Tag: Views

The Insolvency Code is stuffed with severe flaws and will not achieve its purpose

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Joseph-Ignace Guillotine was against the death penalty and urged the French National Assembly in 1789 to adopt “a fair and simple mechanism” to make the punishment more humane. He petitioned King Louis XVI. Guillotine hoped that making the death penalty humane would be the first step to its abolition.

The Insolvency and Bankruptcy Code, 2016 (IBC), was introduced as a law that would provide a new, fair, efficient and simple mechanism for resolving NPAs. The problem with over-simplification, irrespective of good intentions, is that at times they result in larger unintended problems.

If not immediately reviewed and rectified, the IBC is well on its way to lead to suspension of lending activity, stalled projects, erosion of value of Indian enterprises, faster growth of unemployment, increased costs of lending, and vesting of assets developed through public sector debt financing (read taxpayers money) with non-resident vulture funds. Parallel with the IBC is the RBI’s recently announced “Revised Framework” for “stressed assets” issued on February 12, directing lenders to classify loan accounts as “stressed” immediately on default and as a NPA in case of “any restructuring” of the loan.

Huge Toll on the Judiciary

The term “loan” has been defined very broadly to include “any concession” granted by the lender to the borrower for economic or legal reasons related to the “borrower’s financial difficulty”. The RBI’s mandate to lenders will place an unnatural load on the judiciary dealing with corporate insolvency, much like immediately expecting a hippopotamus to run a mile in seven minutes.

The main problem with the IBC is that, apart from having been a result of a cut-paste effort of adapting from English law, its framework is not a load bearing structure particularly for the volume that would be generated after RBI’s “new framework”. Also, its one-size-fits all prescription has the ability of being abused as a contract enforcement mechanism, or a debt recovery mechanism, which require fundamentally different approaches that can address the specific merits of the dispute.

Further, the process under the IBC does not provide for due classification based on the specific requirements of each sector or industry and the how that may be addressed. There is no provision preventing otherwise healthy companies that are not defaulting on loans to lenders being taken through the IBC by the so-called “operational creditors”.

Added to this, the recent insistence that promoters should not participate in the resolution process defies reason. Apart from negating the basic principles of corporate law (where companies are separate legal entities, and the “corporate veil” is lifted only in identified extreme circumstances), the exclusion of promoters is confounding if the intention is to get the best deal for the lenders and other stakeholders. Prohibiting promoters from participating in the resolution process also begs the question of what will happen if larger public sector undertakings start being put through the IBC process.

For example, what will happen if GAIL, which has entered into financial obligations estimated to total $30 billion under long-term LNG purchase contracts with US companies at prices which the Indian market cannot absorb, defaults on its take or pay obligations and the US entity files as an operational creditor seeking GAIL to be put through the IBC process for recovering the ship or pay amounts due?

Needed: A Serious Review

The flaw in the approach of the IBC, coupled with the RBI directions, is that they are seeking to resolve economic issues and banking sector regulatory issues through the tool of the insolvency process, which is simply not capable of addressing the underlying concerns. The IBC clearly needs a rethink and more importantly needs to be amended to prevent large-scale unintended consequences. Unfortunately, the recently released Report of The Insolvency Law Committee has failed to address the core issues that lie in the structure of the IBC and instead has only made recommendations addressing only a few issues that have arisen in the first few months of implementation of the IBC.

Interestingly, the report itself recommends creating special treatment for promoters of MSMEs and home buyers in real estate sector, but fails to follow through on the underlying issue that IBC will eventually need to recognise that each type of industry and infrastructure sector will need special treatment and that there is a need to change the basic structure of IBC itself.

The Guillotine was used 16,594 times between June 1793 and July 1794 including on the king who had approved it, which of course was not its intended consequence. Guillotine spent the rest of his days unsuccessfully petitioning that his name not be associated with the machine. One can only hope that the IBC does not suffer a similar fate.

