. In the war of the rebels searching for a cause, the entire class of tax payers will lose if the fake and selective alarm on privacy sounded by Pied Pipers, enthusiastically embracing the leaky social media to amass followers and embark on populist causes, overrides Aadhar’s efforts to bust ghosts.

Mohan Sule

Fasten the seat belts

Many changes that call for a portfolio shake-up go beyond disruption caused by innovation

If there were any doubts of equity being a risk capital, three recent events have put them to rest. The Telecom Regulatory Authority of India saw nothing wrong in predatory pricing. Coal mining has been opened to the private sector. The size of the Punjab National Bank money-siphoning fraud due to lax oversight ballooned by another Rs 1000 crore to Rs 12000-odd crore, souring the mood that was turning favorable after a series of reforms to clean up banks. The journey of the telecom sector from emerging as a new investment idea to a battle for survival is a tale of a recipe gone wrong in cooking. Due to 25% supply deficit, genuine end users had to import coal from countries that behaved like Shylocks, squeezing the buyers by imposing export tariffs even as fly-by-night operators cornered blocks at home out of turn. Negligence by the monetary authority in addressing complaints and by banks of warnings to plug the scope for misuse of systems and procedures has pushed the nationalized category to the edge. For a time, it looked the turmoil in all the three sectors was ebbing. Consolidation had cast aside the early gold digger and left only three telecom services providers with deep pockets. Bharti Airtel’s African business is showing signs of a bounce-back after being a drag on the consolidated performance since the costly foray. Idea’s merger with Vodafone India is progressing. The Aditya Birla group company is raising capital with end in sight to the pricing wars. Late-entrant Reliance Jio is charging, although very modestly, subscribers after providing free services, resulting in operating profit in the third quarter and lifting the parent’s share price. Coal India’s thrust on cost-efficiency translated into standalone profit in the latest three-month period from a loss a year ago. The capital infusion in banks that agreed to follow prudent norms and the central bank pulling the plug on the endless rehabilitation process and nudging defaulters to declare bankruptcy had seen a rerating of the industry. 

Recent regulatory-, industry- and company-specific developments, however, have created uncertainty instead of resolution. The decision of Trai to not interfere with pricing is being contested by Jio’s rivals. Those who were attracted by the cheap valuations might balk or reduce exposure, increasing the sector’s volatility. With its status as the sole supplier of coal under threat, the scarcity premium of Coal India will be under scrutiny. After recording the highest output last fiscal year, the economic slump has resulted in stockpiles and downward revision of the production target. As it is, the counter has shed more than 30% from its all-time high in July 2015. Despite being listed, there is lack of accountability in PSU banks. Their difficult-to-replicate reach was once envied and used as a justification for being invested. The digital revolution is reducing the compulsion of physical presence to be near the customer. The market value of a private bank with 150% lower gross advances is more than double of the largest government-owned lender. 

What these examples of fluctuation in the fortunes of companies and industries demonstrate is the fear of unknown that investors face. Disruptions can be gradual or sudden. There was hardly any warning about the transformation that Internet and wireless communication were set to usher. In contrast, the market is preparing for the imminent arrival of electric vehicles. India is promoting alternative energy sources so aggressively that the  solar industry is in distress as prices have crashed. China’s unexpected crack-down on polluting industries, a source of blue-collared employment, has given a new lease of life to manufacturers of steel and inputs in emerging countries. The surprising finding of the 1991 liberalization is that owning automobiles and white goods has become a necessity rather than a luxury. The dominant position achieved through the first-mover advantage can be challenged by smart upstarts that enhance user experience (private airlines), provide a price edge (online retailers) or cater to niche markets (new private banks). Often it is greed (rush into IT, telecom services and real estate) and technology innovation (online aggregators) that result in a shake-up. Sometimes the issues are complex. The accounting fraud by Satyam Computer Services did not affect its rivals but the PNB scandal triggered de-rating of its peers. The adverse impact of the ban on issue of letters of credit and undertaking for imports will be widespread and not restricted to the gem and jewelry sector. Will streaming content kill the movie-going habit that the advent of TV was forecast to do and the introduction of cellular phone has done to the traditional camera is a question that still cannot be answered with any firmness.     

