Sucheta Dalal :Arm-twisting v/s privatisation (28 July 2002)
Sucheta Dalal

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Arm-twisting v/s privatisation (28 July 2002)  

One the one hand the government talks about autonomy and privatisation of the public sector; on the other, it cannot seem to the give up its old habit of dictating and directing investment by public sector banks and institutions and make financial commitments on their behalf without their permission.

The latest example is the new list of sponsors reportedly finalised for UTI. A newspaper report says that the new sponsors include State Bank of India, the two insurance companies LIC and GIC, IDBI, Bank of Baroda and Bank of India (BOI). Nobody bothered to seek their views or their consent.

The government probably expects them to read the media report and fall in line. Moreover, each of these potential ‘sponsors’ have their own mutual funds (except BoI which wants to get out of the business).

Will the new sponsors also have representation on the UTI’s board? If yes, won’t the problem of conflict of interest with their own mutual funds arise again? Also, now that we have seen the JPC’s ‘jottings’ on the future of UTI, shouldn’t government wait until the report is released before restructuring the Unit Trust?

Infrastructure equity too

The much touted Infrastructure Equity Fund is another example where government is trying to arm-twist banks into coughing up the Rs 1000 crore corpus for the fund which Yashwant Sinha announced in his budget.

While banks are criticised for bad investments, this is just such an investment whose chances of fetching any return on the investment are very dim. Yet, mandarins at the finance ministry held a meeting to ‘persuade’ banks and institutions to cough up the corpus.

Some refused to do so and asked for a written direction asking them to make a contribution, which the babus refused. It only means that if another JPC sits in judgement over this issue in a few years, those bankers who pay up may be rapped for a decision that was forced on them. Tough conditions After having their defaults dragged into parliament the Ruias are apparently in a hurry to settle at least their most embarrassing problem– the unsecured Floating Rate Note (FRN) issue whose investors have filed winding up proceedings against Essar Steel.

The company hopes to use the recovery in steel prices to strike a bargain with FRN holders if it can get Rs 250 crore from BoI to pay them off.

We learn that BoI has insisted on exceedingly stringent conditions to lend the money. It wants a super charge on all of Essar Steel’s secured assets pledged with other lenders, an escrow of all receivables, with BoI having the right to appropriate them towards its dues.

Essar has to get written consent from all lenders for the deal and a release of all right over receivables that they may have. The company exudes confident about obtaining lenders consent; but industry circles are very sceptical about such promises and would rather wait and watch.

Recovering fast

While Essar is hoping for consent from other lending institutions to BOI’s conditions, the IDBI is busy turning the heat on steel companies to repay more. In the last few weeks it is understood to have recovered Rs seven crore from the Jindals, Rs five crore from Essar and hopes to get a similar sum from the Mittals who also have an FRN default looming over their heads.

In each of these cases, IDBI managed to extract repayments by dangling the lure of other deals and adjustments. IDBI, say sources, also plans to write to the Gujarat Government informing it about possible action under the Securitisation and Reconstruction of Assets Ordinance of 2002 to prevent it from extending the protection given to Essar Steel under the antiquated Bombay Relief Undertakings Act.

Tailpiece: Here’s one mail which is doing the speculators’ circuit and reflects that general disgust with the US markets barring the smart rally on Friday. “If you had bought $1000 worth of Nortel stock one year ago, it would now be worth$49.

With Enron, you would have $16.50 of the original $1,000. With WorldCom, you would have less than $ 5 left. If you had bought $1,000 worth of Budweiser (the beer, not the stock) one year ago, drank all the beer, then turned in the cans for the 10 cents deposit, you would have $214.

Based on the above, my current investment advice is to drink heavily and recycle. Cheers!”

-- Sucheta Dalal