Piyush Joshi heads the Projects and Project Finance unit at Clarus Law Associates.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Corporate insolvency must not catch equity investors off guard

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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India’s rise by 30 places to the 100th position in the Easy of Doing Business rankings received much attention last year. The feat was celebrated, deservedly so, but one detail was nearly overlooked  — India’s ascent to fourth place in the field of ‘Minority Investor Protection’.

It is to the credit of the central government and capital market regulator Sebi that India stands out here. Ergo, it is surprising that Sebi has been slow to react to the changes brought about by the Insolvency and Bankruptcy Code, 2016 (IBC), given its impact on minority investors.

The IBC came into effect on May 28, 2016 and its substantive provisions dealing with corporate insolvency have been in force since December 2016.

Sebi, at a board meeting on March 28, 2018  — exactly 22 months after the IBC took effect —  has commenced a consultation process for reviewing the requirements of the various regulations that are applicable to listed companies undergoing an insolvency resolution process under the IBC.

Sebi has sought public comments on a consultation paper until April 15, 2018, after which the necessary amendments to various regulations will be carried out.

In the meantime, several of the initial cases under the IBC will see conclusion. Many of these companies, including companies in the RBI’s “Dirty Dozen”, are listed.

Spare a Thought for Investors

The fate of the equity investors in these companies hangs in the balance. Under a resolution plan in the IBC, a new investor may choose to write down all the existing equity shares, or dilute them down to an insignificant percentage. An acquirer may even seek to delist the company.

In any event, in cases where secured creditors are taking a substantial haircut, there will certainly be no payoff to the equity holders.

It is true that equity holders are last in the queue to receive a payout in an insolvency. Investors understand this.

It is nobody’s case that equity investors should be assured any return or be protected from the ‘equity risk’ in any manner. However, it is equally true that such risk should be an informed risk.

It does not appear that investors today are fully informed or aware of this risk. What else could explain the increase in prices in the scrips of companies immediately after news of commencement of their insolvency becomes public?

The purely speculative nature of these trades, which have no correlation to the shares, should be a cause of concern.

Some Warning, Please!

In some other markets, trading in scrips of insolvent companies is suspended. It is not known yet whether Sebi will choose to go down this path as well.

If it does, it is imperative that investors have adequate warning about impending insolvencies so that they can assess their positions well in time. Sebi had proposed a rule requiring immediate disclosure of loan defaults by listed companies.

This would have helped investors take an informed decision early. However, the rule was put on hold one day before it was to have come into effect on October 1, 2017.

It is heartening to know that Sebi is said to be re-looking at introducing the default-disclosure rule. The sooner that happens, the better it will be for equity investors.

Reema Tendulkar is is an anchor and associate editor-research at CNBC-TV18 and has been covering the technology and telecom sectors for almost 10 years.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Why the Chinese are loving Bollywood movies

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Indian movies seem to be the flavour of the decade in China. The Salman Khan starrer Bhajrangi Bhaijan reportedly earned more than Rs 200 crore in China. Secret Superstar starring Aamir Khan, whose movies have been doing well over the past few years in China, is said to have made close to Rs 150 crore and counting.

As revealing as the numbers may be, they do not tell the real story of the Chinese audiences’ romance with the magic masala of Bollywood. Their affinity for Bollywood has been a slow and gradual process.

Experts say the Chinese have accepted Indian movies as part of the mainstream. And perhaps there is nothing more mainstream than the Chinese cab driver, especially the ever-so-friendly and all-knowing Beijing cabbie. “Are you Indian?” is the first question, as you get comfortable in a Beijing cab to take on the city’s comatose traffic.

Before the response reaches the last repetitive assurance in the positive, in case the missed the first two “dui…dui…dui (yes, yes, yes),” the cabbie has broken out in song. This is not just any famous Bollywood tune, but the one and only “Awara Hoon…”. They will then tell you that it is a very old song noting with dismissive certainty that “kids now a days won’t know it”. Nevertheless, the cabbie is always delighted if you can change his opinion by singing along.

