Sucheta Dalal :Spectacular turnaround
Sucheta Dalal

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Spectacular turnaround  

Nov 1, 2004

There is an important lesson to be learnt in Lakshmi Mittal’s awesome achievement of creating the world’s largest steel company and in the process becoming one of world’s richest individuals. It is, that the right environment can turn a defaulter into a global magnate.

Few remember that Mittal and his father moved to Indonesia over two decades ago after their company Andhra Steels turned sick and was declared a defaulter. It was then blacklisted by the erstwhile Hindustan Steel, which was the precursor to the Steel Authority of India Ltd. Andhra Steel’s capacity was a mere 70,000 tonnes; while he started his Indonesian operation with double the capacity (1.5 lakh tonnes). Today, Mittal is a global entrepreneur, who has broken away from the baggage of the Indian companies and controls a 57 million ton production capacity across Indonesia, Kazakhastan, Mexico and Trinidad. More importantly, 88 per cent of Mittal Steel Company will be held by the family, which means that a bulk of the profits will remain directly under their control. While L.N. Mittal is reputed for his remarkable skill in financial re-engineering of companies that he acquires to cut costs and make them profitable, the role played by his wife Usha Mittal is largely unknown. Her formidable role in the management and administration of operations has contributed hugely to the success story and now their son Aditya Mittal is credited with remarkable acumen in spotting takeover opportunities and structuring deals.

Onerous rules

The tax officials have a way of complicating and confounding simple collection systems. Effective September, capital market regulations require that sub-brokers can no longer issue trade contracts to their clients (they will be issued directly by the main broker). Yet, sub-brokers have to obtain registration and pay service tax separately on their business. Doesn’t it make sense for the broker to pay a consolidated service tax on behalf of the sub-broker? No, says the Service Tax Commissioner. Instead, there is a cumbersome new system, which will work as follows.

The sub-broker is registered for service tax before October 31. He has to obtain a credit note from his stockbroker along with a statement of account and pay the tax. The stockbroker will pay half the service tax on behalf of each sub-broker and the other half will be credited to the sub-broker. The stockbroker will be ‘‘entitled to claim credit for the service tax and cess billed by the sub-brokers’’.

Brokers are perplexed at this convoluted new system. Instead of a neat and consolidated collection from approximately 1,800 brokers, the separate registration of sub-brokers will only increase administrative work involved in the registration and claiming of refunds. The claims themselves will open up enormous leakage, tax evasion and mischief by the sub-brokers. Instead of getting more revenue by forcing sub-brokers to be separately registered, the government stands to lose half the tax it would have collected through the recently introduced consolidated billing system and will also spend more on tax administration.

Strong signals

There were more subliminal signals in the Finance Minister’s statements in Mumbai, than real policy pronouncements. For instance, he signaled to bankers, that in a battle between the Reserve Bank and the Finance Ministry over foreign banks taking over private banks it is the Ministry that will call the shots. Of course, with full support from the Prime Minister. The FM’s announcement that foreign banks can acquire 10 per cent of a private bank’s equity every year, contradicts the RBI’s draft proposals. Significantly, it was made a few days before revised proposals were to be released. It is the government’s way of telling the central bank that it does not like the confusion caused by its changing stance over foreign investment. Similarly, the FM’s announcement that SEBI would soon come out with its May 17 report clearly took the regulator by surprise. This paper has already reported a shoddy interim report that was submitted by the regulator to the Finance Minister within days of the collapse. If the same quality of investigation persists in the final report and regulatory actions, then SEBI will only have more egg on its face once it is public. Now that the FM has forced a sort of informal deadline on the regulator, it also cannot drag on the investigations or let off dubious Indian brokerage firms.

Good governance?

Corporate India neither wants job reservations in the private sector, nor does it want to give any rights to pesky whistle blowers. And they are powerful enough to lobby government and get their way. So the Congress Party president, Sonia Gandhi may preside over a National Advisory Committee packed with NGOs that pushes for Right to Information and protection for whistleblowers. But corporate India has forced SEBI to dilute its already mild policy that merely required companies to establish a mechanism for whistleblowers to report their concerns about unethical behaviour and suspected fraud to the management. SEBI has now said that having such a mechanism is optional, the rest need not even hear about dubious corporate practices.

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-- Sucheta Dalal