Mohan Sule          

     

Time's up

Both equity and debt instruments carry investment risk and deserve a uniform tax treatment

The comeback of long-term capital gains tax on equities indicates a reversal of traditional policy formulation. Vehicles with uncertain outlook got preferential rates compared with those with predictable returns. Two arguments were offered in support of removing LTCG tax on stocks in 2005.  The most important justification was to encourage investors to take a longer view. The proposition was that it takes patience, ranging from three years to 10 years, for the investment to show a decent appreciation. The underlying message was only those who have surplus funds to spare should dabble in stocks. Yet the nil tax acknowledged that as the span of staying invested increases, so do the external and company-specific risks. Second, the unequal tax treatment punished trades based on arbitrage opportunities. Such strategies are capable of producing bumper gains in a short period and, hence, a higher tax rate. The nimble-footed participants, moreover, contribute to volatility, scaring the cautious investor as well companies who might want to pricing shares for private placement and follow-on offers, usually a function of historical averages. The higher rate of tax on fixed-income instruments, thus, is a response to the perception of predictable returns. In comparison with share capital, chances of a sharp appreciation or depreciation on debt are rare. The stock market reacts to news, minute by minute. Influencers of money market such as the credit policy and macro economic data dissemination are spaced out. 

Profit on debt is equated with income. Short-term gains are taxed accordingly. Ironically, most credit-worthy issues have coupons barely above inflation. Conceding that the interest rate scenario could undergo a change over a longer time, LTCG attract a lower tax rate with the benefit of indexation.  Even among debt instruments, the rate of tax is different. Interest on fixed deposits is deducted as per the personal tax slab. Indexation is not applicable irrespective of the holding period as banks and companies offer assured returns despite no guarantee about the trajectory of inflation going ahead. Bonds issued by companies and government absorb wide-ranging stimuli. Yields move in tandem with the outlook on interest rates. Prices depend on liquidity besides demand. As a nod to possible volatility, debt traded in the secondary market is categorized into short- and long-term holdings. The tax rate, however, is higher than that on short- and long-term gains from equities. Recent developments have ambushed the conventional theory. Over the last several years, liquidity was flowing into stocks and fixed-income paper from bond-buying by central banks in the developed world after a half-decade-long slump following the credit crunch triggered post September 2008. Indices have been hitting new highs at a pace that is not matching the earnings recovery. Investors in debt funds have been reaping rich gains as sluggish consumption kept interest rates low. The win-win scenario contributed to the perception of ease in making money.

Normally, bonds and equities find hard to coexist.  Investors opt for the safer debt over moody stocks when interest rates start climbing. Ironically, shares displaying exuberance in anticipation of the economy mending start shedding valuations when macro indicators confirm their confidence. Though the linkage has sustained over time, there is no surety that the equation will continue. Till recently, the money market was providing attractive returns in the belief that interest rates will only go down due to the fragile health of most countries even as the stock market was running ahead by betting on economic revival. Central banks by and large are reluctant to disturb the status quo to avoid panic in the financial markets. If they do so, they take care to sound contrite and give direct or indirect warnings on and off. As the developed and emerging nations stand poised to usher growth, the task of the monetary authorities is becoming complicated. Any hint that the economy is gathering pace creates turbulence instead of satisfaction. Dithering triggers even more chaos. Staying put is greeted with relief when the sentiment is bullish and frustration when it is bearish. Of late, the markets are taking away the power of the monetary authorities to shape the landscape. They react to fiscal deficit projections in India and unemployment data in the US to determine the direction of the economy without waiting for the central banks to act. As such it is time to revise the discriminatory tax treatment on equities and debt. Both are prone to sudden and violent movements and deserve a lighter tax touch irrespective of the duration of exposure.