Break of a Few Years

That said, the cabbie might not be entirely wrong. There was a hiatus in this cinematic tryst between 1994 and 2011 when few Indian movies released in China. This generation of Chinese moviegoers became more in sync with movies produced in the West, especially Hollywood, unaware of an eroding connect with Bollywood.

China imposes a quota system that limits the number of ‘foreign made’ movies released in the Chinese Mainland at 68. These include Hong Kong-made movies too, but nowadays many of them are co-produced —  a solution to avoiding the quota cap.

However, Prasad Shetty, who is in the business of bringing Indian movies to China, says since 2014, there has been a steady stream of movies from India coming into the Mainland.

“We are hardly a hundred days in to this year, and already three Indian movies are making waves in China. This includes Bajrangi Bhaijaan, Secret Superstar and Hindi Medium, which will open in April,”

— Prasad Shetty, film distributor in China

So, what is the secret sauce?

“There is none,” insists Mr Shetty. “It is all about the content. If it is a good movie and there is a connect with the local culture, it will certainly work. Even an independent movie will work if there is a cultural connect. There is no Chinese formula; even Hollywood hasn’t been able to break it. For example, the latest iteration of the Star Wars franchise did not do very well in China. Last year, a Spanish movie did very well here as did a Thai movie. It is all about how the audience can connect with the movie.”

He also believes that the Chinese movie market is one of the most accepting markets in the world when it comes to good cinema. He adds that Aamir’s social work and involvement in TV projects like Satyamev Jayate have not gone unnoticed here.

Meanwhile, movies such as Secret Superstar have also connected with the Chinese millennials. Twenty eight-year-old Beijinger, Ms Jiang says, “I think the movie is inclusive, as it touches on issues like women rights, domestic violence, and motherly love. The movie is very encouraging since the pursuance of dreams is the overarching theme. It resonates well with me, as I struggle between my work schedule, and taking care of my one-year old child.”

She adds that she also liked Aamir Khan’s Three Idiots because “we have similar problems with our education system here, and it was so funnily put, not like some boring documentary, which is how education is usually approached on screen”.

Perhaps there is a secret sauce …

For movie fans in China, it is no longer just the magic masala of the dreamy silver screen that keeps them coming back for more Bollywood, but also messages of meaning and hope that walk out with you from the cinema.

Danny Geevarghese is a journalist based in Beijing.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

By-election results show that Hindutva has been reinvented

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The recent by-elections in Phulpur and Gorakhpur, which resulted in a decisive loss for Prime Minister Narendra Modi’s party candidates, continue to be held up as an example of a rising opposition, and a weakening of the Bharatiya Janata Party (BJP).

To be blunt, a BJP loss in Chief Minister Yogi Adityanath and Deputy Chief Minister Keshav Maurya’s constituencies is quite an embarrassment, particularly for the latter as he, and his predecessors have held onto to Gorakhpur for nearly thirty years. Thus, we cannot unequivocally state that the election results had nothing to do with the BJP’s appeal.  In all likelihood, there may be some aspects of fatigue or unhappiness with the party, and how they operated these two constituencies.

However, if we only listened to Akhilesh Yadav and Mayawati, we would conclude that the “secular forces” have triumphed over the “communal” BJP, and voters have rejected Modi’s right-wing Hindutva agenda.

Nothing could be further from the truth. If anything, the elections tell us that the Hindutva strategy works quite well. After all, Yadav and Mayawati stole a page from the BJP to win these two districts.

Let me explain.

The BJP’s success in 2014, and thereafter, can be largely attributed to the party’s consolidation of all Hindus across all castes. The traditional view that the BJP only appealed to upper caste Hindus was shattered as the party made successful inroads into lower-caste communities. For the BJP, this was the only option to deny regional parties from monopolizing select vote banks, which until then, precluded the BJP from winning national elections on their own.

