Necessity is also the mother of assertive action. After decades of reckless, corrupt and politically dictated lending to the private corporate sector, Indian financial institutions (FIs) appear to have reached the point of no return.
Investors no longer have faith in them, raising fresh funds is extremely difficult, most of them have already sought a bail out by the exchequer and almost all of have a few thousand crore rupees stuck in undeclared bad loans. With aggressive recovery as their only option, FIs are finally showing some seriousness in getting their money back.
The first tentative effort began when they forced the powerful Vinay Rai to step down from the chairmanship of Malvika Steel, started criminal proceedings against Koshika Telecom and recalled loans to Usha Industries. Independent raids by the Income Tax and a CBI investigation followed this action.
More recently, under the leadership of IDBI, they intervened to end the long running feud for control over Spectrum Power Generation, the first fast-track power project. A Supreme Court ruling has empowered FIs to re-constitute the board and enhance their equity by converting a part of the outstanding loan into equity.
Similarly, the FI consortium has realised that Enron is unlikely to cooperate in the smooth sale of Dabhol Power Company and has sought court receivership over the controversial $2.9 billion project. FIs hope that being in the driver’s seat will allow them to resolve the sale imbroglio faster. If IDBI under the chairmanship of P.P.Vora has turned tough, then UTI under M.Damodaran is just as determined.
His decision to block all debt restructuring proposals unless its dues are paid is already yielding results. Secondly, UTI had identified a few business groups for focussed action where it believes that promoters are in a position to pay and are wilfully defaulting on their commitments.
These include Padmini Polymers, HFCL and the Essar Group. UTI has also written to the Ministry of Disinvestment asking that companies which owe it money, should be disqualified from bidding unless they have cleared its dues. After all, the exchequer is also picking up a fat tab for UTI’s repeated bailouts.
Essar’s plans to bid for State Trading Corporation (STC) and HFCL’s ambitions in connection with telecom divestment are likely to be affected by this action. UTI also made a serious, if futile effort to change the management of DSQ Software — one of the four companies in which it has lost heavily in 2001.
Unfortunately, the total FI holding, as well as that of private companies with large DSQ investments, fell short of stake required to force management change. It is now willing to rope in retail investors to join its effort and make up the numbers.
But things are not going to be easy on the recovery front. We already have the example of the wasted effort in 1996 to sell their controlling stake of 51 per cent in Modi Rubber. At that time, UTI had surreptitiously sold a chunk of MRL shares and brought the effort to nought.
It happened again in July last year. The FIs in a great show of solidarity had negotiated a block sale of their holding to the Modis, at a price higher than the Rs90 per share open offer. This time it was LIC, which tricked the consortium by selling a 12 per cent stake on the last day of the Modi open offer. The blame was passed on to two junior officials who have never been named nor is there any report of a vigilance inquiry against them.
Such examples of a corrupt nexus with corporate management will end, only if the Chief Vigilance Commissioner is willing to initiate suo motu action against errant officials.