-Mohan Sule

Treat, not kill

PSU banks are too important for financial inclusion to allow them to fail

In the early 1990s, Harshad Mehta exploited the manual transactions undertaken by banks to get rich. Fake bankers’ receipts, not backed by underlying assets, were issued by two little known entities to secure funds. Some banks transferred money that was to be used to buy government securities into his personal account to play the market so that they could get better returns. Shares were held in physical form. Long positions could be carried forward from settlement to settlement after paying a nominal charge. Brokers undertook proprietary trades using clients’ money. The scam triggered the transition to automation in banks and the stock market. If modern trading practices have increased the size of the market, the downside is limitless damage. The rollover of letters of undertaking by some employees of Punjab National Bank did not leave a trail despite using the Swift network to direct money into its accounts in foreign branches of Indian lenders since 2011. The fraud, estimated to be more than Rs 11000 crore, was detected when there was a change in personnel mid 2017. In 1995, a two-centuries-old British bank vanished into thin air due to unauthorized trading by a 28-year-old derivatives trader in Singapore.

If an individual’s greed brought about a great institution’s demise, the meltdown of the global markets in September 2008 stemmed from the financial markets’ insatiable hunger for profit. To capitalize on the housing boom, there was a scramble to buy and sell mortgaged-backed securities comprising a cocktail of low- and high- rated paper. Eventually, prices of homes reached bubble territory. Buyers dried up, leading to loan defaults. Not only Wall Street firms but even those in remote places such as Iceland ended up holding worthless instruments. Finally, the US government forced many of the too-big-too-fail financial services providers to merge and allowed some to die. A few smaller economies in the euro region had to be bailed out by the rich nations.  The first conclusion is that money skimming schemes can occur with or without digitization. Second, internal controls and risk management are invariably lax. Third, greed at every level contributes to the blowout. Fourth, due to global linkages, the fallout is across partners within and outside the border. The PNB money-siphoning scandal has come at an inopportune time. Credit growth is reviving. The period for recognition of non-performing loans has been shortened. Time-consuming restructuring processes have been junked. Borrowers are being shepherded to insolvency. The headwinds of demonetization and roll-out of GST are fading. Yet, the demand for privatization of the ailing nationalized banks is growing louder. The rise and fall of Global Trust Bank, one of the earliest new-age private banks, should silence the vocal proponents of wholesale selloff of government-controlled peers. Goldman Sachs owned 4% and the International Finance Corporation 5% when GTB suffered in the market crash of 2001 due to exposure to Ketan Parekh-boosted stocks in 2001. It was acquired by Oriental Bank of Commerce in August 2004. Shareholders received nothing.

Nonetheless, the grouse against political interference, from appointing top managers to influencing to whom and where to lend, cannot be dismissed, going by the fate of UTI. Flagship US- 64 scheme bought KP stocks even as their market value was plunging mid 2000.  Getting a whiff of trouble, there was a run on the scheme mid 2001. Units of Rs 10 were redeemed at Rs 14.20 when the actual value was less than Rs 8. In July, purchase and sale of units was frozen for six months. A 10% dividend was declared. Repurchase was undertaken at face value. The then NDA government had to spend Rs 3500-crore on recapitalization. PSU banks need to thrive as they are important links in the last-mile connectivity of various financial inclusion schemes. The strategy to revive the PSU asset management company can be copied to clean up the banking system. In August 2002, UTI was split into two. Tax sops were extended to US-64 and assured returned schemes. These were handed over to the Specified Undertaking of UTI, managed by a government-appointed team. The shortfall in US-64 scheme was Rs 6000 crore and of ARS Rs 8561 crore. UTI Mutual Fund got other net asset value-based schemes. Shareholding was offered to some PSU banks. When the market recovered, Suuti returned all the support provided by the government and was wound up in 2012. In the same way, the top 10 banks’ assets can be divided into good and bad banks. Bad loans can be disposed of at a good price as economic recovery catches speed and the bad banks dissolved. The government should remain a strategic investor, instead of owner, in good banks.

Mohan Sule