Grouping of Different Castes

Hindutva, as a campaign strategy, really boils down to unifying all Hindus by promoting a common set of policies and ideas. You can disagree with these policies, beliefs, slogans, and messages, but for the purposes of elections, this is the essence of the strategy. Accordingly, rather than appealing separately (and perhaps exclusively) to upper caste, Other-Backward Castes (OBC), Dalits, and so forth, the BJP leverages Hindutva to turn all Hindus into one giant vote bank.

As a result of this strategy, 2014 broke the previously held view that coalition politics were inevitable in India due to the regional parties, which divided the electorate along demographic lines making it hard for any one party to obtain a majority in parliament. By consolidating all Hindus, the BJP dented the political strategy of regional parties and put Yadav’s Samajwadi Party (SP), and Mayawati’s Bahujan Samaj Party (BSP) in a fix – their business model was questionable.

The Uttar Pradesh (UP) election in 2017 further corroborated the above view as the SP failed massively.

Learning from both instances, Yadav shunned a tie-up with Congress for the Phulpur and Gorakhpur by-elections. As evidenced in 2017, Congress was not, and likely is not able to bring any particularly Hindu demographic to the polls. So what is the value in an alliance with them?

BSP on the other hand can bring out the Dalit vote, which SP lacks. Hence Yadav decided to join Mayawati. Now this may seem obvious and simplistic, but we should look between the lines to see what this alliance really means.

A New Campaign Strategy

As noted, the previous strategy of parties like the SP and BSP to divide demographics and deny any one party from crossing the 50% threshold is no longer tenable when one party, the BJP, is able to appeal to multiple demographics at once. Instead, the SP, BSP, and other regional parties are trying to unite groups across Hindu demographics rather than split them, which is in fact the essence of Hindutva at a campaign level and what made the BJP successful.

Granted, SP and BSP will likely not draw support from upper caste Hindus, but that’s a separate point.  In by-elections it does not matter as much due to low voter turnout.

But the broader point is intact, the SP and BSP are learning from the BJP and using the same strategy – unite Hindus to win. Thus, whether Yadav wants to admit it or not, his so-called secular forces are starting to copy the so-called communal BJP.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Why tier-2 and tier-3 cities are staging a comeback in real estate

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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After a protracted period where interest for real estate investment was concentrated primarily in the larger cities, we are now seeing a resurgence of the tier-2/3 story in India.

Many of these cities are seeing increased economic activity and infrastructure growth, to some extent reducing the outward migration to the metros. This is a welcome development, which will eventually result in a more uniform spread of real estate demand across the country, and reduce the pressure on the larger cities.

The value of residential properties in tier 2 and tier 3 cities and towns start from a significantly lower base, owing to cheaper land prices and also the fact that developers active there are more aligned with affordability. Buyers tend to be more cost-sensitive as economic drivers in the city may not be on a par with those in the larger cities.

Help From ‘Smart Cities’

That’s not all. Under the incumbent governments, a significant infrastructure deployment is happening in several of these cities. Quite a few have come under the Smart Cities programme, which bodes very well for their real estate markets.

With increasing demand, one can expect prices in these cities and towns to move gradually upward. Price growth will be higher and faster in cities coming under the Smart Cities programme. This would indicate that potential buyers should not delay their purchase decisions indefinitely because the lower existing base currently provides the ideal entry point, especially for price-sensitive ones.

The ability of a smaller city to offer good options for investment depends on the kind of economic drivers are already in place and if they are expected in the short-to-mid-term.

Definitely, accelerated infrastructure activity in a particular city or town indicates that price growth will be healthy going forward.

Investors need to study each market for its growth prospects, including rental demand and capital appreciation trends as well as expected employment growth. A number of larger players have now expanded into tier-2 and tier-3 cities on the back of increasing demand for quality residential offerings there.

