Who's afraid of East India Co wolf? - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Who's afraid of East India Co wolf? A  A  A

31 MAY 2008

Although the private sector has thrown off its initial fears of being swamped if exposed to foreign competition, the Government and the bureaucracy continue to harbour a fear of a repeat of the East India company. They, therefore, maintain a majority stake in 18 public sector banks, which have 70% of the business, and have kept a cap of 74% foreign holding in the telecom sector. This hurts economic growth.

At a recent analyst meet, the CMD of Punjab National Bank, was asked by this columnist why it was that, given their pedigree (it is 113 years, SBI is over 200 years old) and their finances (both have produced excellent results), their market caps are, respectively, $4 and $ 23 b., far lower than the $450 b. commanded by ICBC of China, which is far younger and doesn't produce such impressive results. Although, given China's earlier start down the path of economic liberalisation, ICBC has a balance sheet more than 7 times larger than SBI.

Perhaps one of the reasons could be the reluctance of Government to bring down its ownership below 51%. In a globalised world this is stupid, because you Lilliputianise your large players (if I may coin a term). Look at the top Fortune 500 list and see how many are family owned. To grow to a global size, firms have to give up stakes and it will be institutional investors who would buy them. Bill Gates would not be the richest man in the world if he had held on to his 78% stake when he first listed; it is now down in the early teens. ICICI Bank is no less Indian even though more than 70% is held by foreign investors.

Dr Chakrabarty, PNB's ebullient and frank CMD, made a good observation. If, he said, India is to become the third largest economy in the world by 2050, as everyone now believes, there must be financial institutions from India that have become global and will be able to serve the needs of Indian companies that would also have grown. PNB is taking steps to move in that direction.

It will not, however, happen, unless Government lets go of the fear of financial Armageddon if foreigners control the financial sector in India. One should think a majority stake in SBI plus one or two other large banks would be enough; the others must be allowed to grow through organic and inorganic growth.

In telecom the cap is at 74% for foreign holding. This is making it difficult first for Bharti Airtel and now for Reliance Communications, to make a sensible merger/acquisition of MTN of South Africa. Since foreign investors already hold 13% of R Com, Anil Ambani can offer a maximum of 61% (swapping it with a 33% stake in MTN to emerge as the largest holder of the combined entity); besides MTN has to make an open offer for 20% from minority shareholders.

The reason the Government retains majority control has less, however, to do with the wolf at the door syndrome, and more to do with controlling and appropriating the profits. That is why oil and gas companies are being looted. Indian Oil Corporation, a Fortune 500 company, has reported a loss for Q4 ended Mar 08. Prices of petrol, diesel and other petro products are kept artificially subsidised and the oil marketing companies like IOCL have to bear a part of this subsidy. They have run out of money to buy petro products and there is a looming rationing of petrol and diesel. Moreover, because they are partly compensated via issuance of non marketable petro bonds, they have had to borrow heavily from SBI which, in turn, has made its largest repo borrowing of Rs 13000 crores and has had to hike deposit rates.

There was even an asinine suggestion that in order to make up for loss of revenue if excise duties are reduced (the oil sector contributes some Rs 70000 crores, the highest, to tax revenue) the Finance Ministry was thinking of levying a cess on all taxpayers. Look at the ridiculousness of this! It means that for car owners to get cheaper petrol, all tax payers must pay! And this has got support of the Left parties!?!

Look further at the insane consequences of this. Facing a liquidity crunch for no fault of its, IOCL is thinking of selling its 7.7% stake in ONGC and 2.4% stake in GAIL!

All this to save car and truck owners the pain of paying market related prices for petrol and diesel! This reduces demand elasticity which is 16% in America and so leads to artificially high demand for them, and hence for oil, pushing up its price. Is this a responsible Government?

Under insistence from its Left coalition partners, the Government is following a policy of not selling profit making PSUs. Now that IOCL, BPCL and HPCL are hurtling towards becoming loss making PSUs one supposes they will be sold at bargain basement prices. Does no one in Government see that this is sheer idiocy?

The Government has to take several steps to make India a more energy efficient nation. One of these is to improve public transportation systems and to discourage private transport. During the past few years it has had hugely buoyant tax resources to allow it to do so. These, sadly, have been frittered away, a lot in subsidies which do not serve their intended purpose. Because of poor ports and roads, it is felt that power generation target of 70,000 MW would fall short by 20%, as the equipment would not be able to reach the work sites on time.

Look at the Government's appetite for tax in the case of a tobacco company, for instance. Granted, tobacco is harmful to health and must be taxed. In the case of ITC, for the year ended Mar 08, the Government collected Rs 15,398 crores through excise and corporate tax, leaving a profit of Rs 3120 for shareholders. The ratio of Government share to shareholders' share is 5:1. None of this has, however, been used for providing tobacco farmers an alternative livelihood to wean them away from tobacco.

In corporate news, Tata Motors is coming out with a rights issue of Rs 7200 crores to part fund its acquisition of Jaguar Land Rover.

Last week the sensex fell 234 points to close at 16415 and the NIFTY fell 76 to close at 4870. The fiscal deficit is hugely understated by all the off balance sheet bonds given to oil and fertiliser companies; the RBI Governor has quietly stated as much. Interest rates would have to be raised as inflation is not under control, partly due to Governments fiscal incontinence and largely due to its thoughtless policies of state control over important sectors (banking, oil & gas, coal). The US is also likely to end its interest rate cut cycle and start to raise them. Rising interest rates makes debt markets relatively more attractive. So it is unlikely that the sensex would do anything dramatic this calendar year.

Have you read the latest Honest Truth by Ajit Dayal?

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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