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
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
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
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?