Investors will always be driven by an investment rationale, as well as their own knowledge and preference of some markets over others. Investors with better capitalisation may wish to focus on the larger cities, depending on their risk appetite while others would be more interested in India’s reviving tier 2/3 story.

Larger Playing Field

That said, not all tier-2 and tier-3 cities are performing uniformly well, though it is true that supply will generally follow demand. In other words, cities that are performing well economically will attract more migrant population, which will need rental housing.

Simultaneously, local home-buyer sentiment will also be higher in such a city. Both investors and end users would have a very decent inventory to choose from, which enables them to fine-tune their final choices according to location, amenities and ticket sizes. At the end of the day, end users will purchase homes in their cities of residence, or in the case, of NRIs, in their cities of origin. Investors obviously have a much larger playing field.

 Anuj Puri is chairman of ANAROCK Property Consultants.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

US tariffs against Indian exports can actually be an opportunity

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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India could theoretically seek to negotiate a rollback of export subsidies in return for an agreement totalisation, H-1B visa’s, greater investments, or any other issue of concern to New Delhi

The Trump administration’s decision to approach the World Trade Organization (WTO) over India’s various export subsidy programs has rankled officials, and observers in India. Specifically, the US government plans to approach the WTO regarding its view, and complaint, that India is no longer eligible to subsidize some of its exports as its per capita income has exceeded $1,000 per year.  This means that India has “graduated” and according to WTO rules, needs to phase out export support.

According to US Trade Representative Robert Lighthizer, these subsidies are worth around $7 billion. While Lighthizer himself did not draw the link, this figure represents around a quarter of the US trade deficit with India.

At best, the pending move by the US is seen in some quarters as yet another example of Washington’s increasing protectionist bent. At worst, it is cited as the US’s vengeful posture against India and the opening of a pending trade war.

However, in reality it is neither of the above. Furthermore, if handled carefully, the current events can actually provide an opportunity to further the US-India partnership.

 Opportunity in Adversity

First, it is critical to recognise that the US move is not intended to harm, castigate, or harm India, which cannot be said of Washington’s increasing disagreements elsewhere in the world. India has actually benefitted in recent months with the new US government as much of Trump’s world view comports with India’s – specifically Washington’s new approach towards Pakistan.

Second, and as extension of the above, the US’s argument is largely ideological. The Trump view towards trade can be seen as one based on reciprocity.  In other words, if the US does not impose import duties and export subsidies, and has engaged in free trade along with an open capital account, then others should act in kind regardless of their level of development – i.e. it is not the job of US citizens and consumers to bankroll the rise of other economies. Again, from the perspective of the Trump administration, this is not meant to be punitive to India, but based on an ideological stance of why one country should support free trade while the other does not.

Third, the measure is not unilateral and shows a willingness by the Trump government to work with India through the WTO dispute resolution mechanism.  This is worth emphasising given the general disdain Trump holds for institutions like the WTO. Yet despite this, Washington will go through proper channels to handle their grievances rather than pursue unilateral and punitive measures against India.

With these three points in mind, it is now worth looking at how India can leverage the situation to its benefit.

An Out-Of-The-Box Approach

While Washington and New Delhi eagerly look to “deepen the US-India strategic partnership”, it is hard not to notice that the two at times talk past one another.  Both have a set of “asks” they would like the other to do. Unfortunately, many of these “asks” remain stuck due to structural differences between the two bureaucracies and how they engage one another.

For example, India wants the US to slow the H1-B visa reform process, enter into a totalisation agreement with India, which would give social security tax reprieve to Indians temporarily working in the US, and support New Delhi diplomatically in multilateral forums, particularly in respect to Pakistan.

The US wants India to open its markets to goods, move towards a free-trade agreement (thereby reducing the trade deficit), and buy more US defense technology/equipment with fewer bureaucratic hurdles.

