After planning out several options, the finance ministry has decided it is going to borrow more from the market in this fiscal, rather than risk selling the shareholding of three private companies. There was obviously great national interest at stake if the government shareholdings in ITC, L&T and Axis Bank were to be sold.
Much better to saddle the markets with R40,000 crore of additional borrowings. There is a dual agreement here, an explicit one to borrow and an implicit understanding that the shares will not be touched. Since we last visited this topic, the case has become even more curious. The finance ministry is trying to pledge the shares by setting up an asset management company. The step will provide the housing of the shares within the government with a permanent address. The percentages are large enough to conceivably protect the companies in question from ever having to face a credible takeover threat.
The finance ministry is aware of the negative fallout of the second additional borrowing. To moderate the impact of the announcement on the stock, bonds and currency markets, on Sunday it permitted individual foreigners to buy equity directly from the Indian stock markets. Until now, only a foreign institutional investor could invest in Indian stocks directly.
The borrowing is on top of the additional R52,800 crore that has already been raised from the market. The second helping is not chicken feed either. It is 11.6% of the total budget estimate of the net borrowing programme for the year.
The additional money will surely raise yields and hurt the price of government bonds. This means treasury managers in banks will be staring at big losses in their portfolios of securities, losses their colleagues will have to make good by basically raising interest rates on loans. All this, despite the clear evidence that RBI has reached the top of the interest rate hike cycle, which, therefore, should have opened up space for banks to lower rates.
Even if assuming the banks were to cut rates, the extent will surely be much lower than if they did not have to factor the negative impact of the additional borrowing on their treasury income.
All this happens as the banks work in a market with tight liquidity. So, to pay for these papers, the banks will have to appear more frequently at the repo window of RBI to buy cash. The cost of borrowing will check the benefits they could have offered to industry but which the economy sorely needs. The lower reduction in rates consequently hurts both corporate India generally and individuals like you and me.
The justification for this pain for the rest of the economy must be because these companies are operating in sectors that are strategic for the country.
But if it were to be proved that banking, construction and FMCG, where these companies operate, are not strategically important then it would beg the question why the government has taken this decision. In other words, whose interests are being protected through the continued holding of the shares of these companies by the government of India?
Or at the cost of R92,800 crore, more borrowing from the market than was budgeted for.
The shares of Axis Bank in this lot are historical baggage. The shares represent the interests of the erstwhile UTI as the promoter of the bank. When UTI was broken up, the government had rightly decided not to burden the new entity, UTIAMC, with the additional job of running the bank and transferred the same to Specified Undertaking of UTI (SUUTI), where it was housed. But the shares of L&T and ITC were bought by the original UTI from the market from the funds of US-64 as a mutual fund buy. SUUTI is controlled by the finance ministry and was supposed to be wound up by 2009 after all the mutual fund holders were paid off. The accounts of the last of those have been paid off in 2008.
At the depths of the 2008 meltdown, the US government had stepped in to buy shares in several of its companies that were going down under. The warrants bought by the US Treasury have since all been liquidated and have earned the cash-starved government useful dollars. The US Treasury secretary Tim Geithner has informed American citizens in detail how this was done and how the purchase and sale benefited them. It was clearly understood that help for the companies was a necessary step (sure, there was political choice regarding which ones to help and which not to) to stave off unemployment and bigger financial trouble for the economy.
Today, the Indian government is in a financial wringer. It has contemplated auctioning more spectrum and it has considered disinvestment in public sector companies. Since the markets were thought to be lukewarm to fresh issues, the government has even toyed with the idea of bleeding the cash-rich companies to buy shares in each other to temporarily garner some money.
Yet, a sale that would not have raised any such questions, generating almost the same amount as the additional borrowing, has been jettisoned. There can, of course, be an argument that a sale now would earn the government far less than, say, one in early 2010, but then no one had stopped this government from doing the exercise then. Besides, between a sale of equity in a company and raising debt, the former is infinitely superior. Unless, of course, they are of strategic importance to the government, even if the companies are presumably not in strategic sectors.
Incidentally, the board of ITC has more than one member who hails from SUUTI. The administrator of SUUTI sat on the ITC board during the same period when he held the finance ministry chair during 2004-08. Coincidence, perhaps?
subhomoy.bhattacharjee@expressindia.com