A shocking insider view of how a big PSU was destroyed!

Nov 16, 2013

In this issue:
» Best and worst sectoral performers- 2008 to present
» What is the real reason behind the QE program?
» Moody's downgrades ratings of four US banks
» Govt's war against gold imports spurts smuggling
» ...and more!

One of the most critical determinants of a company's success is its people. This is the reason we lay a lot of emphasis on evaluating the quality of a company's management. Some important questions that you may want to ask are: Is the management maximizing value for its various stakeholders? Is the management incentivised to work in the best interests of the company? Is there a system to reward good performance and punish poor performance?

These questions gain even further significance in the context of public sector undertakings (PSU). PSUs are often subject to political interference, undue bureaucracy, rampant inefficiencies and corruption. This is why listed PSUs often trade at a significant discount to their private sector counterparts.

But there is a reason why you should be worrying even about unlisted PSUs. Many of the mismanaged PSUs are bailed out with thousands of crores of taxpayers' money. A classic case is Air India.

We recently attended a discussion by Jitender Bhargava, ex-Executive Director of Air India who has authored a controversial book called Descent of Air India. Mr Bhargava, who has spent two decades with the national carrier, gives a shocking insider account of how a once-successful airline was systematically destroyed to serve vested interests.

Let us share with you some key highlights of the discussion that we witnessed. Firstly, it is important to understand that the airline sector is a very thin margin business. It is extremely vulnerable to adverse macroeconomic changes. As such, it is very crucial to maintain cost efficiencies and ensure optimal utilisation of capital.

One of the reasons for the highly inefficient management is the constant government interference and excessive bureaucracy. For instance, the CEO of Air India would be obliged to spend most of his time dealing with government bureaucracy. The independence of the CEO would also be often compromised. Diktats from ministers had to be followed. Moreover, the top management and the board of directors often comprised bureaucrats instead of experts and professionals. How can you have people who have no clue about the airline business be responsible for all the key decisions?

Apart from the enormous inefficiencies, the author has also alleged that Air India has been intentionally and systematically sabotaged to serve the interests of certain ministers and private carriers. Many questionable decisions such as harmful bilateral agreements, shutdown of profitable routes (later taken over by private carriers), reckless expansions, etc. pushed Air India to the brink of disaster. What is even more shocking is that people who questioned or opposed many of these bad decisions were shown the door. On the other hand, those who danced to the tunes of ministers thrived.

While prima facie the author's views appear to be genuine, the validity of the allegations is yet to be proved. If the views of the author are true, this would be yet another massive scam wherein a national asset has been destroyed and crores of public wealth looted.

Do you think Jitender Bhargava's views about Air India deserve a fair consideration or does he appear to be just a disgruntled ex-employee? Let us know your comments or post them on our Facebook page / Google+ page

 Chart of the day
The first time the S&P BSE-Sensex hit the 21k mark was on January 08, 2008. Recently, the Sensex crossed the 21k mark and hit an all-time high on November 03, 2013. While the Sensex is almost where it was back in 2008, the performance of the S&P BSE sectoral indices has been highly skewed. Today's chart of the days shows the biggest sectoral gainers and losers between the two above-mentioned dates. FMCG, healthcare, auto and information technology indices have been the biggest gainers. In other words, defensive sectors as well as sectors that gain from rupee depreciation have reported strong performance. On the other hand, metal, capital goods, power and realty indices were the biggest losers. It must be recalled that these were the very sectors that had led the stock market rally that culminated in the 2008 peak. These sectors were adversely impacted in the aftermath of the 2008 global crisis and continue to languish far below their earlier highs. As such, it is clear that the current stock market rally is not broad-based.

Biggest sectoral gainers & losers since 2008

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From day one, we've been maintaining that quantitative easing is a disaster for the US economy. That it has one chance in thousand to create meaningful jobs in the economy. Instead, all it will end up doing is further increase the rich-poor disparity. Looks like an insider in the US Fed also thinks the same way. And this insider is a gentleman named Andrew Huszar. Turns out from 2009 to 2010, Huszar was responsible for managing the Fed's purchase of more than US$ 1 trillion worth of mortgage-backed securities. And what does Huszar think of this move? Well, the quantitative easing, he argues, 'has been the greatest backdoor Wall Street bailout of all time'.

Of course it can't be anything else. Anyone who has a good understanding of the crisis knows that most Wall Street firms should have been wiped out by now given the losses they had racked up. What has transpired though is the total opposite. The US Fed opened the floodgates like never before, making the same Wall Street banks that were teetering on the brink of a collapse, one of the most profitable entities in the world. And the sad part is the US Fed seems far from done. It seems hell bent on rolling out one QE after another, ignorant of the pain it would eventually cause.