However, because many of these issues are of interest to only one side, negotiating their advancement becomes a challenge.  Furthermore, issues have often been negotiated and discussed within their specific domains – trade talks are handled by the commerce ministries of the two countries, and are delinked from defence, economics, or immigration issues, which are in turn handled by their respective agencies. Cutting deals across topics has been elusive. If the US agency responsible for totalisation, the Social Security Administration (SSA), concedes to India, what does it receive in return? The SSA has virtually zero “asks” of India.

This is where the US move on trade should be seen as an opportunity for an out of the box approach toward negotiations.

While the SSA does not have any “asks” of India, the US Trade Representative does on export subsidies and import duties. Thus India could theoretically seek to negotiate a rollback of export subsidies in return for an agreement totalisation, H-1B visas, greater investments, or any other issue of concern to New Delhi.

That’s not to say the process will be easy – neither bureaucracies are structured to negotiate across equities and on behalf of other agencies/ministries in their respective governments. But India is likely to find the current Trump administration as the most likely to do just that given the US president’s claims for “making deals.”

Thus, rather than viewing the latest from the US as hostility, India can and should spin it into an opportunity to advance its own agenda with a US administration that is predisposed towards transactions with its partners around the world.

Shailesh Kumar is director, South Asia at Washington-based Eurasia Group and analyzes political and economic risks and developments in India, Pakistan, Sri Lanka and Bangladesh.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

An important indicator is flashing red!

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The gap in US dollar LIBOR-OIS spread has brought back fearful memories of the 2007-08 crisis for many in financial markets.

During the crisis of 2007-08, LIBOR shot higher, indicating a virtual freezing of funding markets. Financial institutions did not want to lend to each other. A few collapsed. Although we aren’t anywhere close to seeing that kind of panic in 2018, LIBOR-OIS spreads have doubled this year to over 50 basis points.

This is the highest level since the European sovereign debt crisis of 2011-12. The current levels have been exceeded only during global financial crisis period of 2007-08.

Lets start with the basics:

OIS stands for overnight Indexed Swap (OIS) rate. It simply reflects the rate that banks (with access to the U.S. Federal Reserve credit window) charge for lending to each other. This rate very closely reflects the official federal funds rate.

LIBOR stands for London interbank offered rate. $ LIBOR reflects the rate at which, banks (without direct access to the U.S. Federal Reserve credit window) lend to each other at.

So what does the widening of the spread actually indicate? Simply put, it reflects an increasing scarcity of dollar funding over & above Fed’s intended tightening. And the Fed is set to tighten in 2018. Only question is, by how much?

Why is this happening now ? Experts don’t have a definitive answer but most point to the tax reform in the U.S. which is leading to dollar repatriation into the United States, which means dollar funding is getting tighter in other geographies.

What could be the impact of continued expansion in the $LIBOR-OIS spread ? LIBOR is still the reference point for loans of all kinds. So cost of borrowing goes up. As we saw in previous episodes, money market rates could shoot higher and we could see weakness in other asset classes like the stock market. A tighter dollar funding market would also mean stronger dollar. Not exactly great news for emerging markets.

To be sure, so far experts are only looking at this as a U.S. centric phenomenon. If one looks at LIBOR-OIS spreads in sterling and Eros, they have been almost completely unaffected.

Coming to India, the benchmark Nifty is down roughly 10% from its peak. Reasons attributed to the market fall have so far been mostly local – be it PSU bank scams or a weakening political narrative. The strong global picture so far has been used to make the bullish case. The last thing investors need right now, is the global picture souring.

Watch this space for more.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Government should stop appointing board members of PSU banks

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Two speeches on public sector banks by two policy makers in one week and the message was one and the same: Public sector banks can be fixed when the government stops appointing their board members.

On March 14 RBI governor Urjit Patel, in a rare and landmark speech, pointed out that under the Banking Companies Act, the regulator does not have the power to supercede the board of a public sector bank for non performance nor even sack key management personnel like the managing director or board members.

