Sucheta Dalal :Bolting the Stable Door
Sucheta Dalal

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Bolting the Stable Door  

June 19, 2009

The Reserve Bank of India (RBI) has done well to nip the creation of backdoor sovereign guarantees on debt obligations of private companies. Had the RBI not acted after the State Bank of India (SBI) chose to guarantee Tata Motors’ loan, such guarantees would have proliferated rapidly to create a huge moral hazard. The RBI was quick to recognise these as proxy sovereign bonds and issued a statement saying, “guarantees by the banking system for a corporate bond or any debt instrument not only have significant systemic implications but also impede the development of a genuine corporate debt market.” It said that the interest on such bonds would be lower because of the low risk of default due to the quasi-sovereign guarantee. What is worse, the guarantee earns the bank a paltry fee while exposing it to the entire debt of the bond-issuing company.

A curious twist to RBI’s action is the fact that the gates to such guarantees were closed only after Tata Motors got the ‘irrevocable and unconditional’ cover that it wanted on its Rs4,200 crore issue, that too, despite the RBI deputy governor Shyamala Gopinath, who is on SBI’s board, having ‘strongly opposed’ (according to media reports) the guarantee. How then was the issue cleared? An RBI spokesperson told Dow Jones that “SBI didn’t interpret our guidelines correctly.” How is this possible when a deputy governor was on the decision-making committee? Did the RBI deliberately allow the Tata Motors issue to slip through before bolting the door to others waiting to exploit this route?

The recent economic downturn and the government’s willingness to help industry with funds has encouraged several habitual defaulters to start queuing up once again for a bailout. Among these is the Ispat group, headed by Pramod and Vinod Mittal, which has done a second round of corporate debt restructuring by pledging shares to the lenders. If that is so, shouldn’t the lenders also put in place an independent CEO who will report to them and not to the promoters? Or, is the pledge only a fig leaf to lend the Mittals more money?

-Sucheta Dalal

-- Sucheta Dalal