Once considered too-big-to-fail, the big US banks have been given a dose of reality by the renowned rating agency Moody's. In its latest report, the agency has downgraded the rating four big banks by one notch. So what has prompted the change in the stance? One of the triggers is that unlike in the past, the future bailouts of such banks by the Government using tax payers' money are less likely. The agency believes that this time things might be different, thanks to the new US banking regulations. The agency expects that if a crisis strikes a bank, instead of public funds, bank holding company creditors will be bailed-in and will share much of the burden to recapitalize the failing bank. As such, next time if a crisis hits, bank's creditors should be bearing the worst consequences.

However, an assumption that new regulations can handle big bank failures seems to be naive. The rot has set in too deep to limit risks at this stage. Banks have been given unrestricted power in the past. There are huge systemic risks associated with the failure of one big bank that can threaten the entire economy. It is not difficult to imagine the disaster after already having witnessed thecollapse of Lehman Brothers. Hence, steps should be taken to ensure that banks don't take unwarranted risks and remain less likely to fail in the first place.

The Finance Minister and RBI have worked hand in hand to curb India's penchant for gold. They have collectively put up several measures to deter gold imports. The government has blamed high gold imports as one of the reasons for the high current account deficit (CAD). The measures have included increasing gold import duties. It also included introducing the 80:20 rule by which 20% of all gold imported must be exported before further imports can be made. These measures have led to two things. One the demand for gold has come down. But this could be more attributable to higher inflation rates as well as higher gold prices. This has led to consumers restricting their purchase of the yellow metal. The second thing that import curbs have led to is an increase in smuggling. As per a report by the World Gold Council, smuggling of gold in India has shot up to meet the shortfall in supply.

The measures have not really been able to displace India's love for gold. Though, the pace has slowed down, it continues to be an important avenue of savings for us. It is also a safe haven asset in uncertain times. Given that the curbs on gold imports are actually backfiring as evidenced in the increase in illegal activities; the government and the RBI may want to reconsider their decisions.

Barring UK and India, major global stock markets ended the week in the green. The US stock markets closed on a positive note. The US markets hit new highs, on back of positive comments from Federal Reserve chair nominee Janet Yellen. Yellen indicated to the Federal committee that the central bank's monetary stimulus would continue as it was too early to end the same. This event had positive impact on the global markets too.

China's equity markets too closed in green on back of continued Fed support and as China's ruling party announced some changes in its economic policy. The new policy targets to encourage private participation in finance, to undertake market competition in various parts of the economy and to promise the farmers better security.

Japanese stock markets gained most among the various global indices. The top banks in Japan witnessed better earnings and also raised their full year outlook. This was largely attributable to "Abenomics" (economic policies advocated by Japan's Prime Minister Shinzo Abe) policy. The Japanese currency Yen too slipped, helping the Japanese stock markets to rise.

The Indian stock markets closed in red. After weak trading session till Wednesday, markets followed global cues which turned positive on the statement by Janet Yellen. The market sentiment also propped up as the RBI Governor gave a promising speech, calming investors' nerves over rupee depreciation and pegging the Current Account Deficit (CAD) at around U$ 56 bn. However, with WPI inflation at 7% in October compared with 6.46% in September this year, expectations that interest rates might ease any time soon might have ended. The BSE Sensex closed the week with 1.3% loss.

Performance during week ended Nov 15
Data Source: Yahoo Finance

 Weekend investing mantra
"Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don't have the first, the other two will kill you. You think about it; it's true. If you hire somebody without [integrity], you really want them to be dumb and lazy." - Warren Buffett

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49 Responses to "A shocking insider view of how a big PSU was destroyed!"


May 11, 2016

While it is disheartening to know that AIR India has lost 32,000 Crores over the past 5 years.

Some praises for the management as well as Ministry responsible for the Airline at relevant times, as they have always flown non-profitable sectors and hence connected people across India. However this could have been done more intelligently if they had passed a regulation as to different non profitable sectors to be managed by different carriers instead of putting the entire burden on Air India.

This also points out to an very interesting fact as to the banks, SEBI and the Govt. or putting pressure on Vijay Malaya of the King Fisher fame for recovering 9000 Crores, while all the past CMDs and the ministers are free after driving the Air lines to its current state while spending the tax payers money to the tune of 32k Crs and could be even more if that period is extended.

While the recovery of the 9k Crs from Kingfisher must be done without fail, but can be done more amicably as he is willing to pay. But at the same time it is important for the Govt. to note that Air India does not lose any money in the future. However if the main contributor to 8 crore profit is the lower oil price, then it is rest assured that we will continue to lose money on account of operating Air India.



Nov 24, 2013

I used to travel frequently from Mumbai to Chennai early 90s I found the evening flights are allotted to private carriers and Indian airline flight will be late in the evening say 8 pm and it will be totally empty as the connectivity in Chennai used to be poor and reach home at odd hours loosing dinner.Private carriers used to be totally occupied since it starts at 6 Pm .


Satish S Dabholkar

Nov 21, 2013

Now the government is taking step for destroying the public sector banks.As the Chairmen and Ed are appointed by finance minister. Naturally decisions are taken what is expected by minister than what the institution's requirements.
For many years the banks are starving of the staff. There is no replacement for retired staff though economy is expanding. There is no analysis of how many staff are required to run the banks. The result is we see a long queues at the bank's counters. Many services are stopped, no guarantee whether within two days we will get credit for deposited cheques, no follow up for loans disbursed due to shortage of staff.There is Instruction from Finance minister to the chairmans that what last years profit contributed to Central Government by banks should be kept at the same level for this year also?
I fear one day the banking system will collapse if government's interference is not stopped.


Ajay De Howrah

Nov 19, 2013

Looting of public wealth seems to be our State Policy. This energised also those in monopoly private sectors. For example, CESC Limited of Kolkata. Now a days, we all know, all enterprises grow with moneys borrowed. Even the so called main 'stake holders' do not bring in with more than 3% approx. There is example, as the workmen placed charter of demands for revision of their share of growth by way of salary and wages and the management declines in the pretext of poor coffer. Naturally, a strike notice is placed - again, naturally government intervenes because it is a public utility service of generation and distribution of electricity in and around Kolkata - the management says no wage revision is possible unless rate revision is allowed by the government - that time it was like that - ultimately a settlement was arrived at, that required to pay off say Rs. 3 crores a year - whereas management got nod for a rate revision worth Rs. 30 crores a year approx. Curiously, the people at heights are always seen selected from those having individual ambitions to grow, specially in personal wealth. That is why the management is always dependent on mercy of political parties in power in State. Even for transferring a worker or even an executive, obtaining nod of the union affiliated from the ruling party is a must - today or yesterday. Even the Head of its Medical Deptt was required to join State Medical Branch of the ruling party with all his fellow juniors in deptt. immediately with 'change' in State abandoning his decade old naked allegiance with the party / union bosses just lost. But why ? Reason is simpliest - in all departments including its Legal Deptt. Personal corruptions and level of ability to give personal comforts to own superiors is the only yard stick for growth because they all know - management would never question how much is the cost involved to overcome any apparent problem. Author may like to appear to be just a disgruntled ex-employee. But there would never any reply what steps ever had been taken against those inefficient cozy executives who prompted the supremo to cost worth a day's extra wages to all employees in over time category for wrongly declaring 'half holiday' in the organisation under Negotiable Instrument Act when sitting Governor of State - Prof Nurul Hassan passed away. Because the executives caused the M.D. of the company to sign on defective circular for lack of knowledge that N. I. Act does has no provision for ant half holiday were not booked for each of them having political blessings, and company does not bother for some crores of wasteful spends who can replenish the coffer as above. I know writing all the articles would be no correction because, repeat, Looting of public wealth seems to be our State Policy.



Nov 18, 2013

One ludicrous instance quoted in the book -Thulsidas ,ex MD of AIR INDIA, probably at advice of astrologers, decided to improve the fortunes of AIR INDIA , by shifting location/angle of his table in his office! When such Crisis management experts run AIR INDIA, it will be a disaster only

Like (1)


Nov 18, 2013

Air India is not the only one. MTNL, BSNL, SAIL are other organisations not to mention BALCO etc. which were hived off.

Like (1)


Nov 18, 2013

All this loot of public's money is already known by public, similar is the degradation of BSNL/MTNL, etc

Mr. Jitender Bhargava has added the actual implementation details to this loot.

Like (1)

Ajay Gupta

Nov 18, 2013

It is not surprising that PSU are destroyed for personal interests and it is a loot and scam, but definately Mr. Bhargvas statements need further investigations to reveal further more scams.

Like (1)

Prof. N K Jain

Nov 18, 2013

I am shocked that equitymaster is shocked about this story. The fact most of PSUs suffer losses or under perform is that they have similar fate. The degree may vary.

Like (1)

Ashok Golas

Nov 17, 2013

Appointments in Air India & other PSUs are made on the basis of how much the applicant can bend himself in allowing the loot that merrily goes on. In fact there is stiff competition with each candidate pulling all possible strings to get the coveted job so that his next seven generations need not work.

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