Effectively the governor was arguing that the governance problems of public sector banks emanate from the constitution of their boards. The board of PSU banks is packed with government’s handpicked nominees, who are responsible only to the government. Their loyalty is not even to the banking company on whose board they sit and they really don’t have to bother about the regulator.

Exactly a week later, Vinod Rai, chairman of the government-appointed Banks Board Bureau put in the public domain, a compendium of the BBB’s recommendations most of which are yet to be acknowledged by the department of financial services. But the most important revelation of that compendium was Rai’s first chapter, where he details what mandate the BBB sought for itself, but was NOT granted. Rai said the BBB wanted:

1.To send their recommendations directly to the appointments committee.

2. To appoint the non-executive members of the PSU bank boards

3.To develop the roadmap for the transition of the government share-holding in banks into a holding company ( as advised by the Nayak Committee)

4. A specific mandate on stressed asset resolution.

Barring the last request, what the BBB was seeking was a mandate to separate ownership of PSU banks from control and governance. The BBB believed, like all sincere banking experts, that the only way PSU banks can exist viably and work commercially is if the sovereign restricted itself to giving broad directions that a promoter gives and allows the board to control and execute what is good for the banking company.

It’s not a surprise that both these stalwart policy makers are pointing to the same issue as the heart of the problem of PSU banks: the lack of independent and high quality board members. But they are not the first to do so. Dr Y V Reddy, in his book “Advice & Dissent” writes about how when he was banking secretary in the early nineties, his finance minister Manmohan Singh was determined to improve the quality of PSU banks by improving their boards. Reddy says, Singh asked him to draw up a list of financial experts from which he could pick board members. Banking secretary Reddy did as he was bid and submitted a list. A few months later he confronted his minister about the latest on the PSU Bank board members. The minister replied that every name he suggested was rejected by the ruling party as a persons “unfriendly” to the party. The party then started recommending names from which the ministry was to pick capable people. But the list invariably came without any details of address, qualification, achievements, assets or experience. Eventually, writes Reddy, the party even dispensed with the formality of sending the list to the finance ministry. Names were sent directly from the party to the Appointments Committee which the latter okayed.

Dr P J Nayak, a joint secretary in the finance ministry before he became chairman of Axis Bank again identified that the real problem of PSU Banks is their “compromised” boards. As chairman of the Committee to Review Governance of Boards of Banks in India, Nayak judged that control of the government over PSU banks won’t end till its majority ownership was brought down. Nayak hence recommended the now famous holding company structure. He advised the creation of a holding company which will own all the government shareholding in PSU banks and which would eventually divest government stake to below 51% both in the holding company and in the subsidiary banks.. Of course as a precursor, the Banking Companies Act, he advised, has to be annulled and PSU banks should be brought under the Companies Act. (Again an advise that finds mention by Y V Reddy, Vinod Rai and Urjit Patel.)

Most experts thought that the paradigm shift recommended by Nayak would never happen under the UPA regime considering that the nationalization of private banks and the creation of the Banking Companies Act was the brainchild of the Congress Party PM, Indira Gandhi. The hope was an NDA government, under a PM whose main plank is Swachh governance, would be more receptive to separating ownership of PSU banks from their control, even if not to their outright privatization.

But no. The flat refusal of the government to Vinod Rai’s and the BBB’s demand to appoint non-executive board members, to send their recommendations directly to the appointments committee and to also frame the roadmap for the creation of a holding company shows that the NDA is no more ready for independently run PSU Banks than was the Congress or the UPA.

From LK Jha to Manmohan Singh to Y V Reddy to N Vaghul to PJ Nayak to Vinod Rai to Urjit Patel: all good doctors have prescribed the same medicine. But the political dispensations aren’t listening. For now, India looks condenmned to have “sick” PSU banks.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow