Sucheta Dalal :Shifting Goalposts
Sucheta Dalal

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Shifting Goalposts  

December 31, 2008

CROSSHAIRS (MoneyLIFE Issue, 15th Jan 09)

Investors who bought deep discount bonds of Sardar Sarovar Narmada Nigam Limited (SSNNL) are in a fix following the Gujarat government issued notices for “compulsory premature redemption” after passing an enabling legislation. Some have filed petitions against the redemption. Others are confused about the consequences of not signing the discharge form. The SSNNL bonds of Rs3,600 each issued in 1993 were to have a maturity value of Rs1.11 lakh on redemption in 2014. The government wants to redeem them at Rs50,000 each in January 2009. Now, if you were to invest that Rs50,000 in another instrument, you would need a 15% return to earn Rs1.11 lakh in 2014, so it is clearly a bad deal for investors to accept the deal. Since no investor wants to lose out on that kind of return, they have approached the courts for help. In the past, the court had indeed prevented SSNL from enforcing an early redemption, so this time, the government passed an enabling legislation to get around the court order. What should an investor do in this situation? R Balakrishnan, our columnist says, “investors must have patience” and see what happens to the litigation opposing the move. Even if the court rules in favour of SSNL and the Gujarat government, they cannot do worse than getting Rs50,000 per bond.
The case is interesting because it is not a bunch of retail investors who are fighting the Government’s action but Provident Fund trusts and large corporations such as Indian Oil Corporation, SAIL and ITDC provident fund. If the government were to seek investors’ consent for the early redemption, it would need concurrence from at least 75% of the investors and nobody would voluntarily want to deprive themselves of such extraordinary returns. SSNL would have paid out around Rs8,000 crore on maturity to redeem the bonds. Since the company, in its desperation to raise money, had foolishly omitted to write in a ‘call option’ allowing it to redeem the bonds, it was committed to a debilitating high interest burden on a long-dated instrument. This was a bad policy and showed an utter lack of foresight on the part of SSNNL’s then management. Evidently, since the bonds carried a government guarantee nobody bothered about the consequences of committing the company to such high-cost funds.
While one sympathises with SSNNL’s predicament, it would set a dangerous precedent if a public sector undertaking is able to use the might of the state to change the financial covenants of a bond. If state governments are allowed to use legislation to change the terms of financial instruments, what is to stop them from doing the same with large infrastructure projects or other contracts?

We Are the World  

In the last week of December, the National Institute of Securities Management (NISM) promoted by the Securities and Exchange Board of India (SEBI), organised a seminar on capital markets at which many well-known and not-so-known academics were speakers. Someone who attended the seminar remarked that other than the capital market regulator and finance ministry officials, only one Exchange was prominently represented among the speakers – the National Stock Exchange (NSE). He said, it symbolised NSE’s growth from being an underdog in the mid-1990s, to its dominance over the equity markets and more importantly, its deep influence over regulation and policy-making.
The NISM seminar is not the only example. When the finance ministry and SEBI felt the need to talk to investors at Singapore and rebuild confidence, it is NSE alone that was asked to organise meetings and represent the Indian security market. NSE’s enormous influence could well be a tribute to its success, but how does one explain the treatment of its rivals?
If the Bombay Stock Exchange (BSE) is languishing, it is mainly because of SEBI’s policies, which do not allow any single investor/entity to have a meaningful stake and interest in its future. Consider this. SEBI’s intervention led to a change in BSE’s top management and the exit of its former chairman Shekhar Datta and CEO Rajnikant Patel. Why is the regulator not making an equal push to ensure that a competent CEO heads BSE? So long as the BSE remains rudderless and in decline, NSE remains secure in its near-monopoly. To see what BSE could have done with a good leader, turn your eyes towards the currency exchange. When it comes to the currency bourse, the NSE is facing stiff competition and reacts with a questionable action. Yet, SEBI has remained a mute spectator to its attempt to discredit its rival by placing the software of Financial Technologies on a “watchlist”. In fact, NSE’s refusal to explain its charges and the revelation of its own investment in a software provider that is a rival to FT, raises governance issues. But the regulator is not asking any questions.
The favouritism is even more evident over the SME exchange. The high entry barrier (Rs100 crore capital requirement) and the ownership restrictions seem designed to ensure that only NSE qualifies to set up the bourse. This has not yet caused a stir of protest since we are in the middle of a global meltdown, but actions like these hardly make for a healthy capital market.

Speed Money?

The Clinton Foundation’s list of donors is causing acute embarrassment to companies, charitable foundations and trusts around the world. As was expected, it threw up plenty of expected names and a few surprises. The website provides the bare minimum of information – just donors' names, without organisation or country details, clubbed in certain slabs rather than specific amounts. The list has 205,000 donors listed over 2922 pages and starts with those who donated over US$5 million to the foundation’s charities. Laxmi Mittal is among the first 10 along with Amar Singh in the US$1-US$5 million category. Not surprisingly, Amar Singh had denied the contribution, probably knowing fully well that the Clintons are unlikely to provide any further details on why and how the donation was made. Others who figure among the top donors are the late Lalit Suri, Suresh Nanda, the EKTA Foundation, Ajit Gulabchand, Ranbaxy, Reliance Europe and Suzlon. Gulabchand says that he forked out the money for the Foundation to take up HIV-AIDS- related work in Jammu & Kashmir. Are we expected to believe that there are no NGOs who would know more about working in India than the Clinton Foundation? Unless, of course, they trust Bill Clinton to use their contributions better than any Indian social organisation.
The India Today group figures in the list, but it probably paid to get Clinton as a speaker at one of its high-wattage conclaves. But what about the Confederation of Indian Industry (CII)? It claims that it paid the Foundation to get traction on its [email protected] event that was being held in New York and got the mileage it wanted. It is interesting that CII never said that it needed Clinton’s help to get the right attention in New York. We were led to believe it was the light of India Shining that attracted all the bigwigs to its events. In any case, why are some senior CII members in the dark about this payment?
Then there are the top corporate executives and socialites who apparently forked out over $10,000 to the Foundation – clearly not for charity but to have the doors opened to business or social contacts. Let us not forget that Indians are in great company. Scores of sovereign nations as well as powerful, well-funded foundations are listed. It makes one wonder if the foundations are about charity or for lobbying.

-Sucheta Dalal

-- Sucheta Dalal